Mort Zuckerman
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.
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.
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