Column

SEND OUT THE SLEAZEBAGS

How can business stay creative while controlling its dirty players?

DONALD COXE May 24 2004
Column

SEND OUT THE SLEAZEBAGS

How can business stay creative while controlling its dirty players?

DONALD COXE May 24 2004

SEND OUT THE SLEAZEBAGS

Column

How can business stay creative while controlling its dirty players?

DONALD COXE

MAJOR LEAGUE BASEBALL recently nearly joined the list of malefactors on the Web. It agreed (for a reported US$2.5 million) with Hollywood’s Columbia Pictures to cover its bases with Spider-Man’s trademark web and red and black colours to promote the sequel to that cartoon-character smash hit. Astonished by an outpouring of protests from long-suffering fans, those frequently base baseball moguls—the capitalists you love to hate—scotched the deal. Diamonds will continue (apart from Chicago’s wonderful Wrigley Field) to be surrounded by billboards, and products will still be pitched at mega-decibel volumes by loudspeakers, but the field of dreams will not be, however temporarily, a nightmare for those who have kept the faith.

That baseball owners’ greed would let them violate the rules of their game is part of a much bigger and much more noxious process of corruption of the rules of the game that is our economy. The announcement cancelling the Spider-Man deal came the day that Lea Fastow, wife of Enron’s infamous CFO, pled guilty to a minor income tax charge in a plea deal that will send her to jail for just one year. Three days earlier, Frank Quattrone, Silicon Valley’s highest-profile and biggest-earning investment banker during the mania years, was convicted of obstruction of justice arising from investigations into his practice of “spinning” hot new tech stock offerings to clients and to insiders of companies whose underwriting business he sought. The buyers were usually able to sell their allotments within minutes for huge profits.

Further, these stories came within days of the revelation of the latest accounting mess and stock price collapse for Nortel, once Canada’s most valuable corporation, headed by the nation’s most-admired CEO, John Roth, who exited with a fortune in stock-option profits before the company’s first plunge. Nor were the horror stories restricted to the nineties nouveaux riches: one of capitalism’s most venerable names, Shell Oil, whose motto has long been, “You can be sure of Shell,” fessed up recently to overstating its oil reserves by 3.9 billion barrels, which at today’s prices is worth more than US$125 billion— or more than was lost in Enron or WorldCom.

ACCOUNTING messes, obstruction of justice-is the expression ‘business ethics’ a risible oxymoron like ‘military intelligence’ or ‘Playboy philosophy’?

Milton Friedman, capitalism’s pre-eminent economist, has long maintained that “the main problem of capitalism is capitalists; the main problem of socialism is socialism.” Since the earliest days of capitalism, there have been sensational scumbags who pillaged the public. The South Sea Bubble occurred nearly three centuries ago. Its underlying premise was no sillier than those used to peddle hundreds of Internet companies. Even Sir Isaac Newton, perhaps the most brilliant scientific mind Britain ever produced, bought into South Sea shares near the peak and lost heavily.

Is the expression “business ethics” a risible oxymoron like “military intelligence” or “Playboy philosophy”? And how is it that the era in which accounting scams and alleged fraud (like WorldCom or Parmalat) occurred on record scale coincides with record populations of accountants and chartered financial analysts? As Casey Stengel lamented, “Can’t anybody here play this game?”

These scandals have unleashed a wave of well-intentioned reforms, starting with the awesomely detailed U.S. Sarbanes-Oxley legislation. Corporate governance failures have also produced a new breed of enforcers, such as CalPERS, America’s largest pension fund. These organizations use their formidable share ownership positions and their promotional powers to pressure managements to meet their ethical criteria.

The good news is that entrenched boards are under siege from major investment organizations. The bad news: many of the new laws, regulations and liabilities are discouraging worthy business people from serving on corporate boards, leaving control to academics and public figures who usually don’t have the deep financial pockets that could attract lawsuits. The new pettifoggers can carry their purification to the point of absurdity: Institutional Shareholder Services, one of the leading shareholders’ rights groups last month demanded that Warren Buffett, America’s most successful investor and Coca-Cola’s largest stockholder, be dumped from Coke’s board for “conflicts of interest.”

Actually, the most useful reform in recent years is the new accounting rule forcing companies to expense stock options. Companies are responding by altering their executive compensation packages, emphasizing cash or shares of stock that must be held for significant periods of time. By reducing the rewards for sleazebags to overstate earnings during a bull market, and then cashing out options and selling before the truth emerges, the new rules will do more good than all the complex regulations that have created a new cottage industry in corporate governance.

By its nature, capitalism attracts the audacious and those who seek to play outside the rules. Hockey has failed to become a major sport in the U.S. because it honours brutes who bash those who skate better and shoot more accurately. Business in general is struggling to balance the need to control its dirty players, while still attracting the venturous and creative. Ultimately, a sensible incentive system should largely clean up the markets. Baseball may have to wait. fifl

Chicago-based Donald Coxe Is Global Portfolio Strategist, BMO Financial Group. dcoxe@macleans.ca