STORY OF THE WEEK/Corporate Crisis: Once, the US felt in a position to lecture. Asia suffered economic crisis because it was corrupt to its core, Wall Street boomed. Then came Enron, Andersen . . . Conor O'Clery, International Business Editor, reports
In Asia during the economic crisis of the late 1990s there was a drum beat of criticism from the West of "Asian values", which were blamed for the cronyism of the business culture in countries like Indonesia and China where corporations often became family dynasties and bribery was endemic.
In Jakarta and Beijing visiting politicians and economists hammered home the message that the West, and in particular the United States, had the most efficient and fair business model, one based on the principles of transparency and accountability, and that they would well do to imitate it.
Now corporate governance in the US itself is going through its worst crisis in a century.
Since the watershed of December 2nd, 2001, when Enron announced the world's biggest bankruptcy, there has been a stream of scandals exposing an underworld of corrupt analysts, bent accountants, compliant directors, supine management and greedy chief executive officers. Confidence in the financial system has been steadily eroded by deceit and avarice, not just among investors but among hardworking staff in firms like Enron and Andersen who feel betrayed by their executives and damned by association with wrongdoers.
Andersen, one of the five largest accountancy firms in the world, has been exposed as an accomplice to fraud. Enron was just the biggest in a series of Andersen audits where the accountancy firm had to pay huge fines, including $110 million (€122 million) to settle a shareholders' lawsuit alleging fraud in its audit of Sunbeam, the maker of electric irons and pop-up toasters. Sunbeam's chief executive, Al Dunlap, whose motto was to boost the bottom line by deep layoffs, also boosted company figures, for which he had to pay $15 million to settle another shareholders' lawsuit.
Faith in high-profile chief executives has been battered with the actions of people like Kenneth Lay, who steadily sold his Enron shares while urging staff to hold on to theirs, and by corporate icons like Larry Ellison, head of Oracle, who in January exercised $706 million in stock options just weeks before lowering earnings forecasts.
The big Wall Street names began to gather some of the mud as the focus shifted to the excesses of the dotcom stock boom which drove the Nasdaq to over 5,000 and enriched investors, analysts and brokerages alike. In the scramble for largesse, moral integrity got trampled.
In January Credit Suisse First Boston had to agree to pay $100 million in fines - and fire three brokers - to settle charges that it allotted shares in initial public offerings to investors in exchange for huge commissions on other trades.
Two weeks ago the National Association of Securities Dealers notified JP Morgan Chase and the Robertson Stephens unit of FleetBoston Financial, both prominent in the underwriting of technology stocks in the late 1990s, that they could face civil charges for doling out IPO shares to selected clients in exchange for big commissions.
On April 8th New York state prosecutor Eliot Spitzer charged Merrill Lynch, the world's biggest brokerage, with harbouring analysts who recommended stocks to the public while privately describing them as rubbish.
The investigation has been extended to several other brokerages suspected of encouraging analysts to promote shares so the investment banking department could get the lucrative business of underwriting and mergers. In their eagerness not to offend client companies, analysts throughout the business have given "sell" ratings in only 1 per cent of their recommendations, according to Thompson Financial/First Call.
Maintaining the value of stock became the prime goal of executives and directors because of the stock options on which they increasingly depended for pay-outs, or what is known in boardrooms as "compensation".
Everything was driven towards that goal in the boom years of the 1990s, during which CEO rewards rose 340 per cent to the point where they are now 411 times as much as the average factory worker (whose "compensation" rose only 36 per cent).
Despite all the reforms in American business since the anti-trust laws of a century ago, and the much-vaunted transparency of company reporting, with its conference calls and Securities and Exchange Commission (SEC) filings, bad news is now seen to have been routinely suppressed and creative accounting used to ensure continued good performance rating.
Legal but misleading financial sleight of hand has become commonplace, as when IBM beat Wall Street's forecasts at the end of last year by using $290 million from the sale of a business three days before the end of the quarter.
The scandals in American business have stirred such outrage that a new era of reform may be unfolding.
The SEC, the US Justice Department and prosecutors are initiating actions that could send some executives to jail. The lobbying clout of big business on Capitol Hill, where Enron was a multiple benefactor, has been severely diminished. Companies are rushing to ensure that their annual accounts will survive close inspection.
The system has already taken its own retribution on the worst offending companies like Enron, Andersen and Global Crossing, which have all bitten the dust. Exposed executives like Jeff Skilling of Enron may still be building mansions with their loot, but they have become social pariahs.
Another watershed was reached when on March 14th a grand jury charged Andersen with obstruction of justice.
The trial of the company got under way earlier this week, sending a strong message that it is no longer so easy to sweep a scandal under the carpet by doing a deal with the SEC.
Businessweek magazine has taken the lead in suggesting reforms. It recommends that Congress force companies to list options as expenses and grade them to performance; that accountancy be separated from consultancy; that shareholders resolutions, frequently ignored, be made binding to ensure accountability; that auditors should rotate every few years; that analysts be forced to declare conflict of interest; that regulators be given more funding and power; and that offenders be sent to prison.
The US model is still the most transparent in the world - the vigorous exposure of its flaws are an indication of that - but until real reforms are enacted, and shareholders protected from companies with crooked accounting, there is little room for lecturing emerging economies about corruption and cronyism.
