Enron lapses and corporate ethics
New questions surface about corporate leaders as Kenneth Lay testifies before Congress today.
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"They said, 'If we take it away, it's not Starbucks anymore,' " says Chip Espinoza-Johnson, an assistant professor and consultant at Vanguard University in Irvine, Calif.Skip to next paragraph
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Nor are all executives just interested in enriching themselves. Warren Buffett, one of the nation's most successful investors, only gets paid $100,000 a year, despite his net worth of $36 billion. He still lives in the same gray stucco house he purchased decades ago for $31,500. His sole extravagance appears to be a corporate jet he calls "The Indefensible."
In the current recession, other executives have trimmed their pay as well. Michael Eisner, the chairman of Disney - who has been criticized in the past for excessive compensation - cut his pay to $1 million in 2001, down from $12.3 million the prior year. In San Francisco, Millard Drexler, CEO of the Gap Inc., cut his bonus by $2.4 million and his total pay fell 29 percent in 2000.
Still, for the most part, American executives get paid well - something that can make them look greedy in hard economic times. For example, Forbes lists Michael Dell, the chairman of the computer company, as the top earner last year with a total compensation of $235,912,000. And Sandy Weill, the chairman of Citigroup, has a five-year compensation of $785,227,000.
In hard times, the scrutiny goes beyond paychecks to the personal spending habits of corporate leaders. Last week, for instance, the Global Crossing telecommunications company declared bankruptcy. Only four years ago, the company's chairman, Gary Winnick, spent $60 million on a house in Bel Air, an exclusive part of Los Angeles. He then spent another $30 million in renovations.
"When it comes to executive compensation, it's almost like they are on another planet," says Timothy McMahon, professor of management at the University of Houston. "And people are stepping back, wondering how this kind of thing [bankruptcies such as Enron and Global Crossing] could happen when we are paying these people all this money."
Indeed, the gap between CEO salaries and those on the factory floor is widening. In 1973, for example, the typical CEO made 45 times the wage of the average worker. Today, it's as much as 500 times, experts say.
"They've lapped the field 10 times," says Graef Crystal, a columnist at Bloomberg News and an expert on executive compensation. He says Japanese executives earn 20 to 30 times the lowest-paid worker while, in Europe, the ratio is about 40 times.
To some observers, it's not so much high salaries themselves that are a problem. The big dollars represent the going rate for top management talent. For example, Jack Welch retired last year with an intact reputation for stellar leadership at General Electric that, to his fans, makes him well worth big paychecks.
In terms of ethics, the larger issue is how often America's platinum compensation packages are actually buying better performance - creating jobs and new wealth beyond the corner office.
As experts debate the answer - pointing to examples on both sides - some companies are trying to keep the ratio lower. Ben Cohen and Jerry Greenfield, the quirky entrepreneurs behind Ben & Jerry's ice cream, kept the ratio of top to bottom earners at 7:1 - though that did not last after the two stepped down in 1995. They sold the company last year to Unilever, which sells everything from Lipton tea to Dove soap.
While the pay issue may never get resolved, many corporate boards have spent a lot of time on the issue of ethics or standards of conduct in the past decade. Many companies instituted new ethics programs in the 1990s, after a series of financial scandals.
But most were designed to protect the corporation from the conduct of the employee, says Michael Josephson of the Josephson Institute of Ethics in Marina del Rey, Calif.
The codes are not any indication of the ethics of a company, he says, and are usually written by the legal department or the human-resources department.
Still, many companies take ethics very seriously. Johnson & Johnson, for instance, holds a five-day leadership program for its senior management, including all directors. Included is five hours on ethics and values, led by one of the most senior people in the company.
Back in Houston, the questions surrounding of Enron's ethical practices still haunt the 4,000 laid-off workers. Some have resigned themselves to humor and are auctioning off company momentos, such as the code of conduct.
But Jennings, for one, is not disheartened by what she sees as "plain old-fashioned greed" in the Enron case. In fact, she thinks its collapse will be beneficial in the long run. "With the crash of the new economy and bankruptcies like Enron's, I see a return to that good old-fashion, down-to-earth business model," she says. "Companies are in business to make money, and there isn't anything wrong with that - as long as long as they are encased in a set of values and time-tested principals."