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Benefits and Pensions Monitor

Corporate Malfeasance Never Goes Out of Style

By: Jim Helik

Even though we are well into 2003, we are still talking about – take your choice –Enron/WorldCom/ Martha Stewart/Insert Your Name Here. There is also a continued scurrying around by some elected and non-elected bodies to discuss imposing new standards that bear a remarkable similarity to the old ones – which reminds me of the old joke about the person who says “I’m for capital punishment, as long as it isn’t too severe.”

So here are some thoughts about those matters that refuse to go away:

The Names Are Different, The Game Is The Same
Crime isn’t new. Fraud, theft, and corruption in the boardroom have gone on since Adam Smith’s day – and maybe even before. Even the types of crimes are the same. The outright lying frauds of BCCI in the 1980s and Bre-X in the 1990s have become the Adelphia of today.

The ‘some good people caught up in some nasty business’ dealing of the Savings and Loans became the excessive corporate pay packages of the new century.

And in the category of ‘It sure smells like fraud but we will probably have to pass some new laws to make sure of it,’ the junk bond market of the 1980s became the Enron of late.

Greed and self-dealing can’t be legislated away, but it can be punished and looked out for. Solution next time around – Keep your eyes open and your hands to yourself.

Some Things We Tried To Help The Problem Didn’t Work
You know, there was a time when stock option packages were supposed to align the interests of managers with their shareholders. Now we know better.

Solution next time around –
Keep trying to attack those so called ‘agency problems’ where those who run the company, ‘the agents,’ should act like owners.

Some People Did Slip Up

Individual analysts and their employers, and accountants and their employers either looked the other way or participated in the scams. These were the people who were supposed to provide the checks and balances in the system. They didn’t. Some are beginning to pay. Others who are innocent – think of the newly-minted 40-year-old partner in Arthur Andersen who saw their employment and longer term financial health ruined in a matter of months – have paid too.

Solution next time around –
To all those individuals who don’t act professionally, hanging is too good for you. Some Of Those People Who Slipped Up Include Us We knew, or should have known, what was going on, but the bull market ride was just too much fun. We all joked about how thin an investment bank’s Chinese Wall was. It was a rare individual who ever saw a ‘sell’ report from an analyst. Most of the information we needed to catch any wrongdoing was in that old-fashioned document, the annual report. While stock options were not listed as an expense on the income statement, the number of options issued were right there in the footnotes. So was the total of Jack Welch’s huge retirement package.

In other cases, the warning bells were there. Analysts sometimes stated that they “didn’t really understand how Enron made its money.” Enron, like Livent before it, was a company that was ‘openly closemouthed,’ almost begging you to stay away. We saw it all, but we just didn’t care.

Solution next time around –
Learn from history, both ancient and modern. Will we ever be able to legislate ethical behaviour into everybody, no, but we really wouldn’t want to live in a society with all of those regulations anyway. Instead, let’s prepare for the next time, knowing that we will go through this all again and just hope that it isn’t soon.

Jim Helik is co-author of ‘Energy Markets Risk Management,’a textbook published by the Canadian Securities Institute. He also teaches at the School of Business, Ryerson University in Toronto.

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