<nettime> The Corporate Abuse-reform Cycle - Edward Herman

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The Corporate Abuse-reform Cycle

By Edward Herman

We are at the peak of the latest corporate abuse-reform
cycle in which business abuses have been so severe, and
their effects so conspicuous, that their low-key treatment
and normalization by the mainstream media has been
unsustainable.

During the past year the media have featured the Enron
collapse; the Enron (and many other) management's conflict-
of-interest dealings with and looting of their own company;
Enron's (and other companies') manipulation of electric
power prices and looting of California consumers and
taxpayers; the conflict-of- interest and criminal actions of
Enron's auditor, Arthur Andersen; the role of the major
banks in helping Enron and others engage in various
malpractices;

the disclosure that brokers had touted stocks underwritten
by their investment banking department, but which they
privately derided as "a piece of junk" or "a piece of crap"
(in the words of internet stock analysts at Merrill Lynch);
managerial overpayment and de facto looting via stock option
plans, golden parachutes and other forms of more or less
legal theft, all on an obscene scale; and the utter failure
of regulation to curb these excesses.

The extensive publicity has sparked anger and distrust of
business. Naturally, this distresses the corporate
community, and some of its members, along with the media,
are in the phase of trying to repair the damage. Business
Week's Cover Story of June 24 was "Restoring Trust In
Corporate America," with subtitle, "Business Must Lead the
Way to Real Reform."

This was the same problem that faced the business community
during the Great

Depression. Business abuses of majestic proportions in the
1920s had helped inflate the stock market with borrowed
money and unload on the public vast quantities of sure-fire
dogs issued in the United States and abroad. The Great
Depression collapsed these junkpiles and uncovered massive
fraud in security

markets and banking alike.

Some Wall Street dignitaries actually served prison time
(notably, Richard Whitney, former president of the New York
Stock Exchange). Business had a huge public relations
problem on its hands, which also provided an environment in

which REAL reform could take place. In 1934-35 this included
creation of the

Securities and Exchange Commission (SEC), public disclosure
requirements for the sale of securities on the exchanges,
the Glass-Steagall Act's enforced separation of commercial
and investment banking, and the dismantlement of public
utility holding companies.

These real reforms of the 1930s were fought bitterly by the
bulk of the business community, although an important
segment did support them, considering them needed to make
capitalism viable. The reforms were softened and weakened in
these struggles, but were unstoppable at that time. It is
therefore of great

interest that as the business community has gained political
and media muscle over the last two decades it has succeeded
in steadily eroding those earlier

REAL reforms.

Reflecting this transformation, the word "reform" has come
to mean deregulation, privatization, and faith and trust in
markets. During this period the Glass- Steagall separation
of commercial and investment banking and other limits on

financial integration were removed, and regulation was
weakened by inadequate funding, damaging rule changes, and
more frequent and blatant conflict-of- interest appointments
of regulators.

For example, George W. Bush's appointee to head the SEC,
corporate lawyer Harvey Pitt, had worked for dozens of banks
and security firms, the New York Stock Exchange, and all of
the Big Five auditing firms, including Arthur Andersen. He
had helped the Big Five fend off regulatory constraints on
the conflicts of interest that were notable features of the
Enron-Arthur Andersen relationship.

His conflicts of interest as a regulator are remarkable,
almost co-extensive

with the scope of securities regulation. Unsurprisingly,
Pitt does not support very strong legal or regulatory
changes (Business Week notes that his "proposal to put 'real
teeth' into auditor discipline has some big gaps where the
gums are showing").

The corporate community's (and Business Week's) call for
business to lead the way to "real reform" thus reeks of
hypocrisy. Business took advantage of its

advancing power to create an environment in which Enron,
Global Crossing, Arthur Andersen, Citibank, Tyco
International, et al., would thrive and be able to exploit
their increasing freedom from the controls of the earlier
and effective REAL reforms.

Business was enthused about the Gingrich revolution of 1994
and is extremely

pleased with George W. Bush, who has been aggressively
pushing the traditional business agenda, supporting
consolidation and weakening regulation. Business's
successful drive to weaken labor, by diminishing the
strength of a major countervailing power, has made it easier
to exploit pension fund money as well as elevate profit
margins that can be skimmed off by managers practically at

will.

Although by now the media have given considerable attention
to Enron and to managerial abuses across the board, they
have stopped short of examining in detail and exploring the
political meaning of the links between Enron et al. and
George W. Bush and leading Democrats.

If all politically viable politicians are on the corporate
take, this helps explain why the Enron phenomenon could
happen, and why Glass-Steagall could be eliminated and SEC
regulation weakened. But this would make it crystal clear

that the developments leading to disaster were just what
business wanted, and that the call for "real reforms" by
those who engineered these results, and their media front
persons, must be treated with the utmost skepticism.

The needed reforms enumerated by Business Week, suggested by
the New York Stock Exchange, Business Roundtable, and
various business reformers, are exceedingly modest, and the
reformers are perfectly frank that the important thing is
"renewing confidence" rather than doing much of substance.
For many businesspeople the abuses have been minor excesses,
the worst of them by "bad apples." And there remains great
faith that "the market" can still be relied on to straighten
things out in the long run.

For Business Week and the new business reformers, what is
needed first and foremost are improved standards of
corporate governance-- most notably a board dominated by
independent directors. They are also pushing for constraints
on

stock option plans (like requiring that they be approved by
vote of stockholders), and improved accounting practices,
perhaps helped along by audit company reform and separation
of auditing and consulting.

In the more radical proposals, very unlikely to be
implemented, it is urged that stock option costs be
"expensed," meaning charged off at time of installation so
that their costs to stockholders would be put on the table
when granted.

These proposals are remarkably thin and would have minimal
effect on corporate behavior even if adopted, which is far
from certain.

It is hard to define "independent" directors in such a way
as to assure the selection of directors who are not
dominated by the managements, as the top executives must
choose or approve the directors, they frequently have
personal or business relations with the "independents," and
the managers control the flow of information to the
directors.

In each abuse-reform cycle there is a call for more
independent and active directors, and more firms than ever
have a majority of independent directors, but this only
works when the management want it to work, which is where it
isn't much needed. When the managers want to dominate, they
find this easy, unless the company is in serious
difficulties. In the boom phase of cycles, moreover, when
things are going well and stock prices are soaring, managers
easily dominate and abuses can become egregious and
extensive. (These issues are discussed in detail in Herman,
Corporate Control, Corporate Power, chaps. 2 and 7.)

Trying to constrain stock option plans by requiring a
stockholder vote suffers from the fact that the management
usually gets a very large majority of the votes
automatically in the proxy collection process, so that its
proposals are rarely shot down--corporate democracy is a
mirage. It is argued, however, that forcing the vote will
still impose a publicity constraint on the abuse of stock
options, and there is some small element of truth in this.

But corporate proposals at stockholder meetings normally
don't generate much

publicity, and the options usually only get out of hand in
times of prosperity and euphoria when they are hidden
beneath the trappings of success. Furthermore, managements
have shown great ingenuity in finding new modes of self-
aggrandizement when old ones suffer from adverse publicity.

The usual accounting reform proposals suffer from the fact
that accounting firms are in a basic conflict-of interest
position: they are hired and paid by the

managements whose business operations they are supposed to
audit independently. There are no "practical" proposals for
reform on the table today for addressing this problem (e.g.,
hiring auditors for only one year, or having them assigned
by an outside body like the SEC). Company accounting
practices that mislead are currently under fire and may be
repaired, but there is little reason to believe that similar
abuses won't crop up in the future under corporate pressure
to show good results.

Even a modest "real reform" today would call for a return to
Glass Steagall and more, the selection of at least a number
of independent directors by major corporate constituencies
like labor and local citizens groups, a requirement

that there be really independent auditors, and a renewed and
strengthened SEC. These are real (if modest) reforms.

More basic would be decentralization of the overconcentrated
corporate system, including the media conglomerates, and a
strengthening of the labor movement, which would tip the
scales toward a more democratic capitalism and away from

"corporate democracy" and plutocratic capitalism.

But at present even modest real reforms are unlikely.
Capital was discredited and in disarray in the 1930s, with
the system in obvious crisis and the need for real reform
undeniable. Ironically, one reason why the crisis today is
not as severe as in the 1930s is that the government sector
is relatively as well as absolutely much larger, helping
reduce the impact of private instability, a benefit of Big
Government that neoliberals are doing their best to rectify.

So, with the help of Big Government, capital remains in
complete command and

still rides high, despite Enron, the looting, and the New
Economy collapse. The media and major political parties are
its agents, allies or hostages; market

ideology reigns supreme despite the growing evidence of
deregulation's failures; and the corporate community is well
on its way to riding out this new crisis

with the most nominal reforms, if any at all.


source: http://www.zmag.org/sustainers/content/2002-
06/29herman.cfm

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