Corporate scandals more likely in future

MANHATTAN, Kan. – Diane Swanson had a premonition.

The Kansas State University associate professor of management had been watching the procession of corporate scandals as they emerged in recent months. She felt something big was about to happen, so June 24 she moved most of her money in stocks into a money market account.

WorldCom announced the next day that it had improperly accounted for $3.8 billion in expenses.

Falling down. “It’s like a house of cards. You expect it to fall apart at some point, when you keep hearing news that the information investors are supposed to be able to use is bad,” Swanson said.

The stock market plunged after the news hit, though it has rebounded since.

Swanson said more bad news is probably on the way and a fundamental change in American culture may be the only cure.

Economy. The recent string of corporate scandals, from Enron to Martha Stewart to WorldCom, will continue to hurt the economy, Swanson said. People will take some of their money out of stocks and put it into less risky investments, making it harder for companies to invest in their growth.

Swanson said the Securities and Exchanges Commission will probably find more financial misconduct if it begins to look into other companies. Government deregulation of business started in the 1970s, leaving less money in the federal budget to oversee corporations, Swanson said.

Greedy. “Corporate greed increased in the 1970s and perhaps the focus on short-term profit and stock prices has run full circle,” Swanson said. “America has bought into the idea that greed is good and has made heroes out of corporate executives. They should be seen as stewards of our resources, not objects of hero worship. And executives’ pay seems to me to be out of hand.”

Those executives often receive “golden parachutes” – hefty severance packages when they walk away from the company. Moreover, some executive compensation is tied to the company’s stock price, the justification being that it rewards financial success. The problem is that it gives the chief executive officer an incentive to inflate stock prices.

Government mandating. Placing some corporate rank-and-file employees on the board of directors may also help ensure alert oversight, she said. Swanson said that if corporate boards of directors do not re-evaluate compensation packages on their own, the government should consider mandating it.

Though chief executive officers have the responsibility to know what is going on in their companies, many times the scandals emerge from mistakes in middle and lower management. Swanson said that flattening the hierarchy of corporations could allow information to move to the top more quickly, preventing problems from being hidden or misrepresented.

Reform help. Legislatures could also help by passing reforms that would prevent accounting firms from auditing the companies that they consult.

“Can they really be independent auditors when they have their hand out for consulting?” Swanson said.

American business colleges are also partly to blame, she said. Their courses teach future executives about finance and stockholders but little about their responsibility to the community.

“If a company’s employees are laid off, the CEO has failed. They are supposed to try to provide steady employment and safe products for consumers, not just short-term gains,” Swanson said.