When ‘greed is good’ goes wrong

By Susan Harrigan Newsday

July 2, 2002

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"Ladies and gentlemen ... greed, for lack of a better word, is good," Gordon Gekko, a fictitious corporate raider, said in the 1987 movie "Wall Street" at a meeting of shareholders in a company he was stalking.

Gekko's speech caught the spirit of an era when many on Wall Street insisted that for companies to do well, the self-interest of their top executives needed to be aligned with that of other investors -- often by making sure that the executives owned a lot of stock in the company.

Now, however, a cascade of corporate scandals has many people wondering what went wrong with the concept of appealing to human self-interest to make companies successful.

Companies such as Enron Corp., Global Crossing Ltd. and WorldCom Inc. have lost huge amounts of market value due to alleged wrongdoing by executives whose income was linked closely to the corporations' fortunes.

"We want corporate leaders to be greedy, but we want them to be greedy on behalf of the shareholders, not on behalf of their own yachts and Gulfstream jets," said Nell Minow, editor of The Corporate Library, a Web site that focuses on company responsibility to investors.

The scandals are undermining popular confidence in American corporations. A recent survey of wealthy Americans by the Charles Schwab Corp. U.S. Trust unit found that 76 percent question the reliability of corporate financial statements, and 66 percent don't trust management of companies.

Some experts are worried that unless reforms are made, the stock market won't rise from its bear market levels for a long time, and in fact may fall further.

"If you put money in any company, you trust that management will be good stewards of your money," said William W. George, former chairman of Medtronic Inc., a large medical instruments-maker based in Minneapolis. "If you don't have that [belief] you're not going to give that money to a company, you're going to put it in the bank or a mattress."

What's causing the wave of alleged misdeeds? Some observers think ethical standards in general have declined in the United States.

Charles Elson, head of the Center for Corporate Governance at the University of Delaware, said former President Bill Clinton's affair with Monica Lewinsky and subsequent evasions of the truth about it "had a very corrosive influence" on the country's economic life. Financial executives were encouraged in a belief that it's OK to stretch the truth, Elson said.

Other experts, however, point to structural flaws in the American business system, beginning with the way many executives are paid. Jay Lorsch, a Harvard Business School professor who specializes in organizational behavior, said, "We've so juiced up the incentives [to commit fraud] that we've taken people who maybe ... wouldn't have been so greedy, and created these [corporate leaders] who've gotten everybody upset."

Specifically, Lorsch and other experts say that the heavy use of stock options as a form of executive pay has created an incentive to do anything possible to drive up stock prices, and then cash out. Stock options allow the executive to buy stock in the future at relatively low prices if the stock price appreciates, and sell it at a profit. At Enron and other companies that have hit the skids, top executives sold tens of millions of dollars in stock, and share prices plummeted.

A focus on short-term rather than long-term results also was fanned by the media, some experts said. Many stories focused on whether companies met analysts' "expectations" for quarterly earnings, and some executives have become media "heroes" for artificially raising earnings through acquisitions, said George, the former Medtronic chairman.

Moreover, entities that were supposed to scrutinize executive behavior also have failed to do so, according to W. Michael Hoffman, director of the Center for Business Ethics at Bentley College in Waltham, Mass. Many supposedly independent board members have been compromised by financial ties to top executives. "You can't be a watchdog over people who feed you," Hoffman said.

Accountants and analysts also have conflicts between their own self-interest and their duties to shareholders, experts said. They noted that accountants often fear they'll lose consulting business if they blow the whistle on a company's bookkeeping, and analysts don't look closely because their pay is often linked with winning that company's investment banking business.

But although eliminating such conflicts is important, it's crucial that company boards "be very careful who they appoint as CEOs" in the first place, Hoffman said. It's not just important that chief executives be "people who can get things done," but also "that they are people who do the right things and are ethical," he noted.

"If this [wave of corporate scandals] teaches us anything, it will teach us that a business without ethics is a business at risk."