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
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
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 (firstname.lastname@example.org) 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."
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