Corporations - Page 4

(7/20/02) - As a former Dilbertina in corporate America, it seems to me that something important is missing in the current efforts to diagnose and treat a very bad case of corruption. The malady is not limited to "a few bad apples," nor will it yield to new regulations, important as they are.

The infection is systemic, reflecting a 20-year change in corporate culture that converted full-time employees to temporary workers, all but eliminated corporate investment in communities and gutted strong companies to "maximize shareholder value." The resulting, and temporary, increases in stock prices and reductions in operating costs (at the expense of employees) fueled an obscene rise in executive salaries.

Employees and communities were the immediate losers in the new corporations. Now we see that shareholders can also lose. Employees once were valued members of a corporate family. They worked an eight-hour day and were paid a fair salary that included a company-paid pension plan and decent medical-dental insurance. They may also have had a 401(k), or one of its predecessors, but this was not a replacement for a traditional pension. In return, most employees willingly gave their best efforts and loyalty. Shareholders received a regular return on investment in the form of dividends. They didn't have to sell their stock for immediate return and could endure the normal ups and downs of the business cycle, knowing that good companies invested for the future. Both employees and investors were usually in for the long term.

Somewhere in the mid-1980s, "paternalism" gave way to "entrepreneurship." Of course, corporate managers bear no relationship to true entrepreneurs. But the illusion led many to believe they deserved to live like robber barons and kings. Companies that once referred to employees as "part of the family" became "lean and mean" places of temporary employment, with employees hired and fired as needed. This was sold to employees as "taking charge of one's career." Divisions were sold off, producing instant revenue and juicing up executive compensation.

It is no wonder that today's corporations do not value "older" workers. They know too much. Attention, young people: In the 1930s, people died to establish the eight-hour workday, and until recent years it was the norm. There is something wrong when today's children are fed packaged dinners by a nanny and parents eat remnants while standing over the sink at 10 p.m. Employers know this.

It was possible to overlook the loss of personal time and such hard-won benefits as company-paid pensions and medical care when it seemed we were all going to be rich. Now that that's over, perhaps we can rebuild our work environment into something fair.

Dethroning the CEO is a beginning. Prior to the 1990s, extraordinary wealth was the realm of the true entrepreneur--Edison, Ford, Gates, Disney and others who, warts and all, created something of value. Many of today's CEOs created nothing; at best they managed well what they inherited.

Businesses should start again to reinvest in employees and the community. This was once touted as being good for business and for shareholders. It still is.

Accountants and economists can start speaking in plain language. Congress can establish independent governing boards and enact effective regulations. But without a change of values, greed and fraud will simply take a different form.

Carolyn Ziegler-Davenport, who now works at Southwestern University School of Law, was a corporate employee for 17 years.

(7/20/02) - EVERETT, Wash.

I work operating industrial machinery at a paper mill that is owned by a global corporation. My mill was built in the 1920's, when the stock market was soaring, F. Scott Fitzgerald was writing about the rich and Babe Ruth was hitting home runs for the Yankees. I get paid by the hour and do not understand the markets. I do not belong to a country club or own a suit. I just want to work at the mill until I retire.

My mill has survived the Depression, a world war, even a couple minor earthquakes. But I worry if it can survive Ken Lay. Small investors like me — encouraged by politicians, financial advisers and CNBC — poured our retirement savings into the stock market. Now we are dismayed that the corporate captains have abandoned accountability while the crew sinks with the ship.

Perhaps I am looking for excuses for the recent poor performance of my 401(k) plan, but I wonder if the market is fair. In 2001, the average chief executive's pay was more than $11 million, according to Pearl Meyer & Partners, an executive-compensation consulting firm. Executive pay has been climbing steadily for the past two decades and has outpaced employee pay. Two decades ago, C.E.O.'s were paid about 40 times more than the average hourly employee; now they make more than 500 times the wage of the average hourly employee.

Last year the C.E.O. of my company made 592 times more than I did. I wonder if that makes me underpaid or the C.E.O. overpaid. Recently management told hourly employees at my mill to make concessions or risk losing our jobs. We made the concessions last autumn, but last spring the C.E.O. received a stock "gift" worth $1.4 million.

This isn't capitalism, it's avarice. I am not naïve. I know about the robber barons of the late 19th century and others throughout history who have abused the system. But never has the gap between executives and employees been greater. This disparity threatens the capitalist system itself. When employees make concessions while executives take bonuses, the bonds of common purpose are broken.

Contrast this with the Marine Corps, which is structured so that enlisted personnel and officers work together for a common purpose. The Marine Corps commandant runs an organization with 172,600 men and women, oversees an annual budget of some $13.2 billion and is paid $163,177 annually — just 13 times more than the pay of a new private in boot camp. The system is successful because of a tradition of shared risks and rewards.

All employees want their company to succeed, and I am proud to work where I do. I imagine my concern about my company's share price is as great as my C.E.O.'s; a portion of my 401(k) is in company stock. I recognize my job depends upon my company making a profit.

But I wonder if corporate executives appreciate the role workers play in their success. Free enterprise is a system of risks and rewards. As it now stands, employees suffer most of the risks, while executives enjoy most of the rewards.

Robert Hemsley is a member of the Association of Western Pulp and Paper Workers Union.

(7/16/02) - In his recent speech to Wall Street, President Bush stated, "In the long run, there's no capitalism without conscience." There is little doubt as to the truth of this assertion, but where is the conscience going to come from that is necessary to assure capitalism's future?

Today's capitalism is driven by large corporations. In addition to sometimes defrauding their own shareholders, big corporations regularly despoil the environment, violate human rights and the dignity of their employees, endanger the public health and safety with dangerous or untested products and damage the welfare of the communities in which they operate. These actions are more illustrative of an absence of conscience than its presence.

President Bush has said that the barrel just has a few bad apples whose shenanigans have called into question the trustworthiness of everyone else. He wants to fix this by forming corporate SWAT teams at the SEC and threatening CEOs and other corporate bigwigs with stiffer criminal penalties for their misbehavior. We are deluding ourselves if we think that this is going to bring (or restore) conscience to capitalism.

Corporations are managed by groups of people acting collectively. Frequently, these people act on the advice of experts from the legal, accounting and banking worlds. Still other groups carry out the plans of the people making the decisions. Everyone knows that pinning criminal responsibility on individuals in this situation is almost impossible. Corporate managers are not going to change their behavior out of fear of prison terms they know they will never have to face.

Despite the president's assertion to the contrary, there is something wrong with capitalism. What's wrong with it is that its engine, the corporation, has no conscience itself.

Under the corporate law, the corporation is dedicated to the unbridled pursuit of profit. The law in all fifty states says that directors must use their best efforts to maximize profits for shareholders. Directors may be sued if they violate this duty. Everybody who works for a corporation knows it is their job to keep this from happening by helping the company make money.

There is no element of conscience in this duty. Maximizing profits is pure self-interest. This dedication to the pursuit of self-interest is the reason corporations act without conscience and, ultimately, why capitalism is largely without conscience.

For there to be capitalism with conscience, we must change the corporation to promote respect for the environment and other elements of the public interest. This change must promote socially responsible corporate behavior throughout the corporation irrespective of who is the CEO or whether he or she is a good apple or a bad one.

Capitalism with conscience requires that all managers understand the pursuit of profits should not result in the destruction of the public interest. For this to be achieved, the duty of directors must be changed. I propose we do this by changing the corporate law to include a legally enforceable Code for Corporate Citizenship. In its most succinct form, the Code would simply add the following 24 words to the duty of directors to make money:

but not at the expense of the environment, human rights, the public health or safety, the welfare of communities or the dignity of employees.

The effect of the Code will be to create new duties for directors to protect the environment, human rights, the public health and safety, the welfare of our communities and the dignity of employees. These new duties should be enforceable in much the same way that shareholders are now able to hold managers responsible for not acting in the best interest of the shareholders- -by civil lawsuits brought by or on behalf of the people whose interest the corporation damages.

The Code will require directors to pursue corporate profits only in ways that do not damage the environment or any of the four other elements of the public interest it protects. In a sense, it will free directors and other people in the corporation to follow their conscience (sometimes sacrificing profits to protect the public interest), without fear of being sued by shareholders.

The Code for Corporate Citizenship will improve the profit motive not eliminate it. It will allow capitalism to evolve to its next logical step by providing what the president has correctly stated it cannot survive without--conscience.

Robert C. Hinkley is a corporate lawyer and former partner in the New York law firm Skadden, Arps, Slate, Meagher & Flom LLP. He now resides in Brooklin, Maine.

(7/16/02) - What about states' rights?

Before Enron, WorldCom and the rest of the Wall Street hustler stories broke, in this most recent wave of corporate criminality, anti-globalization protesters and other factions of what I loosely refer to as the economic justice movement were derided by even the liberal media as being senseless when it comes to economics.

But now that the bad apple theory has been exposed as a red herring offered by unregulated free-market worshippers, those so-called idiots who took to the streets of Seattle in 1999 appear to be, well, prophetic.

The muted message coming out of the protests has been: There's something wrong with the global economic system itself -- namely, a lack of democratic accountability.

And now, with even our business-is-king president conceding the point, we can finally have a discussion about corporate responsibility and social ethics without some F.A. Hayek or Milton Friedman fanatic drowning out opposition voices by using meaningless political epithets like "you're a socialist, Marxist, communist, liberal."

Late last week, The Wall Street Journal reported, "Ultimately, the proposals Mr. Bush advanced in (his) speech on Wall Street may well serve as the floor rather than the ceiling for Washington action."

Following the president's address, the Senate moved to go beyond Bush's timid proposals, voting 97-0 to establish sweeping new powers to target corporate fraud, creating a new corporate-fraud chapter in the federal criminal code.

The Senate also voted 96-0 to toughen criminal penalties for white-collar crimes, such as pension fraud, mail fraud and conspiracy -- a provision that would, according to the Journal, "allow courts to mete out the same punishments to guilty executives as now apply to drug kingpins."

The essence of what the Senate was trying to do was captured by Vermont Democrat Patrick Leahy when he said: "If you steal a $500 television set, you can go to jail. Apparently if you steal $500 million from your corporation and your pension holders and everyone else, then nothing happens. This makes sure something will happen." That's an implicit admission that our criminal justice system has long served the interest of the wealthy at the expense of the less affluent.

And not that anyone was expecting it, but the president could have appointed an independent counsel to investigate Vice President Dick Cheney's tenure at Halliburton, amid allegations by the conservative legal watchdog group Judicial Watch that the oil-field services business headed by Cheney engaged in fraudulent accounting practices from 1999 to 2001. It kind of puts the Clinton-Whitewater affair in a whole new perspective.

So now that the momentum has shifted toward greater corporate accountability, maybe the ideas coming out of such organizations as the Program on Corporations, Law and Democracy (POCLAD) will get broader consideration. That will remind us that the sovereignty rights of real people come before so-called corporate rights, as the framers of our Constitution intended (see www.poclad.org).

It was through pro-corporate judicial activism in the early 1900s that the Constitution and concept of private property found therein came to be interpreted as justification for the legal absurdities we have today in which individual rights and liberties meant for flesh-and-blood human beings are extended to corporations.

Want some relevant summer reading? Check out POCLAD's collection of essays and speeches called "Defying Corporations, Defining Democracy." In that book, I found this gem from an 1890 New York Court of Appeals case, involving the North River Sugar Refining Corp.

Writing on behalf of the court, Justice Finch declared: "The judgment sought against the defendant is one of corporate death ... The life of a corporation is, indeed, less than that of the humblest citizen ... Corporations may, and often do, exceed their authority only where private rights are affected. When these are adjusted, all mischief ends and all harm is averted.

"But where the transgression has a wider scope, and threatens the welfare of the people, they may summon the offender to answer for the abuse of its franchise or the violation of its corporate duty. The (North River Sugar Refining) corporation has violated its charter, and failed in the performance of its corporate duties, and that in respects so material and important to justify a judgment of dissolution ... All concur."

Corporations used to be under the authority of the states in which they were chartered. Where are states' rights advocates on this issue today?

Why are they not echoing the sentiments of our great nation's founders -- such people as Thomas Jefferson, who spoke of the need "to crush in its birth the aristocracy of our moneyed corporations, which dare already to challenge our government to a trial of strength, and bid defiance to the laws of our country"?

Employee Advocate: To read 1999 WTO protest comments, click the link below:

Duke And The WTO Protest

We received a trade association press release Friday, hailing the defeat of Sen. McCain's "assault on stock options," calling it a "bipartisan effort in support of high-tech workers." A bipartisan assault on investors is more like it. No one on Capitol Hill seems to understand that accounting for stock options has exactly zero economic effect on a company. What they're supporting is not high-tech workers, but corporate greed and a touch of blackmail. Bill Mann's coming out swinging.

(7/16/02) - I hope by the end of this effort, Taryn Lynds, director of public communications with the American Electronics Association (AeA), wishes she had never heard of me, or The Motley Fool. I know she's going to rue sending us a copy of a press release hailing the defeat of accounting stock options.

AeA is comprised of more than 2,700 high-tech company members. These members make up an enormous slice of the American economy, including such massive beasts as Microsoft (Nasdaq: MSFT), AOL Time Warner (NYSE: AOL), and Cisco (Nasdaq: CSCO). Among its members are the worst abusers of stock options grants in the market, with companies that routinely give away hundreds of millions of shareholder value to insiders as performance-based incentives.

This is not an effort to get companies to rein in executive compensation. I'm not a big political animal, and I'm certainly not one to stoke the flames of class warfare. If they want to pay executives millions of dollars, and the shareholders approve, well, by all means, they should. But as an individual investor, I find the arguments against stock options accounting so disingenuous that I can't understand how people don't see them for what they are: self-interested ways to give insiders enormous pay packages without disclosing the effect to shareholders.

Seriously, these options are worth billions to those who receive them. Not expensing them treats the options as if they've come out of thin air. Someone bears a cost, and that cost should be represented. That someone is the existing shareholder.

For the last time (which means that it won't be for the last time): Options expensing has no economic effect! The cost to shareholders -- in the form of dilution -- is exactly the same, either way. Companies are trying to make their income statements look as good as possible. Congressmen: AeA's arguments supporting high-tech workers in regard to stock options are snow jobs. Companies are afraid that if they have to show the true economic cost of options, earnings will be lower, and their share prices will drop.

Big deal! If stock options provide a distorted picture of performance to the end shareholder, then we're not talking about making financial statements look worse. We're talking about making them look accurate. Where else could you say, "Well, if we lie, it looks better..."?

Oh yeah, Washington. Never mind.

Ah, but what about the rank-and-file employees of these companies? Some companies say that these employees will be denied a valuable form of compensation if the company expenses options. Read that paragraph above once again. Options expensing has no economic effect. So, if a company is going to take options away just because it has to expense them, it's saying, "It's OK to do so, as long as we don't have to tell people the cost...." That's not an argument based on the righteousness of the cause. There's a word for companies that curtail options to the rank and file, simply because of expensing: blackmail.

Earnings presented to shareholders that do not include stock options expensing are deceptively high because they overstate the amount of economic return an investor should expect. Coca-Cola (NYSE: KO) finally gets it. So does The Washington Post Co. (NYSE: WPO). Winn-Dixie (NYSE: WIN) and Boeing (NYSE: BA) have understood this for years. Warren Buffett has understood it for years, calling the current treatment of stock options "absurd." Ah, but the AeA felt good enough about itself to declare "victory."

When the AeA 'won,' shareholders lost

The victory the AeA claims, dear shareholder, is over you. And if you own shares in a company in the AeA, the company is paying dues to an organization that's fighting your interest in determining the true cost of a company's employee compensation. One would think that a trade association representing so many public companies would be more careful than to poke the hornet's nest of angry shareholders.

I have crafted a letter of response to Taryn Lynds of the AeA, expressing my displeasure at its self-interest and anti-shareholder stand on stock options. I pointed out that among AeA's members are the worst abusers of stock options: companies that give mega-grants to executives, that give away 8%, 9%, 10% per year to employees. This, by the way, is the same organization that lobbied hard against stock option expensing last time around (thank you, Sen. Joe Lieberman), and vociferously fought the Financial Accounting Standards Board's banning of pooling interest accounting methods for acquisitions, claiming that it would be disastrous for the technology industry. Guess what? All of those acquisitions used a pooling method that turned out to be a basket of snakes.

But the current turmoil and shareholder anger offer individual investors an opportunity to say to public companies, "Enough is enough. You can hide compensation costs to shareholders, but we refuse to be among them." AeA and other lobbying firms have held sway in Washington forever, and they will continue to. But in order for their plots to keep stock options hidden to be successful, they need individual investors to play along. Well, I won't.

I control The Rule Maker Portfolio. Tomorrow, we're selling one company in the portfolio, an AeA member. In the next few weeks, we will continue to purge AeA member companies from the portfolio. I'm also going to sell the stock of AeA members out of my own portfolio. With each sale, I'm going to send a brief letter to the company's investor relations department. It will say:

Dear Sir/Ma'am:

It is with some regret that I inform you of my intention to sell my entire position in your stock. I don't doubt that yours is a fine company. I would not have invested otherwise. However, I am appalled by the position the AeA, a trade association to which your company belongs, has taken in regard to employee stock options expensing. My investment dollars support you, and, in a small way, those dollars are paid to an organization that holds my right to proper accounting of compensation in contempt.

Your continued membership in and support of the policies of the AeA reveals the level of contempt in which you hold shareholders. Until your company either leaves the AeA or enacts a shareholder-friendly employee stock options policy, which includes expensing, you should expect me to continue on my campaign of getting others to sell your stock.

Sincerely, Bill Mann

While you're at it, why don't you send a note to your senators and representatives, telling them about what you're doing?

I have no ill will toward these companies, nor do I find it particularly pleasant to sell things that I may not wish to sell. Doesn't matter. This is right. Do you hear me, AeA? You may have the big money, but in this matter, you are in the wrong.

Fool on!
Bill Mann, TMFOtter on the Fool Discussion Boards

Bill Mann is senior editor for investing at the Motley Fool. He's also, in spite of the sentiment put forth here, a net buyer of stocks at this time. He has beneficial interest in Cisco. The Motley Fool has a disclosure policy.

(7/20/02) - Securities and Exchange Commission Chairman Harvey L. Pitt said yesterday that it is inevitable that publicly traded companies will have to treat stock options as an expense.

Pitt, who has said he does not favor counting options as an expense, hasn't altered his view, an SEC spokesman said after Pitt's statement. But Pitt believes that given the current political and economic environment, the change in accounting is certain to come.

"The question isn't whether stock options should be expensed," Pitt said during an appearance at the National Press Club. "The question is when and how."

He said, however, that even before such a major change, other fundamental issues about stock options should be addressed that would align the incentives for management with the interests of shareholders.

The granting of stock options, for example, should be tied to a company's long-term financial goals, rather than short-term goals, such as quarterly or yearly results, he said.

Pitt added that publicly traded companies should require that shareholders approve stock option plans, saying he has asked the New York Stock Exchange and the Nasdaq Stock Market to make that a requirement for all companies trading on those markets. Also, he said, stock option grants should be approved by independent directors of the company not tied to management.

Pitt also said corporations should not be able to make up the losses for top executives when their stock options fall in value because of poor company performance.

Only when those issues are addressed, he said, would it make sense to deal with the question of how to account for stock options.

Financial regulators and other experts have been pressing since the early 1990s to change the way corporations treat options on their profit-and-loss statements. But the companies that use them -- especially many high-tech firms and financial services companies -- have pushed hard to retain favorable treatment.

The current rule gives companies the best of both worlds. Unlike salaries, the cost of granting options does not need to be subtracted from earnings, although companies must include an explanation in a footnote of how earnings would be affected if they were counted. But when the options are exercised, the company is entitled to a tax deduction.

Options do have costs for investors, diluting the value of their shares. Perhaps more important, critics say, options create an incentive for executives to push for short-term stock market gains, whether or not such a strategy is beneficial to the company in the long run.

Only a handful of companies now treat options as an expense. But the number is growing. Just this week, Coca-Cola Co., The Washington Post Co. and Dole Food Co. announced that they will do so.

According to a report by Bear Stearns & Co., 38 companies would have experienced an earnings decline of more than 50 percent last year if they had been required to deduct options as an expense, and 20 percent of the profit reported by Standard & Poor's 500 companies would have been erased.

Mark Nebergall, president of the Software, Finance and Tax Executives Council, a trade group opposed to changing the rules, said the revision is not inevitable. The Financial Accounting Standards Board, which sets accounting rules, has not revised the rule, and Congress will be hesitant to get involved, Nebergall said.

He argued that treating options as expenses is hard to do reliably when companies don't know how much their employees will be able to profit from them. "It's a step backwards in terms of clarity," he said.

Staff writer Renae Merle contributed to this report.

(7/11/02) - There is a cancer eating away at the heart of corporate America and its name is “greed.” It is becoming increasingly apparent that more and more large corporations will do anything, legal or otherwise, to fatten the already huge compensation packages of their CEO’s and other senior executives. As we have seen in recent years these corporations lie about their financial statements, cheat or move abroad to avoid paying their fair share of taxes, cut the pensions and health benefits of their employees and throw loyal workers out on the street as they move their plants to China. At the same time many of them line up for billions in corporate welfare from the federal government.

Let’s be clear. We’re not just talking about a “few bad apples,” such as Worldcom, Enron, Xerox, Adelphia, Tyco, Merck, and Arthur Anderson. According to a recent study by the Huron Consulting Group, over the past five years nearly 1,000 companies were forced to correct their financial statements.

The “greed culture” in the United States today is almost beyond belief. CEOs of major corporations now make over 500 times what their employees earn. In addition, they receive bonuses, golden parachutes, stock options, lavish retirement plans, and a wide range of other very generous benefits. The result is that the richest 1% now own more wealth than the bottom 95% and we have, by far, the most unfair distribution of wealth and income in the industrialized world.

At WorldCom, where profits were overstated by $3.8 billion, 17,000 jobs have been lost. Their accounting fraud has cost shareholders some $150 billion, including billions in lost pension assets. Meanwhile, former WorldCom CEO Bernard Ebbers received personal loans from the company of more than $408 million that he still has not paid back.

In addition, John Sidgmore, the current WorldCom CEO, has sold more than $87 million of WorldCom stock since 1997. Scott Sullivan, the former WorldCom Chief Financial Officer, has sold more than $45 million in WorldCom stock since 1995. If you add it up, just 5 people at WorldCom received over $600 million in loans, compensation, and stock over the past few years. Furthermore, according to the Citizens for Tax Justice, while WorldCom reported $16 billion in earnings to its shareholders between 1996 and 2000, it reported less than a billion dollars of taxable income to the IRS - thus avoiding millions in taxes.

As a member of the House Financial Services Committee I have had a chance to confront the leaders of Arthur Anderson at public hearings. But while it is important to make these individuals answer for their crimes, we should not forget the broader questions because these executives represent just the tip of the iceberg. First, what is going on in our country today that allows for the kind of corporate thievery that we are seeing? Secondly, beyond political posturing and sound-bites, what are elected officials really going to do about it? How do we change the culture in this country, and the role of the Congress and the White House, so that we put an end to this outrageous corporate behavior once and for all?

In my view, the most important thing that Congress can do is to put an end to the culture of money and campaign contributions that now permeates Washington. Since 1990, accountants and their PACs have given $57.4 million to federal candidates and political parties. In addition, big business has made $522 million in campaign contributions to both political parties during the 2001-2002 election cycle alone. One would be very naïve not to understand that these huge campaign contributions have played an important role in turning Congress away from addressing the issues of corporate greed and fraud. In fact, right now, the Republican Leadership and the President are working hard for another $1 trillion in tax breaks for the richest two percent of the population. While Congress has recently made progress in campaign finance reform by banning unlimited soft money, much more needs to be done. Ultimately, we need to move to public funding of elections so that candidates are no longer dependent upon the wealthy and large corporations for their contributions.

Secondly, we need a much stronger regulatory system so that auditors cannot cook the books, and corporations cannot avoid paying the taxes they owe. In the short term, SEC Chairman Harvey Pitt should resign because of the very strong conflicts of interest that he has. As a former accounting lobbyist, Mr. Pitt successfully lead the efforts against auditing reform.

Third, new criminal penalties must be established to hold corporate leaders accountable for what goes on in their companies, and that puts them in jail when they break the law. CEOs and corporate directors who destroy thousands of jobs and cheat Americans out of billions deserve stiff penalties for the crimes they commit.

Fourth, corporations that break the law should be prohibited from receiving government contracts. WorldCom receives $1.7 billion every year in government contracts. If they are found to have broken the law, these contracts must end immediately.

Finally, from an economic development perspective, the federal government should stop providing corporate welfare to the large multi-nationals who are closing down plants here and moving to China and Mexico. Instead, we should begin helping those companies, often small and medium size business as well as worker-owned companies, who are trying to increase jobs in the United States.

(7/16/02) - NEW YORK (Dow Jones/AP) - The Securities and Exchange Commission is hitting a nerve with its new requirement that corporate executives swear to the accuracy of their financial statements. A number of companies are asking if they can modify the information in their recent financial results before signing on the dotted line, according to an SEC spokesman. Under an order by the SEC, chief executives and financial chiefs at companies with more than $1.2 billion in revenue have to swear under oath in writing that their financial results are complete and accurate. The deadline for most companies is Aug. 14.

The SEC's response to the requested "modifications," which have mostly been coming from corporate counsels, is an unequivocal no.

"This is black or white, there is no grey," said SEC's John Nester. "Either you attest to the accuracy of the figures" in financial results "or you go into the pile that doesn't comply."

Companies in the noncompliance pile will have the opportunity to explain why they aren't comfortable endorsing their report, and even if the reasons are valid, the hesitation could create some discomfort or even backlash as word gets out. "No one wants to be in the explanation pile," Nester said. "But that's how it's going to be. Our goal is to supply a very clear picture of who's been in compliance and who has not."

The fact that some companies are asking for permission to do a bit of extra work on their already-filed reports did not surprise many market watchers.

"I kind of expected it," said Howard Barlow, managing director at Cypress Strategies. "It's well known that many companies make a practice of massaging their numbers."

The SEC's order is expected to be broadened in the months ahead to include many more companies, but already some of these smaller firms are approaching the SEC about certifying their reports.

The companies see such a move as providing a seal of approval that could serve as an inducement to investors looking for honest businesses, analysts said.

Let the Corporate ‘Crawfishing’ Begin

(7/17/02) - GOSHEN, Conn. — America is at a turning point. Corporate scandals, the fall of the stock markets, the sudden mobilizations in Washington of the last few weeks to legislate against some of the more egregious corporate abuses: they all indicate that the nation's attitude toward business is changing. It is potentially a bigger change than many politicians realize. What's unnerving them is that the payback from the market bubble of the late 1990's is becoming apparent to Main Street. The charts of the downside since March 2000 are starting to match the slope of the earlier three-year upside.

Not that it's a new phenomenon. In the Gilded Age of the late 19th century and again in the Roaring Twenties, wealth momentum surged, the rich pulled away from everyone else and financial and technological innovation built a boom. Then it went partially or largely bust in the securities markets. Digging out is never easy. But this time, the deep-rooted nature of "financialization" in the United States that developed in the 1980's and 90's may make it even tougher.

Near the peak of the great booms, old economic cautions are dismissed, financial and managerial operators sidestep increasingly inadequate regulations and ethics surrender to greed. Then, after the collapse, the dirty linen falls out of the closet. Public muttering usually swells into a powerful chorus for reform — deep, systemic changes designed to catch up with a whole new range and capacity for frauds and finagles and bring them under regulatory control.

Even so, correction is difficult, in part because the big wealth momentum booms leave behind a triple corruption: financial, political and philosophic. Besides the swindles and frauds that crest with the great speculative booms, historians have noted a parallel tendency: cash moving into politics also rises with market fevers.

During the Gilded Age, the railroad barons bought legislatures and business leaders bought seats in the United States Senate. In the last years of the 19th century, one senator naïvely proposed a bill to unseat those senators whose offices were found to have been purchased. This prompted a colleague to reply, in all seriousness, "We might lose a quorum here, waiting for the courts to act."

Over the last two decades, the cost of winning a seat in Congress has more than quadrupled. Legislators casting votes on business or financial regulation cannot forget the richest 1 percent of Americans, who make 40 percent of the individual federal campaign donations over $200. Money is buying policy.

Speculative markets and growing wealth momentum also corrupt philosophy and ideology, reshaping them toward familiar justifications of greed and ruthlessness. The 1980's and 1990's have imitated the Gilded Age in intellectual excesses of market worship, laissez-faire and social Darwinism. Notions of commonwealth, civic purpose and fairness have been crowded out of the public debate.

Part of the new clout and behavior of finance is so deep-rooted, however, that it raises questions that go far beyond the excesses of the bubble. In the last few decades, the United States economy has been transformed through what I call financialization. The processes of money movement, securities management, corporate reorganization, securitization of assets, derivatives trading and other forms of financial packaging are steadily replacing the act of making, growing and transporting things.

That transformation has many roots. Finance surged in the 80's partly because deregulation removed old ceilings on interest rates and let financial institutions offer new services. The rising stock market, in turn, drew money from savings accounts into money market funds and mutual funds, turning the securities industry into a huge profit center. Computers underpinned the expansion of everything from A.T.M.'s to scores of new derivative instruments by which traders could gamble with such dice as Treasury note futures or Eurodollar swaps. Meanwhile, the Federal Reserve and Treasury Department proved during the 80's and 90's that nothing too bad could happen in the financial sector, because Washington was always ready with a bailout.

Supported so openly, rescued from the stupid decisions and market forces that pulled down other industries, the finance, insurance and real estate sector of the economy overtook manufacturing, pulling ahead in the G.D.P. and national income charts in 1995. By 2000, this sector also moved out front in profits. It also became the biggest federal elections donor and the biggest spender on Washington lobbying.

The effects have been profoundly inegalitarian — and not just in the loss of manufacturing's blue-collar middle class. In the last two decades, as money shifted from savings accounts into mutual funds, promoting the stock markets and the money culture, corporate executives became preoccupied with stock options, compensation packages and golden parachutes. "More" became the byword.

In the new management handbook as rewritten by finance, the concerns of employees, shareholders and even communities could be jettisoned to raise stock prices. Major companies could make (or fake) larger profits by financial devices: writing futures contracts, investing in stocks, juggling pension funds, moving low-return assets into separate partnerships and substituting stock options for salary expenses. Enron was only the well-publicized tip of a large iceberg.

A century ago, putting a new regulatory framework around abuses of the emergent railroad and industrial sectors became a priority. This effort largely succeeded. Whether another such framework must be put in place around finance in order to safeguard household economic security is a question that at the very least calls for a national debate. Whether the current proposals are the beginnings of that debate or mere window dressing remains to be seen.

Kevin Phillips is the author of "Wealth and Democracy: A Political History of the American Rich."

(7/14/02) - Why would Bristol-Myers Squibb use incentives to induce its wholesale customers to buy more products than they needed last year, a practice that may have resulted in overstated revenue at the company? The Securities and Exchange Commission is investigating the company, which has said that its sales practices are proper.

And why would Merck & Company include in its revenue in recent years $14 billion in co-payments that consumers made for prescriptions that the company did not actually receive and that did not show up in net income? Kenneth C. Frazier, general counsel at Merck, said the methodology accurately reflects the company's results, and that the revenue recognition is appropriate.

Both questions may share this answer: during the market boom, investors paid close attention to sales growth, and rising sales became crucial to rising stock prices.

But there's another, troubling answer to the queries. In both companies, executives stood to benefit personally by higher revenue because of the way in which their compensation was calculated.

According to Merck's proxy statement, executive bonuses are determined by comparing growth in revenue and earnings per share to those of its peers in health care. Recording an extra $14 billion in sales — 10.5 percent of the company's total sales in the relevant period — cannot have hurt those comparisons.

And last year, Bristol-Myers started a new long-term incentive plan that based payouts partly on sales growth. Previously, they were based on total shareholder return versus its peers and earnings growth.

On Thursday, the company said that regulators were scrutinizing last year's sales for potential overstatement. Richard J. Lane, the former president of the company's worldwide medicines group, left Bristol-Myers in April when its chairman announced that wholesalers were holding hundreds of millions of dollars in excessive inventories of company products and that this year's revenue would fall as a result.

A spokeswoman said the company would not comment on whether Mr. Lane would be returning any of the $2.145 million restricted stock award given to him as part of his long-term compensation last year. He also made $1.25 million in salary and bonus. Mr. Lane did not return a call seeking comment.

Then there is WorldCom. In determining its top executives' bonuses last year, the proxy says, the company assessed revenue, earnings and the market value of its common stock. But it also used an unusual measure: billings by WorldCom under service agreements with its customers. Customer billing records are among the documents that the S.E.C. requested from WorldCom last March as part of its investigation into the company's accounting practices.

It is far too simple to conclude that executive compensation plans can serve as a road map to where corporate cheating might go on, but it is becoming distressingly clear that the pay-for-performance philosophy that was supposed to align executives' interests with shareholders' has been badly distorted. "Pay for pretense" may be a better name for it, given some of the accounting shenanigans that have emerged.

William R. Thomas, who runs the Capital Southwest Corporation, a publicly traded investment company in Dallas, is deeply troubled by what he calls the corruption of capitalism by officers and directors of big corporations and dismayed that few chief executives have vowed to eliminate the rot.

"Their unbridled greed is poisoning the system that has been the source of our nation's wealth," he said. "The impending takeover of corporate America by self-serving elitist managers may prove to be far more damaging to capitalism than anything Karl Marx could have conceived."

Amen.

(7/14/02) - In "The Devil's Dictionary," Ambrose Bierce famously defined a corporation as "an ingenious device for obtaining individual profit without individual responsibility." Bierce and his wicked definition came to mind when President Bush called for a "new ethic of personal responsibility in the business community" during his Wall Street speech. Bierce would've been delighted at the coincidence.

To many of us, the president's rhetoric on Tuesday was all gaping gum, no teeth. If by chance, though, he was being sincere, Mr. Bush was knocking himself out for nothing because, as Bierce's definition implies, the structure of American corporations is inimical to the "new" ethic he was espousing. Despite the efforts of many fine people, American corporations are notorious for daddy-knows-best, brook-no-dissent cultures where personal responsibility more often dies than flourishes. They are also secretive, self-referential environments where transparency, Mr. Bush's other hobbyhorse, is unlikely to be embraced in any form, accounting or otherwise, except as window-dressing.

I make these observations as someone who worked for much of the 1990's as a speechwriter at two major Wall Street financial services corporations. Until then, I'd had no experience of closed societies and rigid hierarchies; perforce, to survive, I had to turn myself into something of an anthropologist.

One paradox was hard to miss: When I crossed the thresholds of those downtown skyscrapers, I went from a one-person, one-vote democracy — messy, noisy, infuriating, but democratic — to a netherworld where fear was the primary management tool and dossiers, censorship, misinformation and various forms of surveillance were standard practice. To me, corporations seemed not merely autocratic but totalitarian; the engines of America's fabled democratic society are anything but.

To heap paradox on paradox, because I worked with investment bankers I was surrounded by free-market fundamentalists who roamed the globe preaching a triumphant gospel of deregulation from which all freedoms would flow, yet returned to a bureaucratic roost perfectly Soviet in its rigidity.

The fall of the Berlin Wall, followed by the tech boom, had "turbo-charged" — to use a favorite piece of business jargon — their sense of superiority and rightness in all things, not just economic. Of course, free markets were allowed to be free only when it suited bankers; when Long-Term Capital Management faced collapse, instead of allowing it to fail, as the market was clearly dictating, they bailed it out to save themselves. In fact, derivatives-related debacles were piling up faster than car wrecks on a foggy highway. Cost of doing business, said the bankers. Harbingers of much worse to come, said prescient students of financial scandals.

One can argue that corporations, like the armed forces, have to be autocratic. But delivering goods and services in an efficient, competitive manner doesn't require the same unquestioning loyalty as fighting wars. Disciplined teamwork, yes, but not blind obedience. From my experience, corporate employees, while understanding the need for unity, are hungry for real debate, not scripted events. Without it, they know, there is no intellectual growth — just executive mind-sets growing thick and wrinkly as elephant hide.

Every now and again, employees revolt against being treated as children. I remember a meeting where someone got the bright — and career-undermining — idea of polling the assembled managing directors on whether they thought the firm's strategy, as just outlined by the chief executive, would succeed; they were to punch in their responses on handheld devices, to be instantly flashed up on a screen in a way that would be hard to ignore.

Against all rules of corporate decorum, a majority voted no, the firm's strategy wouldn't succeed. Loud gasp. As stunning as this moment was, it was just as stunningly passed over; the meeting continued as if the vote had never happened. In any sane, responsive world, the C.E.O. would've stopped the proceedings and started a debate as to why the managing directors felt that way. The frustration in the hall was palpable.

Yet such high-handedness is accepted. Executives not only routinely ignore their employees, they appease the market whenever necessary by firing large quantities of them — all done with impunity. It was not until the events of the last months, however, that many shareholders became aware of the extent to which they, too, are but pawns in management's game. They didn't have to lose their portfolios and pensions to learn this, because there has long been one dead giveaway of corporate disdain for shareholders: All over the United States, when the season arrives for annual shareholder meetings, corporations convene them in out-of-the-way places to dissuade shareholders from attending and asking pesky questions.

To return to Ambrose Bierce. Under the entry for "riches" in "The Devil's Dictionary," instead of a definition, you will find three quotes:

• "A gift from Heaven signifying, `This is my beloved son, in whom I am well pleased.' "
  — John D. Rockefeller

• "The reward of toil and virtue." — J. P. Morgan

• "The savings of many in the hands of one." — Eugene Debs

On which Bierce — prince of curmudgeons, king of cynics, long may he be read and emulated — wisely refused to expand.

Kate Jennings is the author of "Moral Hazard," a novel.

(Monday, July 22, 2002 issue) - Perhaps the most shocking thing about Dennis Kozlowski's $18 million New York crash pad, which was apparently paid for by--and never disclosed to--Tyco shareholders, is that his perk didn't really seem all that shocking. But was it legal? That's the key question to ask about rampant, over-the-top CEO giveaways. The answers are seldom black and white.

One thing is clear: CEOs can negotiate whatever compensation they please. "It would be impossible to exaggerate what they can ask for," says Ken Werner, an executive compensation lawyer at Day Berry & Howard in Boston. Cars, private club memberships, home loans, and moving expenses are common goodies, according to Werner. But most company bylaws state that any senior executive's employment contract should be approved by the board. Tyco is investigating Kozlowski's living arrangement, as well as $13 million in "relocation" loans he allegedly approved without the board's knowledge for former general counsel Mark Belnick. (Tyco has filed suit against Belnick; his lawyer calls these claims "malicious and baseless.")

The rules governing what companies must tell shareholders are even cloudier. The SEC says that any perk worth more than $50,000 must be counted toward the CEO's compensation and included in the proxy statement. Any perk worth more than 25% of the total of all these extras must be detailed in a footnote. But there is plenty of wiggle room. Say the CEO of a construction firm asks his workers to build an addition to his house. The rules say the perk should be valued based on the "incremental cost" to the company, but "you could argue that it's zero if those workers would have otherwise been idle," says Stan Keller, a lawyer at Palmer & Dodge.

Patrick McGurn, director of corporate programs for Institutional Shareholder Services, says the SEC hasn't been policing perks because it has limited resources and didn't realize until now how frequently companies flout the rules. Corporations can buy homes--supposedly to entertain customers--furnish them with priceless art, and then let an executive live there. The imputed rental income from the home should be disclosed to shareholders and the IRS, but in many cases it isn't. In New York alone, GE owns four executive apartments, including an $11.3 million pad recently purchased for CEO Jeffrey Immelt, that aren't disclosed. GE spokesman Gary Sheffer says the non-business use of these apartments doesn't meet the $50,000 threshold for SEC disclosure.

Perhaps the most abused perk is corporate jets, which companies often insist their CEOs travel on for "security" reasons. But there is vast potential for abuse, especially if the CEO schedules board meetings in locales conveniently near his vacation home and calls the flights "all business." Greg Hutchings, the former CEO of British industrial conglomerate Tomkins, stepped down after a dispute with the company over his use of the corporate jets (which he maintained he flew for legitimate business purposes). Former RJR-Nabisco CEO Ross Johnson is rumored to have once used a jet to fly his dog home. We always knew that CEOs lived a dog's life.

(7/12/02) - MILLBROOK, N.Y. — In his speech about corporate fraud and abuse, President Bush mentioned stock options only once — and then to endorse an existing proposal to require shareholder approval of all options plans. His endorsement is welcome, but it is woefully inadequate: the stock-options culture is at the root of the current scandals on Wall Street.

Options, which are not counted as an expense and thus inflate earnings, bring with them a powerful incentive to cheat. They hold out the promise of wealth beyond imagining. All it takes is a set of books good enough to send a stock price soaring, if only for a while. If real earnings are not there, they can be manufactured — for long enough, in any case, for executives to cash out. This, in essence, is what happened at Enron, WorldCom, Xerox — indeed, at quite a long list of companies. That list is bound to grow, judging by the findings of a study I published with two colleagues last year.

We examined operating earnings — profits from ongoing operations excluding nonrecurring items like sales of assets — of firms in the Standard & Poor's 500 index. In comparing these earnings to net income (a company's total profits, including one-time gains or losses and other nonrecurring charges), we found that operating earnings have exceeded net income every year for 20 years.

This is counterintuitive. Especially during the go-go years of the 1990's, companies often boosted their net income compared to their operating earnings by selling valuable assets — a subsidiary, for example, that had been bought years earlier at a low price. The implication is clear: in many instances, corporations recast operating expenses as nonrecurring charges and, to a lesser extent, recast nonrecurring income as operating revenue. Especially notable was the free and often deceptive use of restructuring charges to polish operating results.

More important, firms succeeded, with help from Wall Street, in persuading investors to focus on the operating numbers, even though in many cases they knew those numbers to be inflated. In all, according to our study, corporate America appears to be overstating its earnings by at least 20 percent. About half of the exaggeration reflects the lack of any recorded expense for options; the other half, manipulated operating earnings.

The conventional wisdom holds that options encourage good management and better corporate governance because they align the interests of executives and shareholders. Nothing could be further from the truth.

Most shareholders — that is, the vast majority of the public that buys stock on the market — have the potential for loss as well as gain. With an option, the potential for loss is quite small; if the share price falls below the option price, the option simply becomes worthless. But the potential for gain is huge. The asymmetry encourages executives to downplay risk, if not ignore it, in the quest for returns.

That is why the 90's produced burdensome excess capacity in many industries, especially telecommunications and the technology industry, where option awards are most common. For executives, it made sense to go for broke with expansion plans. Big option payoffs came only with rapid growth, not with steady earnings.

So what can be done? There can be no real reform without honest accounting for stock options. A decade ago, the Financial Accounting Standards Board recommended that options be counted as a cost against earnings, like all other forms of compensation, but corporate lobbyists resisted and Congress did their bidding. Alan Greenspan and Warren Buffett, among others, are calling for the same change now, but it remains to be seen whether the accounting profession can act without Congressional interference. Treating options like other forms of pay would make executive compensation transparent, diminish the temptation to cook the books and make managers less inclined toward excessive risk-taking.

The president's speech, unfortunately, was not as strong as it should have been. And whether Congress is up to the job of reform is questionable. It may fall to investors — individuals and institutions — to force the necessary change.

Walter M. Cadette, a senior scholar at the Levy Institute of Bard College, is a retired vice president at J.P. Morgan & Company