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Jewish World Review Jan. 13, 2004 / 19 Teves, 5764

Mort Zuckerman

Mort Zuckerman
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Consumer Reports

Policing the corporate suites

http://www.NewsAndOpinion.com | Have we saved capitalism from the capitalists? In the glum years of the new millennium, one business scandal came hard on the heels of another. It wasn't just Enron and WorldCom. The supposedly "independent" auditors, directors, accountants, and stock market advisers and banks were all tarnished; the engine of the people's involvement, the mutual fund industry, was shown to be permeated by rip-off artists rigging the system for the benefit of insiders and the rich. To crown it all, the high temple of capitalism, the New York Stock Exchange, was polluted by cronyism and greed.


The remarkable thing is that even after all this, confidence in the system seems to have survived. With stocks and profits on the rise once again, we are now at the point of letting the bad memories of the new millennium slide into oblivion, momentary blips on the curve of satisfaction. That would be a mistake. The images of handcuffed executives doing the perp walk before the TV cameras must be retained on all our retinas —but especially on those of unhandcuffed CEOs smiling for the annual report.


Boondoggle. The leaders of the mutual fund industry, in particular, must appreciate how close they have come to undermining the system that is the investment vehicle for 95 million Americans. It was outrageous —perhaps the biggest outrage of them all —that half of America's 88 largest mutual funds have been allowing choice customers to jump in and out of funds at a cost to ordinary investors of some $5 billion a year. This is a betrayal of the very justification for the mutual fund industry —giving the average guy a chance to participate on equal terms.


The men and women at the top of American industry and finance make big money. Americans by and large don't begrudge enormous sums earned by anyone —by Tiger Woods, by Nicole Kidman, or by business stars like IBM's Lou Gerstner. Their performances are measurable. But the average pay of a chief executive in major U.S. companies no longer bears any relationship to performance. It has gone up from 42 times that of the average wage in 1982 to a staggering 411 times today —a multiple of nearly 10 times. Is the average boss really 10 times better than he was 20 years ago? And gilding the compensation lily are golden parachutes and severance pay. The average severance package for departing CEOs in major companies last year was about $16.5 million —paid even when there was a dramatic decline in corporate performance, making it look like a boondoggle and a reward for failure.

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On top of that, there were all those stock options that raised conflicts of interest, like "pump and dump" plays by top executives, who did all they could to inflate share prices in the short term so they could exercise their options and sell quickly at enormous profit. So the public was made to stand by while Global Crossing's Gary Winnick took out $750 million before the company filed for bankruptcy and Enron's Kenneth Lay and Jeffrey Skilling sold off hundreds of millions of dollars' worth of shares before the company collapsed. Then there were the CEOs who simply used their companies as personal piggy banks. Tyco's Dennis Kozlowski was the hands-down winner for chutzpah there. He spent $2 million on a 40th-birthday party for his wife, charged half of it to his company, and bought a co-op apartment in New York for over $18 million, misrepresenting it as a personal purchase to the co-op board while secretly paying for it out of company funds.


Misconduct like this rightly falls under legal scrutiny and will, with luck, result in the appropriate legal penalties. The idea that there are two tracks on the economy, one for the rich and the other for the rest, is utterly corrosive to our system and must be abjured. But most of the blatant excesses in the area of compensation have been quite legal —and simply making them illegal is not the answer.


Government has no part in the private negotiation of contracts. We must not strangle the free-enterprise flexibilities that are the true strength of the American economy. But there is a wholly proper and necessary role for the directors (especially the independents), shareholders, the Conference Board and other public-interest groups, better business bureaus, chambers of commerce, and public opinion served by a vigilant media. While government goes after the wrongdoers, the rest of the business community must insist on and enforce a higher standard of ethics.


Rightly, ethics has moved to the top of the agenda in many major companies. Ethics officers, who enforce codes of ethics, are now prevalent in an increasing number of big companies. Fortunately, American business and American finance tend to fix problems quickly and even ruthlessly. We will all be watching.

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JWR contributor Mort Zuckerman is editor-in-chief and publisher of U.S. News and World Report. Send your comments to him by clicking here.

Up


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© 2001, Mortimer Zuckerman