Scandals don't signify a corporate breakdown

Given the scandals at Enron, WorldCom, Tyco, Global Crossing, several major Wall Street firms, and other companies, many are likely to regard the system that governs American corporations as broken down, kaput.

Not so, says Steven Kaplan, an economist at the University of Chicago's business school. "It is by no means a perfect system of corporate governance. But when you add it all up, it looks pretty good. Governance isn't a disaster."

To Mr. Kaplan and to Bengt Holmstrom, an economist at the Massachusetts Institute of Technology, the system has given the United States exceptionally high productivity in the past decade and good stock-market returns over the past two

decades, despite the bear market of the past three years, especially in comparison with other major nations.

"It suggests a system that is well above average," they write in a National Bureau of Economic Research paper.

"We could not have achieved our current level of national productivity if corporate governance had been deeply flawed," Federal Reserve Chairman Alan Greenspan assured a Chicago audience last Thursday.

Corporate scandals aren't new, of course.

Back in 1910, President Theodore Roosevelt stated that "officers, and especially, the directors of corporations should be held personally accountable when any corporation breaks the law.... We must have complete and effective publicity of corporate affairs, so that the people may know beyond peradventure whether the corporations obey the law and whether their management entitles them to the confidence of the public."

Restoration of public confidence was one reason Congress last year passed the Sarbanes-Oxley Act and why key regulators, the New York Stock Exchange, and NASD, are tightening up their rules for the securities industry and for stock-market listed companies.

At a congressional hearing last Wednesday, Sen. Paul Sarbanes (D) of Maryland quizzed William Donaldson, the new chairman of the Securities and Exchange Commission (SEC), about the $1.4 billion "global settlement" last month with 10 major investment firms whose stock analysts were accused of committing fraud or gross exaggerations in their rosy stock reports.

Some Wall Street CEOs "just don't get it," Senator Sarbanes held.

But Mr. Donaldson noted that the penalties were of record size for the SEC, that the reputation of the firms was damaged, and that they faced civil lawsuits by investors trying to recover losses.

The stakes are huge. The lawsuits could cost Citigroup, for example, as much as $7 billion beyond the $400 million it has already agreed to pay the SEC and New York State Attorney General Eliot Spitzer, estimates Brad Hintz, an analyst at Sanford C. Bernstein & Co., a New York brokerage firm.

At a higher moral level, the governance issue reflects a clash within corporate executives between a desire to do what is right for shareholders and employees and a craving for personal wealth and the pleasures it may be able to buy.

"Behavior is conflicted," says Amitai Etzioni, author of "The Moral Dimension: Toward a New Economics."

At the moment, the balance of pressures is on the side of improved company governance.

"A change in behavior ... may already be in train," Mr. Greenspan said.

Regulation and law are being stiffened. But Greenspan cautions that "rules cannot substitute for character." And George Washington University's Mr. Etzioni worries that the dependence of Washington politicians on corporate campaign contributions will nibble away at the tougher rules for business.

Then there is the media attention. Probably every day, stories related to corporate governance surface - a corporate executive up on charges of malfeasance, an accounting mess, a conference, hearing, a talk on the subject.

Fed Governor Susan Schmidt Bies also spoke on governance last week, talking about the need for corporate internal controls.

If that's a problem, a mini-industry has sprung up to help out - at a price. For example, Providus Software Solutions in Rockville, Md., offers a program to help companies meet the requirements of the Sarbanes-Oxley Act. So does Hyperion Solutions. And Dechert LLP, a law firm, is holding regional seminars to help independent directors of mutual funds meet the new law's challenges.

Already books on the latest scandals have been published. And personal-finance author Don Silver has written a "humorous parable," entitled "Cookin' the Book$: Say Pasta La Vista to Corporate Accounting." It offers, notes Mr. Silver, 10 ways to cook revenues and 10 ways to cook expenses. The book is meant to provide readers with a way to detect accounting tricks. It's not a do-it-yourself book.