A rchive Date
[ 30-06-2002 ]
Category
[ International Relations ]
sub-Categoy
[ U.S ]
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[http://www.chron.com/cs/CDA/story.hts/editorial/outlook/1475715
We can rebuild this decay in trust - here's how
By BOB STEARNS
June 29, 2002, 12:05PM
THE single greatest problem facing business today is the diminishing trust Americans feel for so many public companies and their leadership, a decay amplified by our eroded faith in other key institutions: Wall Street, Congress, the office of the president during the Clinton administration, the news media.
The news about WorldCom is only the latest round in a stunning barrage of corporate and senior management dishonesty. While greed among top executives is nothing new, the end of the bull market has certainly renewed investors' interest in fixing the problem. This situation is so alarming that if we fail to re-establish trust, we are really endangering the virtues of capitalism and the American society that we have built on its foundation. Short of the weighty matter of homeland security, I can think of no issue more important or far-reaching in its potential effect on every American.
It is tempting in this time of crisis to call on the federal government for more regulation and thoughtful legislation and, indeed, some increased oversight is probably called for in some sectors of our economy. The Senate has proposed and the House has passed legislation that aims to root out the most nefarious practices undermining faith in our institutions. So, too, has the Securities and Exchange Commission proposed creation of a nine-member Public Accountability Board to discipline auditors and monitor accounting firms' practices - a necessity to restore the integrity of our public markets. There will likely be some serious political horse-trading over which proposals ultimately become law, but there is little doubt that Washington will respond.
I doubt, however, that legislation is a sufficient solution; it is unlikely that any set of rules can properly anticipate all the ways executives can cheat and abuse such a complex system. The real cure to our ills would seem to lie with something more fundamental: I wonder if we have somehow managed to lose our moral and ethical compass, the common sense that innately tells us right from wrong? Is it that common sense is just not so common anymore? I think so.
The solution must start with the individual: A well-educated person and a supportive family unit are the building blocks of a moral and ethical society, along with a belief in God, or, at the very least, ultimate accountability to a higher authority. Without these, no legislation or set of rules can hope to succeed.
We need to re-establish a solid public education system that serves all Americans, where proper behavior is taught and consistently reinforced; one in which our teachers are excellent role models; one that inspires students to advance and achieve; one that imbues students with a sense of our own history and place in the world, as well as a shared sense of responsibility and stewardship for the future of our society. And, America's business schools must redouble their efforts to teach business ethics as a central consideration in all business decisions.
While successfully rebuilding the way we educate Americans will take many years, there are also some key business practices that can be improved right away:
·Corporate governance needs immediate attention. Boards of directors need to consist of well-qualified people, not window dressing, with solid representation by corporate outsiders, led by a non-executive chairperson.
·They need audit and compensation committees that ask tough and thorough questions, not rubber stamps for senior management.
·They need to avoid overcompensating senior executives. The use of stock options is not the problem. Rather, the issue is the concentration of too many options in the hands of too few. Options should be awarded broadly - employees should be stakeholders and vesting should take place over many years. And the magnitude of the gap between the highest and lowest compensated managers has, in some cases, become obscene - a clear source of abuse.
·Managers and their boards need to be more skeptical about plans that focus on achieving fast wealth and short-term profits, and far more focused on building long-term shareholder value. Senior managers need to stop trying to "game" Wall Street and just run their respective businesses without constantly looking over their shoulders at analysts. Wall Street, in turn, needs to re-establish a high and impenetrable wall between security research analysts and investment bankers. The firms that provide external audit services should not be permitted to also provide consulting services. Chief executive officers and chief financial officers should be made personally responsible and accountable for reported financial results.
And reported financial results for public companies should be comprehensive and expressed in clear and simple language.
·Finally, boards need to be more sensitive to the potential for abuse of power and consider establishing term limits for CEOs and CFOs, as well as external auditors.
Perhaps this is all just common sense, but it has to be done before Americans can be expected to regain confidence in the economy and the stock market. The decay of trust we are experiencing is decay in the very foundation of our economy and threatens the stability of the global economic system. Trust must be re-earned and the first step must begin with the individual, through an investment in public education and faith in common-sense business practices.
One thing seems certain: A persistent loss of faith in the integrity of business management will do far more damage to our economy than any terrorists ever could. We must all - private sector, government and educators - pull together to quickly solve this complex problem.
Stearns is co-founder of Houston-based Sternhill Partners, a venture capital partnership formed in 1999 (Bob.Stearns@sternhillpartners.com)
 World Fact Book (CIA)]
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