Your Thoughts
Is Corporate Leadership Facing a Crisis of Confidence?

Eric Dent

By Chip Cassano

When a Value Line report on September 21, 2001, fixed Enron on the front pages of newspapers nationwide, it somehow seemed like a betrayal. We were only just beginning to deal with the terror and tragedy of September 11. This seemed like a different sort of attack. In less than three months, Enron shares—already down two-thirds from a high of $90—would slide to less than a dollar, and more than 10,000 Enron employees would watch their investment in the company turn to dust.

It was time to look for a scapegoat.

James K. Glassman, of the Washington Post, seemed intent on making the whole company culpable. "Companies like this are guilty until proven innocent," wrote Glassman. "Hang 'em, I say."

An op-ed piece in the Seattle Times was more specific.

"Top officers took millions out of the company. Three walked away with $56 million in one episode. . . Enron's tale reeks of questions of criminality. Serious amounts of jail time ought to be part of the plan for restoring investor confidence."

USA Today smelled a crisis. "Employees' new motto: Trust no one," read a February 5, 2002, front-page headline. The corresponding story claimed that " . . . more than 40% [of employees] say executives are only interested in looking out for themselves—even if it harms the corporation they work for."

One week later, the same paper followed up with a report on a nationwide poll that suggested, rather predictably, that half of all American adults believe the practices of top Enron executives are the norm for "at least some other larger corporations."

Is the country facing a crisis of confidence in its corporate leadership?

"I wouldn't necessarily call it a crisis," said Eric Dent, executive director of UMUC's Doctoral Programs, "but I think several factors contribute to things being worse than they otherwise might be."

First, Dent said, companies face overwhelming pressure to report short-term earnings that meet Wall Street's expectations, and even to portray their businesses as more predictable and stable than is realistic, given a dynamic and turbulent business environment.

"A company that doesn't meet expectations for just one quarter is really taken to the woodshed," Dent said, "and it may have to come back with six or eight strong quarters before it can regain the faith of the analysts."

That presents ethical challenges, of course, at a time, Dent said, when society seems to have adopted a position of moral relativism. CEOs are no exception.

"I think there are many executives who say, 'As long as you don't get caught, it's OK,' rather than saying, 'You know, this is not right. We're going to report it the way it is and take our lumps,'" Dent said.

Another factor relates to executive compensation, Dent said. Years ago, pundits drew attention to executive salaries that remained high even when a company performed poorly, and a shift was made toward tying compensation to performance. That move came at the beginning of a period of tremendous growth, however, and executive salaries skyrocketed.

"At first, that was seen as a great reform," said Dent, "but now I think it has contributed to the perception that [managers at] the top are just skimming off huge amounts of wealth from companies."

Jim Howard

Jim Howard, program director of accounting for UMUC's Graduate School, pointed to a third factor. Enron and companies like it often seem to forget the dictum that underlies most theories of financial management—that the goal of those running the firm should be to maximize shareholder wealth. To do that, management must build a successful firm with satisfied, motivated employees.

Enron saw critical failures in corporate governance on two fronts, Howard said.

"First, there was the failure of the board of directors to prevent self-dealing by members of top management," said Howard. "They allowed the CFO to initiate what were clearly conflicts of interest in establishing off-balance-sheet partnerships. That signaled to those in top management that the board had no intention of exercising its oversight responsibility.

"The second failure occurred in the much-discussed area of auditing. Historically, the Big 5 audit firms do consulting work for the same firms they audit. This sets up a classic conflict of interest between the audit opinion and amount of consulting business. Firms are not supposed to be able to make up their own financial numbers, and the auditor's job is to either preclude that or expose it [to the board]. Due to the tangled web of conflicted interests, that didn't happen."

One remedy is to establish ethical guidelines without codifying various violations, Dent said. (Oddly enough, codifying violations seems only to encourage people to operate within the "letter of the law.")

"When I teach ethics," Dent said, "I encourage people to have more of an ethical checklist, asking themselves questions like, 'How would people who oppose this decision see it? Have I defined it in a self-serving way? What are my motives in making this choice?'"

It is equally important, Dent said, for executives to keep in mind that they are bound by the same rules as everyone else.

"That's a big problem as people climb the corporate ladder," Dent said. "They can begin to see themselves as special, and say, 'I'm the exception. The rules are good for everybody else, but I'm gifted enough to know when the rules apply and when they don't.' And people end up being corrupted with that kind of thinking."

Finally, Dent said, if managers are to be truly trustworthy, they must act as exemplars for lower-level employees. Even if it turns out that Enron's off-the-books dealings were legal, they looked suspicious.

"A number of smart people claim that there are many other potential Enrons out there," Howard said. "If swift action can be taken to establish regulations, procedures, and incentives to remove the most serious conflicts of interest faced by boards of directors and the major audit firms, the damage can be contained and confidence restored. If there are further, similar debacles, with losses of jobs and pensions resulting from unethical and self-dealing behavior, a true crisis of confidence between management and employees can develop and spread throughout the corporate landscape."