Crisis in the corner office

With one scandal after another rocking the credibility of corporate America, investment legend Warren Buffett wrote a letter to shareholders earlier this year in which he ventured a tart explanation of why so many management misdeeds are coming to light.

"You only find out who is swimming naked," he said, "when the tide goes out."

In terms of the economy and stock market, the tide has been ebbing for a couple of years now. At companies such as WorldCom, Xerox, Tyco International, Enron, and Adelphia Communications these hard times helped expose ethical lapses that have cost employees and shareholders dearly.

The details vary by company. But a common thread is fudging the numbers to make profits look better and, not so coincidentally, boost the CEO's paycheck.

Why focus on the conduct of chief executive officers? Others clearly contributed to the climate that made the misdeeds possible – including accountants, directors, and lawyers who traditionally play a watchdog role.

Still, CEOs have a profound impact on the corporate culture and ethics, even at the largest companies. They are in a position to veto dubious schemes by subordinates and, in the words of Nancy Reagan, to "just say no."

For example, the Securities and Exchange Commission (SEC) complaint last week against WorldCom for hiding a whopping $3.8 billion in expenses alleges a scheme, "directed and approved by its senior management."

Next week, President Bush will make a speech on Wall Street in which he is expected to unveil proposals for tougher penalties on executives who engage in unethical behavior. His speech will come the same week the Senate is scheduled to take up business reform legislation.

"It is clearly the job of the CEO to set the proper tone," says Henry Paulson Jr., chairman and CEO of the Goldman Sachs Group, a $31 billion investment bank.

Management lapses are no surprise. In fact, experts say they are a telltale sign of the final stages of a boom. "The scandals were much worse in Europe in 1927-30 and in the US in 1932-34 and in 1936-37," says management expert Peter F. Drucker.

The extent of CEO misdeeds during the 1990s is not yet fully known. Reported incidents affect only a small fraction of the 17,000 public companies or even the 1,000 largest firms. It is this latter group whose missteps are attracting the most public attention.

Whatever the ultimate size of the problem, the dishonesty discovered to date has already exacted a high price in lost jobs for employees, vanished pensions, diminished confidence in the stock market, reduced trust in the US as a haven for foreign investors, and a drop in the public's already meager respect for corporate America.

"The effect of abuses is much more dramatic today," says SEC Chairman Harvey Pitt. Today's financial markets are more sophisticated and interrelated. As a result, negative news about one company "can an have a dramatic impact on other companies in the same industry, and that fact will be felt instantaneously."

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