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A New Corporate Order
Published on Sunday, August 4, 2002 in the Maine Sunday Telegram
A New Corporate Order
We Need Greater Democratization of the US Corporation and More Just Structures of Compensation
by John Buell

WorldCom and Enron have become symbols of the problems corporate crime can pose for employees and investors.

Many investors now distrust all the information they receive from corporations, and many workers worry about accumulating enough for a secure retirement. The Bush administration, attuned to these growing middle-class concerns, promises to get tough on fraud and other white-collar crimes.

Yet unfortunately, much of the sensationalist coverage of financial markets and corporate crime glosses over the deeper problems in corporate governance. Jailing a few outrageous liars and cheaters will do little more than serve up a few sacrificial lambs. Without greater democratization of the U.S. corporation and more just structures of compensation, most workers will have little to look forward to during their retirement years.

While Bush sermonizes about corporate crime, many congressional Republicans continue to sing soothing lyrics. Not to worry, says Republican stalwart Phil Gramm, just a few days before the WorldCom crash. The market is now aware of the problems posed by deceitful CEOs and complicit directors. The New York Stock Exchange is voluntarily demanding that corporations on its list hire independent directors. Corporations are bending over backward to provide comprehensive and honest annual reports. The market will punish corporations and investment houses that play games. Further governmental initiatives aren't necessary.

Enron's and WorldCom's blatant and outrageous fraud was probably rare even in the heady days of the high-tech bonanza. The larger problem lies in the charades, exaggerations and studied forms of denial that go on between corporate managements and Wall Street brokerage houses.

The Washington Post pointed out May 12 that even after admonitions to provide candid information, most corporations issue annual reports that ignore bad news or blame it "on uncontrollable factors such as the weather, the economy, the stock market or government regulation. . . . There is precious little data and analysis on the key operating measures that executives themselves look at to assess the company's performance - things such as inventory turns or the cost for each new subscriber. . . ."

Conservatives argue that the job of investment houses is to sort through this fluff so that clients can make sound investments. Brokerage firms that buy corporate image will fail in the marketplace. They are probably right in the long run, but all of us don't retire in the long run. Even if investment houses restructure analysts' compensation to depend on the value of clients' portfolios, the system as a whole will still be highly susceptible to fits of mass euphoria or hysteria. Individual analysts whose income now is tied to the paper wealth of their clients may often still have an interest in getting aboard or helping to foster new market bubbles.

Even skeptical and scrupulous industry analysts may have difficulty in many situations. Those managements that can skillfully massage the news will continue to induce interest in their stock. The stock price will rise and analysts who don't get on the bandwagon will look foolish. They may not retain jobs or clients long enough to mutter, "I told you so," as the bubble bursts.

If pension funds are to become equitable retirement instruments, our corporate order must start by providing more equal information to all. Independent board members are a feeble start. Preventing auditors from also being hired as consultants, as provided in a sweeping new law signed by President Bush on Tuesday, will be a better place to start. Nonetheless, it still fails to address the many forms of sugarcoated information to which The Post alludes.

A sounder course of action would be to require both worker and consumer representation on corporate boards and a broader voice for workers in corporate governance.

Worker and consumer representatives must have full access not only to financial but to product and operating information. Lost in all the current discussions of auditing tricks are the many ways that earlier deceptions regarding the potential toxicity of the product and/or production processes brought down many corporate behemoths. Nor are such sordid tales as asbestos and tobacco liability confined to ancient history. Just this past May, Schering-Plough was forced to pay $500 million in fines for producing prescription and over-the-counter drugs in factories that failed to meet minimal manufacturing standards.

More honest and efficient corporate performance depends less upon harsh criminal sanctions than it does on the voice and role both workers and the public can have in spotting and preventing malfeasance. The modern corporation is a publicly chartered entity enjoying immense legal and economic privileges. Yet here in the United States, unlike many European nations, most corporate employees enjoy minimal rights to organize, seldom have an equity stake in their firms and cannot even exercise basic rights of free speech within the workplace. More than half of U.S. workers don't even have pensions to be wiped out by market collapse. Deprived of such basic rights, many workers are unable to negotiate even minimal pensions. When workers are disenfranchised, corporations and the public also lose capable whistleblowers and vital talents.

The cycles of boom and bust that characterize our history have been driven in part by systematic misinformation followed by public revulsion. As the dust from WorldCom and other corporate swindles fades, investors and policy analysts would do well to step back and take a broad look at this history. Our stock market has always been a crapshoot. Left Business Observer editor Doug Henwood points out that $10,000 invested in the market in 1937 would have yielded $250,000 30 years later, while $10,000 invested in 1972 would yield $73,000 today.

Even after recent declines, the stock market today is still trading at a price-to-earnings ratio somewhat above historic averages. If future earnings "restatements" lower earnings even further, there may be even more downside risk. For the market to deliver returns equivalent to the 1967 returns cited by Henwood, one must make heroic assumptions about either the rate of growth of profits or long-term changes in the price-to-earnings ratio investors are willing to accept.

Social Security, a frequent target of conservatives, is on more solid foundations than the market. Despite relying on absurdly pessimistic assumptions about overall economic growth, Social Security trustees can still report the system is financially sound for almost four more decades. Even at that point it would need only modest changes to remain solvent another four decades.

Perhaps the most important short-term reform would be to demand that all workers covered by private pensions be extended options that include lower-risk, long-term annuities.

Employers offering pensions should also be required to provide access to genuinely independent advice regarding risks and opportunities.

An adequate retirement income for Americans begins with a healthy Social Security system uncorrupted by risky privatization schemes. It must be supplemented by pension funds for all workers premised on equal information and opportunities for less risky investments. These opportunities, in turn, depend on workers' winning a greater voice in corporate affairs. The stock market is no magic bullet. A comfortable retirement for most of us will require some heavy political lifting.

John Buell ( lives in Southwest Harbor, Maine and writes regularly on labor and environmental issues. He is author of "Democracy by Other Means: The Politics of Work, Leisure and Environment."

Copyright © Blethen Maine Newspapers Inc.


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