Shift toward more ethical business practices urged
Investor cynicism in the post-Enron-WorldCom-Tyco environment has corporate leaders grappling with how to make their companies more legitimate in the eyes of their investors.It boils down to the seemingly simple task of preventing people from stealing money and behaving badly. Preventing malfeasance is not easy, but because it is in some ways the basis of the capitalistic system, it’s viewed as vitally important. That was one of the messages emerging from the second Changing the Game forum held by the Vail Leadership Institute’s Center for Corporate Change in Beaver Creek, which attracted business leaders from across the country. The Center for Corporate Change is trying to drive ethical reform in American business and become a nationally recognized force for corporate ethical reform.The scope of greed, wrongdoing and outright criminal acts by corporate officers in some of those scandals shook the business world to its very foundation and was estimated to cost $7 trillion.”It is now crystal clear that our capitalistic system has experienced a profound failure, a failure with a whole variety of root causes, each interacting and reinforcing the other,” wrote John Bogle, founder of top-performing mutual fund Vanguard, in his 2003 book “What Went Wrong with Corporate America.”Was it the corporate culture or was it the behavior of unethical individuals that caused the failures – and what needs to be done?Not unanimous
There is, of course, disagreement about what should happen but there is no disagreement over the fact that change is needed.Compensation, competitive practices, leadership, regulation, corporate valuation, governance and accountancy have been identified as root elements of unethical practices in corporations. How to tie together those concepts to form an effective cat’s cradle was the job of members of the forum.But designing policy to make sure abuses don’t happen is a tricky business.”The public needs to see business as legitimate,” said Prof. William Allen, a panelist, corporate attorney and judge. “You can’t just ask people to be a better person. That doesn’t work. You have to make laws.”Corporate governance, one of the topics of the forum, is one of the hottest buzzwords in big business world now.”It’s become shorthand for good governance,” said Linda Scott of the $300 billion TIAA/CREF fund. She said the governance issue isn’t just a corporate issue. “We struggle to find ethical behavior in every aspect of our society,” she said.For corporate leaders of huge, publicly-traded companies with hundreds or thousands of employees, there has to be a system of acceptable behavior when millions or even billions of dollars are at stake, speakers stated.What to do?
“One process for all is dangerous,” said participant Doug Sims, chief executive of CoBank.One of the concepts getting wide coverage in the media is separating the chief executive officer and chairman of the board functions to avoid potential conflicts. A CEO might create a situation as chairman of the board where he could benefit to the detriment of the corporation.But that is not a panacea, participants agreed. In a company started by an entrepreneur, the knowledge to run the company may best reside with that entrepreneur.”There’s a danger of a checklist mentality here,” Sims said. “There are no silver bullets here. You’re dealing with people here.”Driving the movement for corporate change is investors, many of them powerful institutional investors like TIAA/CREF.”You cannot look at corporate governance as separate (from operations),” Scott said, noting that in business, as in society, structures have to be designed to protect investors from unscrupulous executives. “We have to build societal structures to protect ourselves from those people,” she said.Ellen Heffes, managing editor of Financial Executive Magazine asked the attendees to consider what went wrong with Enron and Tyco and other companies.”What was the corporate governance at these boards that allows the fraud and these activities to occur?” she said. “Where were the auditors when things went wrong.?”
En-wrongBut Bethany McLean, a senior writer for Fortune Magazine and co-author of the book Enron-inspired book “Smartest Guys in the Room, suggested Enron’s board of directors was infatuated with executives they hired.”The board fell in love with the management at Eron,” she told the forum. “Enron’s board forgot who they worked for – the shareholders.”She said the abuses occurred even though Enron’s corporate structure had a separate chairman and CEO in place. “There was a belief that these (management) people were just so incredibly smart,” she said.One solid change has emerged from the corporate scandals – the Sarbanes-Oxley Act that became law in 2002. Allen said it required more transparent financial reporting from public corporations.”What was wrong with the system was the evolution of auditing firms into multi-service organizations,” he said. “Sarbanes-Oxley fixed that.”Allen said auditing firms that performed additional services for corporations lost their ability to objectively audit a company’s finances.Cliff Thompson can be contacted via e-mail at firstname.lastname@example.org or by calling 949-0555 ext. 450.