Corporate Scandal: A Response

The Question of The Week last week-- "how do you feel about the negative view of business, and what would you suggest to improve matters"-- generated a range of responses. Two of the opinion writers faulted the media for creating more of a story than there actually is. Another writer asserted that, "business is not suffering because of its perception." I am compelled to disagree. Placing the blame elsewhere, or downplaying the issue, causes us to avoid the real scope and magnitude of the problems. Numerous credible sources have reported, with considerable specificity, on very real problems. Consider the following:

Schwab Institutional, a division of Charles Schwab and Co., conducts a survey and determines that "corporate wrongdoing has had a significant impact on both stock market performance and participation in 2002." Among its survey of more than 1,200 financial advisors, 82% of respondents cited corporate scandals as the biggest factor upsetting the markets, followed by disappointing corporate earning and fear of war.

The Wall Street Journal reported last spring that the Gallup organization and Watson Wyatt, had conducted surveys showing a demonstrable drop in employee confidence in senior management. Watson Wyatt's research also shows that returns to shareholders are nearly three times higher at companies where employees report high trust levels, than at companies where employees lack trust in management. The Wall Street Journal also reported that "unethical business practices" were one of the top reasons cited by employees for quitting, in a 2,800-employee random national survey last year by Walker Information of Indianapolis. It was cited by 9% of employees who had resigned from their employer in the preceding 24 months. BusinessWeek asserted that, " faith in Corporate America hasn't been so strained since the early 1900s, when the public's furor over the monopoly powers of big business led to years of trustbusting by Theodore Roosevelt (May 6, 2002)

Finally, let's "do the numbers." The scandals generated by Enron, Lucent, Tyco, Xerox and Qwest resulted in 211bn of loss in shareholder wealth, based on SEC filing numbers. When you add Adelphia, Arthur Anderson, ImClone, Global Crossing, Halliburton, Merrill Lynch and Merck to the mix you are talking about something like 400 billion in total economic loss, more than 175 billion from people's IRAs, billions more from pension funds, and more than 70,000 jobs lost. All of this on the back of a decade where executive pay increased 340%, while that of the rank and file grew only 36%.

Sure, some of this decline would have happened anyway, as a result of broader market trends. But let's not forget that these scandals also adversely effected markets, beyond the direct loss to the wrongdoing companies. You could also dispute the numbers about the exact size and scope of the scandals. Yet, I think it would be delusional to conclude that the problem is not real and significant.

While there are a range of potential solutions and lessons to be learned from these scandals, admitting the problem is always the first step, right? As future business leaders we should welcome and encourage clearer standards and greater transparency. Such efforts not only help restore confidence, but also make it easier to distinguish responsible behavior from rogue action.