Reaping the whirlwind (The wave of corporate fraud did not emerge in a vacuum.)

World Magazine ^ | July 20, 2002 | Timothy Lamer

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The wave of corporate fraud did not emerge in a vacuum. It's in part a consequence of a society that refuses to recognize absolute standards of right and wrong

Did Scott Sullivan really think he could get away with it? Did the now-fired chief financial officer of WorldCom believe that he could forever disguise nearly $4 billion in expenses? Did he even realize that what he allegedly was doing was objectively wrong?

We don't know, because Mr. Sullivan isn't talking to the press, and he pleaded the Fifth Amendment before the House Financial Services Committee last week, along with former WorldCom CEO Bernard Ebbers. But we do know that WorldCom wasn't alone: The telecom giant joined Enron, Tyco, Rite Aid, Global Crossing, and many others on the list of companies that used accounting gimmicks to lie to investors.

But as the list of disgraced corporations grows, some culture watchers are concerned that Americans may be learning the wrong lessons from the scandals. These corporate scandals didn't emerge in a vacuum, they say. The current wave of business corruption is, at least in part, the consequence of some very bad ideas that dominate the larger society.

The National Association of Scholars (NAS) last week focused light on some of those ideas. In a survey of 401 college students conducted by Zogby International, the NAS found that 73 percent of students say their professors teach that "what is right and wrong depends on differences in individual values and cultural diversity." Only 25 percent said professors teach that "there are uniform standards of right and wrong by which everyone should be judged."

The result of such teaching is a skewed view of business priorities. When the poll asked students to rate the importance of various business practices, "corporate diversity" outpolled basic corporate honesty. Thirty-eight percent said "recruiting a diverse workforce in which women and minorities are advanced and promoted" was most important. Only 23 percent picked "providing clear and accurate business statements to stockholders and creditors." (Minimizing pollution and avoiding layoffs garnered 18 percent each.)

Universities may be unwittingly "providing sophisticated excuses for succumbing to the temptations of greed and power," said NAS president Stephen H. Balch. "The relativization and politicization of ethical standards, plus cynicism about business in general, opens the way for such excuse making." It's in this climate that the corporate scandals occurred. "The business world is taking a beating, but what happened there is a mirror image of what's taken place in society," former Wal-Mart chief operating officer Don Soderquist told WORLD.

The problem is that unless society diagnoses the problem correctly, its solutions won't be effective. Mr. Soderquist, founder of the 4-year-old Soderquist Center for Leadership and Ethics in Siloam Springs, Ark., worries that most books on business ethics mistakenly focus on behavior. That misses the mark, he says: "It's not what you do, but what you believe. Behavior will always be governed by what you believe." Will Americans, deeply committed to the idea that no religion, culture, or ethic is superior to any other, have the stomach to take on bad beliefs? Or will Americans concentrate so much on the bad fruit (behavior) that they forget to notice the tree (beliefs) that produced it?

The evidence doesn't look good. Even President Bush sounded a relativistic theme in response to controversy about questionable accounting practices during his tenure as a director of Harken Energy Corp.: "In the corporate world sometimes things aren't exactly black and white when it comes to accounting procedures."

Others see an economic danger in the way Americans are reacting to the scandals. The investing public seems to assume that simply clearing out the corporate wrongdoers will bring back sky-high stock prices. "I think actions speak louder than words," said Jack Francis of UBS Warburg after a speech by Mr. Bush on Wall Street last week failed to lift the markets. "If somebody goes to jail, maybe people will take corporate America a little more seriously."

Maybe, but maybe not. No one doubts that the villains here really are villains, but the problems with the stock market may go deeper than their malfeasance. WorldCom's stock, after all, had fallen from a high of over $64 per share in June 1999 to 83 cents before the furor over its bookkeeping hit, and the stock markets were losing value even prior to the rash of corporate scandals.

Lack of trust is a serious problem for the markets, but it's not the only problem, say some economists. The dollar, which has lost value this year relative to other currencies, as well as the lingering effects of ridiculously priced stocks during the 1990s, are likely the larger culprits. "Stocks have dropped because, compared with historic benchmarks (profits, dividends, sales, assets), they rose too high in the 1990s," writes economics columnist Robert J. Samuelson. "A steep reversal was inevitable."

But consumers don't see it that way. The Federal Reserve reported last week that in May, consumer borrowing grew by $9.5 billion to $1.706 trillion, an annual growth rate of 6.8 percent. Americans are still not content to live within their means; they still seem to be counting on the stock market (or a continued housing boom) to finance (or refinance) their lifestyles. Stocks may rebound soon and housing prices may continue to soar. But if not, indebted Americans could be in for serious problems.

Meanwhile, more revelations of wrongdoing may be on the way. Although Mr. Soderquist says the vast majority of corporate executives act in an ethical manner, he predicts that further scandals will emerge. "We haven't seen the last of it. There will be others."

The problem may even extend beyond corporate America. The next shoe he sees dropping: the accounting practices of some nonprofit organizations.

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The next shoe he sees dropping: the accounting practices of some nonprofit organizations.

Such as JJ's Rainbow scam.