Enron, Etc. - Why Is This Happening?

Here at Saint Edward’s University’s Graduate School of Management, we take ethics and stakeholders seriously, with sections of almost every class devoted to discussions along this line. From these discussions, the confusion around this issue becomes apparent. And that confusion is only a reflection of the same confusion that is felt throughout our society. For example, “Yes, we need to care about the environment, but how do we do that and remain faithful to our fiduciary responsibility to our shareholders? They expect to see gains with every quarterly report; often what we need to do to accomplish this, is in direct opposition to what is right for the community, our suppliers, even our employees.”

Allan Sloan, Newsweek’s Wall Street Editor, tells us the greed isn’t good, that the conventional wisdom of the past few years, “… the pursuit of self-interest (results in) … public benefit …” (parenthesis mine) is not right and leads to all kinds of activities that are not in the public’s best interest. Of course, I support this position; but I say it doesn’t go far enough, doesn’t identify the core issues.

This is not a simple problem that can be solved by convincing people that their interests are better served when we and our companies operate ethically, with a strong sense of the public good. The solutions begin to surface only after we understand more clearly how we got to where we are, and where that is.

Before we look at that, I want to state clearly that I am a staunch supporter of capitalism, an independent who tends to vote Republican. However, the system is badly broken, in many ways and the Enron, etc. events that we are experiencing are only symptoms of a disease that goes much deeper.

Initially, our capitalistic society had a chance to operate freely with little government intervention. The country was large and communication was slow; there was no such thing as a national corporation, let alone a global one. Additionally, if we, as businesspeople, were wronged, cheated out of our just due, we understood that the courts wouldn’t be able to help much. So we took matters into our own hands; we placed ads in the papers warning people not to do business with so-and-so, “He cheated me!”

But even then, capitalism (the free market) had one major flaw; without regulation it was a one-winner system. This meant that many communities were held under the sway of a single person, beholden to them in all ways; hence, “It’s a Wonderful Life.” In many ways, capitalism, allowed free reign, is much like a game of Monopoly; in the end, one person ends up with all the property and all the money.

Then communications improved, and travel from one end of the continent to the other also improved dramatically. We began to see national companies with powerful self-interests having impact on local economies, often negative impact. Finally, it became necessary for government to step in; the Taft-Hartley bill was passed, making it illegal for a monopoly to take advantage of its situation in ways detrimental to the public good. The problem: detrimental to the public good was defined in a limited fashion, basically meaning higher prices.

Along the way, other issues surfaced, that play a major role in the current situation. The major issues are:

Business started operating on a quarterly reporting basis.
The fiduciary responsibility of company directors was declared to be only to shareholders.
Our legal system failed to protect small businesses from illegal and/or unethical practices.
There was, and continues to be lack of understanding of the true danger of monopoly to our way of life.

Let’s look at each of these more closely.

Business started operating on a quarterly reporting basis.

I’m not going to pretend that I fully understand why this practice began, but I will say this: It is a system designed for the convenience and possibly the protection of shareholders. The problem: This very activity, ostensibly designed to “protect” shareholders, is probably the greatest deterrent to corporate success in existence. Intelligent people know that three months isn’t a long enough time span for anything to happen. Effectively it’s an attempt at micro managing from the highest possible level. And it’s a terrible waste of management energy. (A much greater waste than the game I invented, computer solitaire.)

But worse than that, it forces companies to focus on the short-term; with the result that management is almost legally bound to activities that could be disastrous in the long run. One result of this focus can be quoted right out of Sloan’s article; “All sorts of companies are trying to duck U.S. taxes by incorporating offshore. They’re doing it in the name of staying competitive in a global economy.” And they’re doing it as a result of their fiduciary responsibility to shareholders, to the detriment of our society and ultimately to our way of life.

The solution: Semi-annual reporting.

The fiduciary responsibility of company directors was declared to be only to shareholders.

As long as these laws are in place, we can talk ethics and morality till we’re blue in the face; but we will have no more impact on the situation than Demosthenes had on the tide, speaking loudly at it with his mouth full of pebbles.

There is no doubt that any responsibility focused entirely on shareholders (especially when coupled with quarterly reporting) and ignoring other stakeholders, is short-term focused and ultimately detrimental to all stakeholders, including shareholders. In many ways, investors are their own worse enemy.

In my opinion, the opposite is also true; if director fiduciary responsibility was shared equally with all stakeholders, companies would automatically become long-term focused, boards of directors would be legally bound to consider the ultimate impact of their decisions, and long-range planning would become a natural part of running a business, instead of an activity that only gets lip service.

The solution: Fiduciary responsibility expanded to include all stakeholders.

Our legal system failed to protect small businesses from illegal and/or unethical practices.

The legal process within capitalism was never very good at protecting small business and small businesspeople (the true backbone of our society) from attack by others, be it someone's refusal to pay a significant bill, or the major attack of big business, with its power to easily drive any small business into bankruptcy.

This situation has not improved; if anything it’s gotten worse. The minimum costs for defending your rights as a businessperson in Federal Court is approximately $70,000; even if the law is on your side and your position is morally and ethically sound, you have no guarantee of winning. Most of the time, the winner is the one with the best attorneys and the most money … justice simply doesn't exist.

Even worse, if you do win, it is still extremely difficult to claim your legal fees as part of your losses; you can be right and win, and still be forced into bankruptcy.

The result is a feeling among the unethical and immoral that they can do what they want, take what they want, destroy whomever they want; and the penalty, if they lose, is a small one to pay—just close up shop and go looking for another sucker.

I have no faith that the legal process will ever be fixed. Why? First, it's a complex issue with many agendas. And, because we have to depend on lawyers to do the fixing, and the conflict of interest is much too apparent. (If I had my way, I’d make it illegal for lawyers to make laws. It’s all too obvious to me that we’ve hired the wolf to protect the chicken coop.)

The solution: Create a court between small claims and Federal court that allows for claims of up to $100,000 and doesn’t take tens of thousands of dollars to access. One way this could be accomplished is to have it work much like arbitration, with a strong focus on what’s right, legally and ethically; where the power of the lawyer is not greater than the power of the truth.

Sounds naïve doesn’t it … Well, I do have one other alternative.

Alternative solution: Go back to an honor system where individuals are free to announce to the public, who has cheated them, and how they did it. Then refuse to do business with those who can’t be trusted. Likewise, see it as a responsibility to share the good news when its discovered that we're doing business with an honorable person.

There was, and continues to be lack of understanding of the true danger of monopoly to our way of life.

When the Taft-Hartley Bill was being passed, it was obvious that consumers, and therefore the public good, were being harmed, so the bill focused on that. Today it is often not obvious that this is happening. Therefore, confusion reigns. Monopolies argue that they are good for society, “We bring about a consistency that’s essential to moving forward in ways that we must, if we are to succeed as a society.” And many, who truly have the public good in mind, support them in this contention.

To begin to understand this problem is to first accept that capitalism is essentially a “one-winner” system; if left unchecked, one person or one company, would ultimately be in control of everything and everybody. Government must understand its responsibility to make sure this doesn’t happen. Congress must step forward and say, “Monopolies are not ultimately good; they are always a danger that must be watched carefully.” It’s time to take the long-range view and realize that the dangers of monopoly go way beyond the consumer’s pocket book, reaching into the very heart of our way of life.

Capitalism flourishes when individuals have a strong sense that their efforts will be rewarded, that they too have a chance at the brass ring, maybe even a gold one. Monopolies, by their very nature, hoard all of the rings; do everything in their power to make sure that nothing interferes with their current business or future goals. Even worse, they begin to believe their own press, “What’s good for GM, is good for the nation.” Or, “What’s good for Microsoft, is good for the world.” If we knew how many businesses Microsoft has stolen the passion from, even forced into bankruptcy, we might be appalled. And yet, many hold Microsoft up as a standard that we should all emulate.

In many ways Microsoft is the most powerful monopoly the world has ever seen. Do they harm consumers, where it currently counts, in the pocketbook? As the US government and the states are finding out, that’s difficult to prove (one judge had it right). Is the Microsoft monopoly an ultimate danger to our way of life? I have no doubt as to the answer to this question: Absolutely! Left unchecked, Bill Gates would literally try to take over the world, probably rationalizing that it’s the best path to world peace.

The solution: Pass up-to-date laws that recognize the true nature of monopolies and and take into account the long-range public good.