Economy

A LACK OF TRUST

The cascade of corporate scandals has intensified malaise In the markets and unease among execs

KATHERINE MACKLEM July 15 2002
Economy

A LACK OF TRUST

The cascade of corporate scandals has intensified malaise In the markets and unease among execs

KATHERINE MACKLEM July 15 2002

A LACK OF TRUST

The cascade of corporate scandals has intensified malaise In the markets and unease among execs

Economy

KATHERINE MACKLEM

A STRANGE PARADOX has hit the headhunting business or, as headhunters prefer to call it, executive search. It’s become much easier than a couple of years ago to find good people who are interested in a position, says Elan Pratzer, head of the Canadian operation of Korn/Ferry International, one of the world’s largest search firms. Potential execs are even prepared to earn less money—and they aren’t so arrogant. But, Pratzer adds with a sigh, “they’re very hard to land.”

The problem is confidence—or a dearth of it. Executives who a couple of years ago were taking “enormous risks with their careers and their businesses are now being superbly cautious—on both sides,” Pratzer says. The candidates and the companies are each conducting extensive interviews and reference checks about the other. There is huge concern about the ability of companies to sustain themselves over the long haul. “It’s a lack of confidence in our overall business market and in the economy,” Pratzer says.

That malaise, reflected in the tumbling stock markets, belies the economic data. Day after day, the number crunchers from Statistics Canada and the banks’ economics departments send out glowing reports— “Canadian growth exceeds expectations,” “U.S. recovery is alive and well”—whose enthusiasm falls flat in the business world. It’s not just on Bay Street—Main Street has been given pause, too. Partly because of Sept. 11, partly because of the popped tech bubble, and partly because of the scandals, the mood has shifted from confidence to uncertainty and outright distrust.

“This isn’t a fad,” says Hershell Ezrin, chairman and CEO of GPC International, Canada’s largest public affairs and communications company. Three-quarters of Canadians surveyed in February believed an Enron-like scandal could happen in Canada, a GPC poll found. A more recent GPC sounding, in June, found continuing, widespread distrust. A quarter of Cana-

dians put little or no trust in the financial statements of public companies. They don’t trust chief executives; they don’t trust the financial media; it’s been a long time since they trusted politicians. “We’ve lost a sense of innocence,” Ezrin says. “We’ve lost a sense of security in a lot of the systems that used to protect us. We’re just not sure where that protection is going to come from next.”

The scandals, breaking fast and furious, are only exacerbating an already bad situation. For months, Enron Corp. and its nowconvicted auditor, Arthur Andersen LLP, dominated the headlines. But in recent weeks, a veritable cascade of companies has admitted to faulty bookkeeping. One

‘We’ve lost a sense of innocence. We’ve lost a sense of security. We’re just not sure where that protection is going to come from next.’

after the other, major corporations have vaulted onto the dubious stage of suspect performance: Adelphia Communications Corp., Tyco International Ltd., ImClone Systems Inc., WorldCom Inc.—even Xerox Corp., that apparently solid company of such stature that its corporate identity became a verb and an adjective. JeanMarie Messier, last week pushed out by the board from the CEO post of media giant Vivendi Universal SA, is the latest to join the parade of possible rogues. All told, the loss in market value of these companies is a mind-boggling $450 billion. No wonder people feel duped.

So far, the current whirlwind of scandals hasn’t touched down in Canada. Some say Canadian accounting standards, which are based on principles, provide better protection against misrepresented numbers than the rules-based system in the United States. But memories are short. From Bre-X Minerals Ltd. to YBM Magnex International Inc., Canada has had its share of business scandals. Garth Drabinsky, the never-dull founder of Livent Inc., is a “wanted fugitive” of the U.S. justice system, facing 16 indictments from the district attorney in New York City for allegedly taking kickbacks and inflating earnings reports. The U.S. Securities and Exchange Commission has also filed accounting fraud charges against him.

Five months ago, Terry Hungle resigned as chief financial officer of Brampton, Ont.-based Nortel Networks Corp., after it was discovered he’d traded Nortel’s stock outside the window permitted for company insiders. The story hasn’t blown up into one of scandalous proportions—even though Hungle admitted to a reporter that he’d made a “serious mistake in judgment” and the Ontario Securities Commission is investigating. But no replacement for Hungle has yet been hired.

Nortel already had a tough time finding a CEO: an international search to replace John Roth, who decided to cash in his options and depart when the market turned sour, didn’t succeed in placing a star candidate in the corner office. Instead, Frank Dunn, who at the time was CFO, was offered the job. He appears to be the first not to turn it down—Dunn is now doing double duty, as CEO and as acting CFO. Given the current climate, he may be there for some time to come.