By Don MacRae
A Moral Compass and a Big Stick
Corporate America will
regain public trust only when the golden
incentives to err are eliminated -- and
corrupt execs are doing hard time
It's the worst fallout ever from
corporate fraud. Trillions of dollars in value
has been ripped from the stock market -- more
than the GDP of many countries. Investors have
been had by corporate leaders whose moral
compasses were confounded by greed. The execs'
lack of conscience set back the hopes and
dreams of millions who believed the
self-serving pronouncements of a few culpable
CEOs and their supporting cast of
co-conspirators -- bankers, stockbrokers,
accountants, and consultants.
We, who trusted them, have lost our innocence.
We are paying with real dollars and real pain.
The guilty must be held accountable and -- if
there's any justice -- suffer the same pain
they've inflicted on millions of families whose
pensions and savings have been pilfered.
President Bush has at last said as much, and
federal prosecutors seem inclined to follow
through with a vengeance. They must maintain
their resolve, meting out punishment that
investors and execs alike will remember for
decades, if the markets are to recover and the
economy is to avoid a double-dip recession.
How did we get into this mess? The primary
purpose of the board and management of a public
company is to serve and protect the interests
of shareholders. Yet now we find that corporate
officers have used some of America's best-known
public companies as their personal banks.
America's version of capitalism has evolved
into a system that creates an extraordinarily
strong incentive to manipulate financial
information in order to boost stock prices for
fast, huge returns. Executives who each year
receive a million stock options are far more
interested in making the stock rise quickly
than in building a sustainable business.
SCAMS 101. If they
can't improve a company's performance -- or if
they do and the stock doesn't move -- they're
tempted to achieve that goal with short-term
measures, fraudulent or otherwise, that may put
the company and its shareholders at risk. And
the execs who go down this path are more than
willing to share the wealth with the financial
engineers who have helped them achieve their
ends. In other words, there have been many at
Their scams aren't rocket science, just
elementary market manipulation. First they
might borrow money from the corporate treasury
to buy discounted company stock. Then, they
would increase the price of that stock by
various means -- including a dizzying array of
bogus swaps, partnerships, and accounting
trickery designed to camouflage the company's
true condition by overstating earnings and
Voila! The stock price rose -- and the execs
sold their stock before the market could catch
up with the con. If they were caught, the
strategy was simple. Point the finger at
everyone else, shed crocodile tears for
shareholders -- and plead their Fifth Amendment
right to avoid incriminating themselves. What
gutless, unconscionable creeps.
Significant changes must now be made to restore
investor trust in public companies. Yes, we
need longer jail sentences for corporate fraud
and a stronger watchdog agency to catch
accounting misdeeds and even oversee the
profession, all now provided to some extent by
new legislation. But ways must also be found to
stamp out the greed and gluttony of the
Compensation rules must be changed. All
financial dealings between corporate officers
and their companies must be at arms' length.
There should be no more loans that give highly
compensated execs a low-cost way to build a
portfolio of company stock.
Compensation of salary and bonus based on
corporate performance plus stock options must
all be expensed and be included in the
calculation of earnings. A recent Merrill Lynch
study of the 500 largest U.S. companies found
that reported profits would have been 21% lower
in 2001 if options had been expensed -- 39%
lower in the high tech sector.
Such reforms should be just the start: CEOs
should have to wait longer -- five years is a
good, round number -- before exercising their
stock options. A period of this sort should be
sufficient to make insider self-dealing much
harder to pull off. Ken Lay, the former Enron
chairman, sold about $70 million worth of Enron
shares just before the corrupt energy company
went bust -- a failure that robbed employees
and shareholders of about $40 billion.
Compensation for corporate officers must be
more transparent. Compensation committees must
be chaired by high profile, highly respected
and independent board menders. Board-approved
pay packages must be voted on by shareholders.
It's time for shareholders to take back control
of their companies -- and of the officers who
The playing field must be leveled in other
respects. There should be no more golden
parachutes, for example -- severance packages
worth millions, ladled out to people who by
virtue of their wealth are least in need of
such largesse. Let CEOs get out of the plane
the same way the rest of us do -- when it lands
And if anybody tells you it'll be impossible to
find good CEOs to run large public companies
under these conditions, have them look over
their shoulder at the young, bright, scrupulous
people lining up for the job.
Corporate leaders must embrace higher ethical
and business standards -- that's clear. And if
they violate those, they should be precluded
from ever again holding a position of such
authority and influence.
The big lesson, though, is that corporate
officers must learn to lead by example. When
making important decisions they must listen to
their inner voice, whether that be their
conscience or their God, and be prepared to act
accordingly. Do you really think that the inner
voices of Kenneth Lay, Jeffrey Skilling, Bernie
Ebbers and the others caught in a variety of
frauds told them: "Cook the books. Take as much
out of the company as you can. Pretend you are
sorry for any part you might have played in
destroying the lives of people who served you
well. Plead the Fifth."
"SET OF YOUR SAILS".
The good news is that the assault on the
integrity of our free market system, though
perpetrated by a significant number of
corporate leaders, doesn't seem to be systemic.
The Securities & Exchange Commission's
requirement that CEOs personally certify the
accuracy of their companies' financial reports,
starting Aug. 14, will pose no general problem
for top execs. Most will have little difficulty
in putting their reputations on the line to
vouch for the integrity of their financial
There's an old saying: "It's the set of your
sails and not the gales that determine your
direction." Over the past 30 years I have
worked with a wide variety of CEOs and CFOs
from the largest to the smallest of public
companies. Without exception, each had his or
her moral compass set on serving the best
interests of shareholders.
These are not the corporate leaders that you
are hearing about today. But they are the ones
that you will be hearing about in the future.
For your sake and that of the organization you
lead, make sure you are one of them.