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C. Gopinath

THE Business Roundtable is an association of chief executive officers of major corporations in the US. (Of course, that should include Enron, WorldCom, Polaroid and their ilk.) They published a full-page advertisement in the newspapers in the first week of July announcing, "We will make changes to regain your trust as investors and co-workers". They go on to assure me that they are also angry at corporate misdoing. They agree that corporate financial statements must be totally open, boards must be independent, and as part of fairness, executives must return monies received as a result of fraudulent accounting practices. Truly worthwhile motives.

Now, I am one of the 60 per cent of the US population that owns stocks. I am glad that the CEOs of America are working hard on my behalf and want to keep me fully in the picture when it comes to corporate decision-making. A recent example of that landed on my desk, courtesy AT&T. The document is about an inch thick and runs into 730 pages divided into 16 chapters and 114annexures. In it, AT&T is giving me all the information I need about its proposal to merge with Comcast, about its intent to create new tracking stocks and a one-to-five reverse stock split, among other things. It is inviting me to the annual meeting by saying that "Your vote is very important".

All this should really be very comforting. Yet, I feel like the Minister in the popular BBC television series `Yes, Minister!' whose wily secretary supplies him with a huge pile of files to read a day before decisions are to be made. Snuck in at the bottom of the pile is a file that deals with an issue that the secretary wants approved but the minister is against. The ruse works and the minister, out of fatigue and a lack of comprehension, signs them all.

Ethical lapses

Newspapers around the world have highlighted the tide of ethical lapses and some downright illegal activities that have been going on in the most reputable, dynamic, innovative, and fast growing of US corporations. You have heard enough about Enron so I will not repeat that. WorldCom Inc. tried to pass off $3.8 billion (Rs 18,620 crore) of operating expenses as capital expenditure so it could depreciate it over time and show higher profits immediately. It now has the distinction of being the largest filing in US corporate history for bankruptcy protection. About $2 billion (Rs 9,800 crore) of revenue has vanished from Xerox Corp. Merck & Co. included $12.4 billion (Rs 11,760 crore) as revenue that it never collected. Salomon Smith Barney is under investigation that it was allocating initial public offering shares to favoured corporate heads as incentive to get business from them. The list is almost endless. These are not your fly-by-night companies but leaders in their respective sectors and in almost all of them, senior corporate executives had their fingers in the cookie jar.Now let us get back to the pile AT&T sent me. I read it but cannot follow much of what is being said. But AT&T wants me to read them and vote because my vote is important. Perhaps I can rely on the opinions of other experts that our capitalist society has provided to help people like me. So I flip through to the end and find a report from Merrill Lynch, investment bankers, who have addressed a letter to the Comcast board of directors.

The last paragraph states, "we are of the opinion that, as of the date hereof, the Comcast conversion ratios in the Comcast merger, in the aggregate, are fair, from a financial point of view". Now this is the same organization that, a few weeks ago, agreed to pay a fine of $100 million (Rs 498 crore) because at the same time that it was deriding stocks internally, the firm was recommending them publicly! The New York Attorney General has revealed e-mails showing that stock analysts were privately referring to them as `dogs' while publicly keeping them on `buy' lists.

Perhaps I can trust the word of the auditors. I search for the statements and find one that says, "The consolidated income statement below were derived from audited consolidated financial statements. The remaining data was derived from AT&T's unaudited financial statements." Now, WorldCom, the world's second largest telecom company has filed for bankruptcy, its founder/CEO has been fired, and the stock has fallen 99 per cent. Its balance-sheet was regularly audited, but the auditors never caught the company passing off operating expenses as capital expenditure. Audited, unaudited,what is the difference? Perhaps I can trust the board of directors. After all, I elected them to represent me and keep an eye on management. But only a few months ago the board of Enron claimed that it did not know or understand all the mischief the managers were up to. And they were collecting about $150,000 (Rs 6 lakh) per year to serve on the board. The board even included a professor of accounting from Stanford University as Chair of the Audit Committee. The board of Polaroid has paid its directors sums owed to them while at the same time denying employees and retirees pension and other contractual benefits.

So my trust in corporate boards is not particularly high at the moment. Should not the Securities and Exchange Commission be investigating these agencies and setting the system right? Well, it says it is doing it. But SEC Chairman, Mr Harvey Pitt, was formerly an attorney and lobbyist for accounting firms so don't hold your breath expecting radical reform. The only solution the SEC has come up with till now is to require CEOs and CFOs at companies with more than $1.2 billion (Rs 5,880 crore) in revenue last year to swear that the numbers in their financial statements are correct or face civil or criminal charges personally. And I thought the CEO was already certifying to the validity of the company's statements when he or she signed the annual report!

Perhaps the US President would do something about it. And there, we have the most interesting story. Mr George Bush merged his failing oil company, Arbusto, with another firm, Spectrum-7 Energy Corp., which was bought in 1986 by Harken Energy Corp. and Mr Bush gained a seat on Harken's board. Harken gave Mr Bush 200,000 stock and a $120,000 (Rs 58.8 lakh) a year consulting salary. It also gave him two loans at below prime rate of interest to acquire additional shares. (His father was Vice-President at that time.) Harken, while Mr Bush Jr was on the board, was required to restate its profit statements to show a larger loss than it initially reported due to objections by the SEC. In 1990, he sold $848,560 (Rs. 4.16 crore) worth of Harken stock eight days before the company's stock price halved when it announced a large quarterly loss. Although required to immediately report the insider sale, he reported 34 weeks later to the SEC. An investigation was undertaken and then dropped and no action taken. (His father was the US President at that time.) Mr Bush Jr. is now giving speeches saying board members should not get preferential loans and wants strict action against companies fiddling with their financial statements.

Oh, well. Who can I go to for advice? So, I voted `no' on the AT&T merger with Comcast, not because I did not think it was a good deal but because I could not understand why they were doing it. Clearly, there is no danger of corporate America collapsing under the weight of all these scandals. But the tarnish is strong. The CEOs are definitely going to have to get off their high horses and get down to managing enterprises, rather than merely managing the numbers.

(The author is a professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

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