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Even if Heads Roll, Mistrust Will Live On

By KURT EICHENWALD

 NY Times, October 6, 2002

Photographs by Associated Press; Photograph of Rigas by AFP

As the scent of scandal has spread, a few executives have been charged, including, from left, Andrew S. Fastow of Enron, John J. Rigas of Adelphia, L. Dennis Kozlowski of Tyco and Scott D. Sullivan of WorldCom.

Since midsummer, they have come every few weeks, with the predictability of a returning phase of the moon: A corporate "perp walk," in which the government's latest white-collar defendant is handcuffed and escorted to the courthouse, with photographers snapping shots as once highflying executives face the ultimate humiliation.

On Wednesday, it was Andrew S. Fastow's turn — the former chief financial officer who is the first senior Enron executive to face criminal fraud charges in the wake of that company's implosion.

The repeated performances clearly serve a useful purpose for a public demanding justice in the wake of a seemingly endless stream of corporate scandals. The scene sends the searing message that law enforcement is taking action to rid the corporate world of miscreants, and that other executives who might consider crossing the line in their business practices should think twice.

But in the end, experts in law, ethics and psychology say, the public's thirst for justice will simply not be sated at the courthouse. The arrest and punishment of a handful — or even a score or two — of executives will do nothing to counter what these experts see as the true challenge facing corporate America: to persuade a doubtful public that there is integrity in executive suites.

Many issues have been blended together in the public mind-set, these experts said, from cooking the books and stealing corporate cash to receiving excessive pay and perks. That, of course, mixes crime with common practices in corporate America. But with public revulsion placing them all under the same microscope, these experts said, a sense of justice will not be achieved until they are all addressed.

"A simple application of the law is not going to produce what people will perceive to be justice, because many of the things that have been happening are not necessarily illegal, even if the public considered them immoral," said Tom R. Tyler, a professor of psychology at New York University who specializes in the study of popular conceptions of justice. "So if the only response is a legal response, I think the public will end up being quite soured about corporations and the business world."

Indeed, a response that emerges solely from the law enforcement and regulatory spheres may ultimately prove contrary to the ends of justice. All too often, experts said, the mid-level executives caught up in such events are products of the corporate environment in which they work. Punishing the product without changing the environment will not correct the ethical problems that have become evident over the last year.

"A good many people who were caught up in the machinery of doing this are more like us than we would like, and simply sending them to jail is not going to be helpful and may not exactly be just," said John M. Darley, a professor of psychology and public affairs at Princeton who studies the moral behavior in groups. "What we ought to want to do is send the top people who are the originators of this behavior to jail. The lower people, if they made lots of profits, need to give those profits back. And then we need to create barriers so that in the future, fairly decent people cannot be put under these hidden pressures again."

In truth, executives have reached a turning point in terms of their relationship with the public and their place in American society. For decades they have been revered, granted near-superstar status as they dangled the prospect of an ever-improving economy and growing stock portfolios. Now they are the stuff of ridicule, literally portrayed in the Sunday comics as the monsters of children's nightmares.

"We have made chief executive officers some of the wealthiest Americans in the last 20-plus years, and that is a huge change in American capitalism," said Arthur P. Brief, a professor of business ethics at the A. B. Freeman School of Business at Tulane University. "We have infused so much money and power in the executives that they have started to behave as if they are above the rules that govern the rest of us."

In essence, these experts argue, chief executives were granted wide swaths of trust to do the right thing, but too often seemed to forget their obligation to shareholders. Now the public is reacting with a sense of betrayal, something that must be addressed by every corporation — not just those swept up in scandal.

"The public is concerned not just about the executive who commits a criminal violation," said Leon E. Panetta, White House chief of staff in the Clinton administration and now chairman of the public policy and review committees at the New York Stock Exchange. "They are concerned about whether or not there is any sense of integrity or morality in the way they do business. And that means it extends beyond whether they are doing the minimum in meeting the law. It extends to whether they are behaving as a corporation with the highest standards."

Already, private initiatives have begun signaling that parts of the private sector recognize the importance of satisfying the public demand for justice. For example, in June, a Big Board committee proposed rigorous new standards that would tighten corporate governance and disclosure requirements for member companies. Rules stemming from that proposal have been approved by the exchange's board and submitted to the Securities and Exchange Commission.

Under those requirements, the role and authority of independent directors will be increased, new qualifications will be required for directors who run audit committees and new control and enforcement mechanisms will be adopted.

Ultimately, experts said, such private initiatives — if stringent enough and if enforced — will go much further than any prosecution in instilling a sense that the public's demand for integrity in the corporate suite is being met. "The private efforts are going to have more impact in the long run," Professor Brief said. "Corporate governance has been corrupted in America, and the only way to change that is to reduce the power in the C.E.O.'s hands."

CAPITALISM often seesaws between abuses that harm business and waves of self-correction. Now that self-correction is beginning to flow from powerful financial institutions that have been badly singed by the torrent of scandals — from WorldCom to Tyco, from Enron to Adelphia.

In recent months, the Vanguard Group, the giant mutual fund company, sent letters to 450 public corporations, laying out a treatise for what it expected from the companies whose shares it owns, including assurances that executives are long-term holders of the company's stock. Vanguard received responses from a number of companies; others ignored the letter.

"It is absolutely clear that the mantra of growth at all costs, and the lionized C.E.O. who could spin a great story, is gone, and gone for at least a short generation," John J. Brennan, chairman of Vanguard, said in an interview. "And that is really good for the markets."

Now, Mr. Brennan said, companies that pay attention to hitting profit targets at the expense of clear ethical conduct will pay a price — not only in public prestige, but also in valuations of their securities and ability to do business.

"Three years ago, executives got rewarded for traveling at the margins," he said. "Now they'll get penalized, and that's great news. I'm an investor, and I want to invest in integrity-laden management teams. I don't ever want to be subjected to a WorldCom or a Tyco or an Enron in the rest of my career."

But what changes will be viewed as justice? And are executives truly prepared to take those steps?

The fundamental reform, according to experts who have studied American concepts of justice, would come from projecting a stronger message that management is there for the benefit of shareholders — not that shareholders' money is there for the benefit of management.

"A lot of these people seem to feel they had worked their way up the corporate ladder, and now that they got there they deserved whatever they could get," said W. Michael Hoffman, executive director of the Center for Business Ethics at Bentley College in Waltham, Mass. "This is simply a terrible attitude for corporate executives to have. Instead of having a sense of entitlement, they ought to have more of a sense of serving their constituency."

Indeed, these experts said, one level of justice would be for corporate America to address the long-ballooning pace of compensation, where each executive points to another to justify mammoth pay packages. Now, with so many companies struggling, the public will be hard pressed to accept the explanations for excessive pay.

"If the C.E.O.'s had any claim to the astronomical sums they were making, it would only be sustained if they carried the company, the workers and the stockholders along with them," Professor Darley of Princeton said. "But as soon as it became clear that they were self-benefiting in ways that were absolutely wrong, and actually harmed their employees, then their legitimacy and the claim to that compensation was stripped away."

Moreover, the daily drippings of news about chief executives who received favored opportunities from investment banks, who lived in expensive, company-owned apartments and who received vast sums even in retirement have turned up the public anger. Through those tales, executives seem separated from the realities and difficulties of living in a world where housing costs money, investments are not guaranteed to be successful and a paycheck usually requires some work.

The wealth gulf created between the executives and the public is not a matter of jealousy, or simply an outgrowth of anger about the collapsing stock market, these experts said. Rather, it reaches down to the fundamental issues of fairness that underlie American concepts of justice.

That is why even efforts by executives to compensate the victims of corporate disasters — like the recent offer by Gary Winnick, the chairman of Global Crossing, to pay $25 million to cover part of the retirement money lost by several thousand employees when the company collapsed — could well backfire. Rather than being grateful, these experts said, the public is more likely to react with anger that executives have so much to give away — even now.

"There is kind of a tin ear out there among some chief executives who think that if there is a problem, then they should write a check," Mr. Panetta said. "But it goes deeper than that. Executives have to understand that, because if they don't, ultimately investors and shareholders are going to challenge them."

The answer, these experts said, is for corporate America to demonstrate aggressively that it recognizes the rationale for the public's anger. Only that, coupled with the punishment of those who violated the law, will fully assuage the demands for justice. For now, they added, too few executives are taking that initiative.

"For people to step forward and acknowledge responsibility for what has gone wrong, to agree that there is a need for change, to step forward to help to lead an effort — those are all the kinds of things we would tell C.E.O.'s that they should do in the face of public anger," Professor Tyler of N.Y.U. said. "So it is puzzling that we haven't seen more of that happening."

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