The costs of stonewalling

It's time for Corporate America to learn a lesson from the Roman Catholic Church: Stone-walling and playing down revelations of abuse, whether sexual or financial, cannot be sustained in the long run.

Moreover, delaying treatment of the problems allows malaise to spread. The latest revelation: the $3.8 billion cheat by WorldCom. The ensuing loss of trust encompasses not merely the perpetrators themselves, but also those who shielded them. It also costs an arm and a leg.

Initially, following the news about energy-trading company Enron and its accounting firm, Arthur Andersen, and the nearly daily disclosures of further dubious accounting practices in other firms, insider trading, and obstruction of justice, Congress drafted several bills to clean up the mess.

Accounting companies are tempted to overlook inappropriate business practices because these firms had increasingly also served as consultants for the businesses they audited. They didn't want to endanger large consulting fees.

Congress was moving to require the separation of the accounting and consulting business. Congress also seemed interested in requiring the formation of a new regulatory board to oversee the accounting industry. These straightened-out accounting firms were supposed to keep corporations from straying.

At first these draft proposals encountered demands by business representatives and Congress members close to them to dilute the suggested laws. Accounting firms should be able to do some consulting, they said. Other corporate representatives demanded the scaling back of the proposed regulatory body, reducing its subpoena powers and preventing it from establishing auditing or quality-control standards. Now the enactment of most, if not all, of these measures is in doubt, following intensive business lobbying against them.

CEOs often claim, when their corporations are caught violating the law, that they knew nothing, that whatever was done – deaths caused by medications used without FDA approval, pension funds raided, corporate funds used for large personal purchases – was done by one rogue employee or corporate officer.

Hence, the Securities and Exchange Commission proposed that CEOs and their financial officers be required to certify that they read their corporate quarterly and annual reports and attest to their validity. It may seem odd that such a requirement is not already in place. But this modest suggestion may not fly any farther than the others have.

The public has found out that analyses of stocks are highly tainted. Analysts almost invariably give stocks more optimistic evaluations than they deserve, because their firms get hefty fees from the companies whose stocks are evaluated.

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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