Business Page – July 21st, 2002


Free Enterprise or Free-for-All? 

Introduction

“We are like a big fish that has been pulled from the water and is flopping wildly to find its way back in. In such a condition the fish never asks where the next flip or flop will bring it. It senses only that its present position is intolerable and that something must be tried.”  This anonymous Chinese saying, quoted by Perry Link in the book China in Transformation published in 1993 aptly sums up the current state of corporate America and by extension world capitalism because some of the largest and supposedly most profitable companies are involved. The irony is that at a time when the competing ideologies of fascism, socialism and communism have all but disappeared, capitalism is being shaken to its very core.

Sleeping Policeman

Scandal after scandal has surfaced in some of the world’s highest flying companies whose officers are guilty of the application of accounting methods in a manner intended to deceive. Some members and leading firms of the accounting profession have apparently been accessories to these corporate crimes and this misconduct has produced shock waves that have reverberated through the worldwide system of free enterprise. The accounting profession has long been viewed as the corporate policeman because of the critical role assumed by a significant component of its membership, the auditors. The necessity for restated financial statements as a result of auditor negligence is an indication that some have been asleep at the wheel and has cast a shadow over the profession’s ability to carry out its function. The result has been strident calls for reform and tougher regulation.

Special Interests

To his credit former Vice-President of the United States, Al Gore cannot be accused of jumping on the reform bandwagon since he appears to have anticipated the crisis as indicated by this prescient campaign statement attributed to him in the Economist of July 13th 2002 which claimed that current President George W. Bush’s presidential run was being financed by: “a new generation of special-interest power brokers who would like nothing better than a pliant president who would bend public policy to suit their purpose and profits;…”  History has shown that the business lobby as well as the accounting profession has consistently prevented many of the reforms now being called for and the average person cannot be blamed for scepticism about whether these powerful groups will allow any meaningful change. Lawmakers and politicians appear to be either overawed by the imposing might of corporate giants or they have been so dependent on corporate campaign contributions that they have in effect been bought.

Free-For-All

Capitalism was founded on the system of free enterprise and a strong case has been made for market forces being the determinant of resource allocation. Competition for these resources at all levels, the theory goes, makes the system work. Consumers decide on what goods or services they will use, employers compete for workers and employees compete for better jobs and compensation. The system is merciless in dealing with the less efficient, less productive, less skilled and those in any way deficient – they fail. This very freedom results in immoral conduct because unfortunately to some it signifies not free enterprise but free-for –all. Their unbridled greed causes them to seek their gains at all costs and at the expense of anyone without any consideration of the consequences.

Compensation Methods

Pressure from stock analysts, the demigods whose wrath will rain down on companies who do not produce good financial results, encourages a short-term mentality to business. In many instances this focus is reinforced by compensation packages linked to these numbers, and consequently corporate executives succumb very easily to the dictates of the marketplace. “Profit” numbers affect stock prices and stock options which often represent a substantial portion of executive remuneration and which are tied to the performance of the stock i.e. its price. The idea of linking compensation to performance seems eminently logical. However when remuneration is in the form of stock options, whose cost is often ignored when evaluating a company’s financial performance, questions have arisen over the fundamental soundness of present compensation methods. 

Celebrity CEOs

In addition, the unsuspecting public has elevated Chief Executives to celebrity status and the tremendous rush that they experience as a result gives rise to the incredible hubris that convinces them that they can conquer all worlds before them. They are not prepared to give up that spotlight and are therefore willing to do whatever it takes to remain entrenched in their positions. In countries like Guyana it is not unusual for CEOs and other executives or board members even in public companies or state owned corporations to challenge the right of anyone, even shareholders to question their actions. These individuals are so convinced that companies are their personal preserve that they tend to take questions and constructive criticisms as personal affronts.   

Corporate Culture

It is often ignored that corporate leaders impose their moral (or immoral) values on an entity and establish the so called culture of the organisation setting the tone for what is acceptable behaviour. Corporate culture is the essence of the entity: its values, mores, beliefs and practices. Some companies have an overpowering culture that is evident from one’s initial contact with them and it is obvious that their very existence and success depend on it. It takes time for this culture to evolve but there can be no doubt that its origins and continued evolution are responsive to the tone set by its leader or those at the top. Issues of morality will often arise and the manner in which they are addressed by top management is seen as the moral compass by the other employees. 

Patterns of Misconduct

There are a number of unrelated matters that can play a significant role in determining the moral attitude of an organisation. For instance, corporations are morally bound not to harm the rest of society in pursuit of profits and therefore should produce “safe” products. Quality control systems circumvented by management in order to control costs or to accelerate a product to market say to its employees that the company places profits above anything else. If the same entity ignores societal concerns and does not take the steps necessary to prevent pollution of the environment this fits in with its pattern of immoral conduct. Discriminatory hiring policies, advertising that stretches the truth can all be added ingredients to the potion of immorality. It is not surprising therefore that manipulating the accounting records becomes acceptable since this is seen as relatively harmless, and more importantly fits in with the expected standards of behaviour which become part of the culture of the organisation.     

Legacy

White collar crime traditionally has not been taken seriously and cult hero status has been assigned to the likes of Michael Milken, (billionaire creator of the now collapsed Drexel Lambert junk bond empire of the eighties) who true to his name milked billions from corporations through various creative financing schemes that earned millions in commissions and fees. In Guyana during the socialist era of the Burnham regime, entrepreneurs were spawned whose business existence depended largely on breaking the laws (unjust or inequitable though some were) and they were lauded for their ingenuity. The country was therefore left a legacy of bribery of customs and government officials, breaches of the building code, insensitivity to environmental issues, tax evasion and general disregard for good business practices. Regrettably neither our politicians nor our business class have come around to recognising that such patterns of “development” have serious deleterious long-term consequences and are unsustainable.

Accommodating Professionals

The accounting profession in Guyana also allowed itself to become irrelevant because of the state dominated policies of the seventies and eighties. Its members cannot be held blameless and the disgraceful state of the accounts of public sector corporations as well as those of some public companies and other private sector entities is still a damning indictment of those accommodating professionals. This attitude has allowed company executives to resist the financial statement disclosures required by law, sometimes under the guise that the information would give competitors an unfair advantage but in most instances not even deigning to respond to questions raised.   

Conclusion

The issues of corporate crime and corporate governance are not new and the present situation, like that in which the fish out of water finds itself, is destructive, intolerable and unsustainable. Something therefore must be done. In Guyana we are not immune from white collar skulduggery but it can only be addressed if shareholders and members of the accounting profession insist on ethical standards of conduct from directors and executive management.

Whether public or private sector entities the same standards of ethical behaviour, accountability, transparency and good governance generally must apply. Stakeholders must question boards of directors and management of entities vigorously on any aspect of operations about which they are not clear and must demand adequate disclosure of relevant information in financial statements and annual reports. The defining question should always be if there is nothing to hide why the stubborn resistance to compliance with disclosure requirements?

Auditors must discharge their duties in a responsible manner in accordance with accepted standards without bowing to intimidatory tactics. It is not unusual for members of the profession to be faced with the threat of losing of an engagement or exclusion from consideration for future appointments. This corporate lawlessness must not be allowed since it can only serve to erode confidence in an already fragile financial system and deter any investor from placing reliance on accounts produced by companies in Guyana.