The costs of stonewalling

Merrill Lynch took this bull by the horns. It courageously announced that it will base analysts' compensation on the quality of their research rather than on how much investment banking business they bring in.

But, with few such exceptions, the business community has not introduced its own reforms. Little has been heard from the US Chamber of Commerce or The Business Roundtable or The Conference Board. CEOs have been curiously mum. One exception is the chairman of Goldman Sachs, Henry Paulson Jr., who warned that the loss of confidence in business will lead investors to become suspicious of stocks in general.

Mr. Paulson added that a loss of trust in corporate executives is one reason the economic recovery remains sluggish. He suggested a large number of reforms, including requirements that executive officers hold their company stock for "significant periods of time," return gains from sales of company stock made less than a year before bankruptcy, and face restrictions on selling company stock.

But Paulson's voice has been a lonely one; none of his suggested measures seems to have a prayer.

Business should take heed from what happened to other institutions once the public begins to find out about shenanigans occurring behind closed doors.

Whether it is the Nixon or the Clinton White House, or the Los Angeles Police Department, or the Catholic Church, those who stonewall often end up paying a terrible price – first, for their initial transgressions of law or ethics and second, for having lied about what happened, for misleading the public, and for obstructing justice.

At Harvard Business School they teach a case study about a corporation caught selling an adulterated product.

The students are handed a press release stating that the product was encountered in a market in some city. They get 20 minutes to draft a response. Many panic. They tend to draft a statement that's vague or claims they do not know diddly-squat about what happened. Then they face a bunch of reporters, and soon learn that they merely added embarrassment and damaged the credibility of themselves and their corporations.

The purpose of this exercise is to impress on them the merit of admitting up front to all they know, expressing regrets, and promising to clean house. They are to learn that, however embarrassed they feel at the time, it will serve them better to fess up.

One can only wish that corporate leaders would go to one of the summer refresher courses business schools provide for executives. In a free society, stonewalling does not work. And it exacts a high cost – not only of those who stonewall, but of all others in the same line of work, and ultimately of all of us.

• Amitai Etzioni is a University Professor at George Washington University and author of 'The Moral Dimension' (The Free Press, 1990).

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