Image downgrade for US business

Investigations expose more misdeeds and fuzzy accounting, altering mind-sets at work and on Wall Street.

Enron and the swarm of business scandals around it haven't yet resulted in major new rules for accountants or corporate directors, but they are increasingly reshaping the mind-set in American workplaces.

From water coolers to corner offices, hype is out and skepticism is in. After elevating CEOs to hero status in the 1990s, America is pausing for an economic reality check.

Or many reality checks.

What's significant is not just the magnitude of Enron's collapse into bankruptcy, but also the persistent flow since then of revelations about ethical or financial lapses.

In recent days, for example:

• Newly released documents laid bare efforts by Enron managers to manipulate electricity prices in California.

• Telecom giant WorldCom, admired like Enron as an innovator in its industry, had its debts downgraded to "junk" status.

• The trial of Enron's auditing firm, Arthur Andersen, opened with prosecutors citing other firms where Andersen's audits were found to be flawed.

"When you have a catharsis like this, it leaves the base system different than when it started," says Frank Zarb, former chairman of the National Association of Securities Dealers, which regulates brokers.

Already, corporations are scrambling to maintain financial credibility (witness the flight of Andersen's clients). A round of investigation, litigation, regulation, and legislation could further alter US business.

"America has some kind of corporate scandal every few years," says Roy Smith, a finance expert at New York University's Stern School of Business. He isn't so sure public interest in the Enron affair will last.

But others liken this scandal to the corporate corruption that led to the Sherman Antitrust Act of 1890 or to the excesses of the 1920s that were followed by the Great Depression and the establishment of the Securities and Exchange Commission and other regulatory measures.

Enron has "legs," they say, because so many ordinary employees lost jobs or 401(k) retirement money, while executives walked away as millionaires.

The sheer size of the collapse is staggering. Creditors to Enron have lost $50 billion; shareholders another $50 billion.

Enron also grabs public attention because the debacle coincided with an economic slowdown from a record expansion – stock-market bubble and all.

"When you get a downturn ... problems are going to be more noticeable," says Clifford Smith Jr., a professor at the Simon School of Business in Rochester, N.Y.

The reputation of corporate executives has tumbled. A Gallup poll in February found that only 16 percent of those surveyed ranked the honesty and ethical standards of executives as "very high" or "high." It was 25 percent a year earlier.

So far, though, bills in Congress to deal with Enron-revealed weaknesses in the system are relatively mild.

Enron was seen as a factor behind passage of new limits on campaign contributions. But this hasn't dented the clout of corporate lobbyists with the Bush administration or Congress – a key reason, some say, for the modest action in Washington.

"The White House has succeeded in getting Congress to water down these reforms until they are not very effective," complains William Samuel, legislative director of the AFL-CIO, the trade-union federation.

But other aftershocks from the Enron earthquake are significant:

Investors. Accounting troubles at Enron and other major companies, such as Tyco, WorldCom, and maybe even General Electric and IBM, have shaken investors. That not only destroys wealth by hitting stock prices, it also raises the cost of capital used by business for expansion.

In their annual reports this spring, corporations have improved their financial disclosure to try to hold their standing.

Gatekeepers. Auditors and stock analysts, who serve partly as eyes and ears for investors, are under new pressure.

The SEC proposed new rules for brokerage-house stock analysts last week. Eliot Spitzer, the New York attorney general who is suing Merrill Lynch for misleading investors, dismissed the rules as inadequate.

Auditors, meanwhile, are less willing to approve dubious accounting devices to please their customers. Regulation of the profession may also change. Last week, the Senate Banking Committee started work on an overhaul of accounting practices, going further than a bill passed in the House last month.

Directors. Key corporate officers – including the directors who hire CEOs – are tightening their governance grip.

Some experts say the self-correction by frightened businesses will be the most important effect of the Enron scandal. (New regulations, by contrast, might be excessive and costly, they say.)

But as directors take their job more seriously, fewer people want to take the job. Corporations are already finding it tougher to recruit new members to their boards. Many see the post as too risky to their personal assets.

The bankruptcy court won't salvage anywhere near creditors' losses from Enron's corporate assets. So the lawyers will be chasing money from the officers and directors. Members of Enron's board may settle for some millions.

Politics. Heading into fall elections, Democrats are charging the Republicans with being too close to now-tarnished big business. A memo last month from Democracy Corps, an organization of prominent Democratic consultants, advises Democrats to make an issue of "the pervasive corporate influence in the [Bush] Administration."

Mr. Zarb, now an adviser to the NASD, cautions that Enron was "an equal opportunity giver" of campaign money: "It impacted an extraordinary range of politicians without regard to party or planet of origin."

Executives. Fancy compensation for chief executive officers has come under even heavier fire, forcing a few CEOs to give up a chunk of their pay.

Perhaps most important, many executives are again recognizing at least the practical merits of business integrity. They see the misery the Enron scandal and other scandals have inflicted on bosses – and employees.

"It's the soul, stupid," Zarb told a group of business students last month.

Or, as Clifford Smith tells his business students in Rochester: "Pay attention to that advice you got from your mother at a more tender age."