In August of 2002 I received a politely phrased notice from my cable company, Adelphia, addressed to “Dear Valued Customer,” announcing that my monthly cable fee would be increasing. The letter explained that “like other businesses, Adelphia constantly faces increases in operational expenses such as wages, specialized training for our employees, utilities, fuel, insurance, equipment….” Missing from the missive? Any mention of another operational expense that no one at Adelphia seemed too happy to discuss. During the unfortunate latter days of his reign, former CEO John Rigas had borrowed $3.1 billion from the company and spread the money around like seed on a sun-scorched lawn. His own lawn, of course. He spent $13 million to build a golf course in his backyard, $150 million to buy the Buffalo Sabres hockey team, $65 million to fund a venture-capital group run by his son-in-law, thousands to maintain his three private jets, and $700,000 for a country-club membership. It’s a wonder my bill’s not going up a million dollars a month. I just hope Adelphia’s subscribers aren’t also paying for his bail.
In the superheated 1990s we were told repeatedly that the “democratization of capital” and unparalleled increases in productivity would level the playing field and produce unprecedented gains in everyone’s standard of living. Well, far from closing the vast gap between the haves and the have-nots, the lunatic excesses and the frenzy of fraud perpetrated by our high-flying corporate chieftains have left America’s 401(k)s and pension plans in ruins and more than 8 million people out of work. Meanwhile, despite the much-vaunted Corporate Responsibility Act and the highly publicized roundup of a few of the most heinous offenders, the awful truth is that the corporate tricksters have pillaged the US economy and gotten away with it. They’re still living in their gargantuan houses, still feasting on their wildly inflated salaries and engorging themselves on staggering sums of stock options, while the rest of America tries to figure out how to rebuild for retirement. Or send a kid to college on a worthless stock portfolio.
Since, at its heart, the corporate scandal is a political scandal–corporate money corrupts politicians, who, by passing or neglecting to pass laws, make corporate crime possible and profitable–it’s hard to see how we will ever get rid of this corporate hangover until we cure our politicians’ unslakable thirst for campaign cash. Ultimately, the only way is by adopting the Clean Money, Clean Elections model, which replaces the nonstop money-grab with full public financing of elections. In the meantime, a whole raft of specific corporate reforms is urgently needed:
§ Treat stock options as the expenses they are. This reform was dropped from the Sarbanes-Oxley bill–a set of financial-sector reforms passed by Congress last summer–even before it hit the Senate floor. Tom Daschle, fresh from getting an earful from venture capitalist and big-time Democratic Party donor John Doerr (Doerr and his wife have given $619,000 to Democrats since 1999), pummeled John McCain’s attempt to force a vote on stock-option reform, before jetting off to Nantucket.
§ Make breaching the Chinese wall between research analysts and investment bankers illegal. The Sarbanes-Oxley bill has done nothing to make it harder for investment banks to deceive investors with overly optimistic research, using their research departments to land banking business.
§ Prohibit accounting firms from providing consulting services while auditing a company’s books. Under Sarbanes-Oxley, the provision of consulting services by audit firms is only restricted somewhat, not made illegal.
§ Outlaw offshore tax havens and, in the meantime, bar companies that move their headquarters overseas from competing for government contracts. The Sarbanes-Oxley bill neither bans nor restricts the use of tax havens by American corporations. Nor does it ban or restrict government contracts from going to these companies. In 2001 alone such contracts topped $1 billion.
§ Regulate the special-purpose entities used for the complex, off-balance-sheet transactions that were at the heart of the Enron debacle. No new rules governing special-purpose entities were included in the Sarbanes-Oxley bill, so, for the moment, they can still be hidden off the company’s books.
§ Strengthen whistleblower protection and insure that it shields all workers equally. This vital reform was covered in the Sarbanes-Oxley bill, but only with very ambiguous language that allowed the President, hours after signing the bill into law, to issue a White House interpretation limiting whistleblower protection to those providing information during a Congressional investigation.
§ Strengthen the independence of corporate boards. At the moment, the New York Stock Exchange and the NASDAQ are proposing that companies have a board with a simple majority of independent directors. If approved by the Securities and Exchange Commission, the new rules will apply to the 2,300 US companies listed on the Big Board, which will have two years to comply. Companies that fail to do so face the daunting prospect of a slap on the wrist–a letter of reprimand from the NYSE.
§ Drastically overhaul current accounting standards. Warren Buffett, Alan Greenspan and Henry Paulson (CEO of Goldman Sachs), among others, have argued that the current accounting standards are–in Paulson’s words–“ripe for manipulation” and need to be overhauled. But no such overhaul is being proposed in Congress.
§ Outlaw accounting gimmicks that make it impossible for the public to have an accurate picture of a company’s financial health. To this day, Senator (and former Goldman Sachs CEO) Jon Corzine continues to defend what he calls his former company’s “aggressive tax policy,” including the liberal use of securities known as MIPs, which manage to show up as debt on a company’s tax return but equity on its balance sheet. “Lawyers said it was right,” he explains. “Accountants said it was right…. And the courts said it was right.” In other words, shut up and pass the New Economy Kool-Aid.
§ Institute real pension reform. Even though the savage impact on ordinary Americans’ pensions has been one of the harshest consequences of the corporate scandals, no pension reform has been signed into law. The crisis in retirement security is such that half of all Americans have no pension plan at all, and half of those who do will now have to put off retirement because of stock-market losses. There is also a blatant injustice in the way companies provide pension plans, disproportionately benefiting their top executives.
§ Institute some basic lobbying reform. Begin by reinstating the mandatory five-year “cooling off” period between the time officials leave a position in the administration and when they can begin lobbying for a related industry. This elementary rule was instituted by President Clinton on the first day of his Administration but rescinded during his last days in office. Also, it should be illegal for family members of legislators to become lobbyists.
§ Repeal the Financial Modernization Act. The act, passed in 1999, ended the separation of commercial and investment banking functions that had been instituted during the New Deal to protect the public from the kinds of fraud and deception that have been rampant in the past few years.
§ Stop the Bankruptcy Reform Act from becoming law. The bankruptcy act would not only significantly add to the burden of consumers struggling to rebuild their lives amid tough economic times; it also contains a provision that loosens some crucial conflict-of-interest restrictions. The exploitation of the bankruptcy bill shows beyond any doubt that even in the middle of all the public clamor to clean up the Augean stables of corporate America, there is a whole industry working overtime to shovel sackfuls of manure in even as we are taking a few teaspoons out.
§ End the ability of mutual funds to administer 401(k) plans and other employee-benefit services for companies in which they hold substantial positions. The seventy-five largest mutual fund companies control 44 percent of the voting power at US companies. So there are enormous consequences for all of us when owners elect not to act like owners but like timorous lackeys desperate to please management. As owners of huge amounts of stock, it is their job to hold incompetent or self-interested management accountable. But there are massive fees coming their way when corporate executives award them 401(k) and pension-fund assets to invest. For instance, the nation’s largest mutual fund, Fidelity, which owns 5.3 percent of Tyco’s stock, also earned $2 million in 1999 for its part in running Tyco’s 401(k) plans.
The revelations of infectious greed have the potential to ignite an explosion of populist outrage. The question is: Who will light the fuse? Will it be, say, a younger, charismatic Ralph Nader? A Ross Perot without the corporate baggage or bats in the belfry? A real-life version of Jimmy Stewart’s Jefferson Smith, who arrives on the scene funded by $1 donations from paperboys and soda jerks or, these days, video store clerks and cubicle drones? My guess is none of the above. Instead, it will be a critical mass of individuals and groups mobilized by the injustice given flesh and blood by the current scandals.
Beneath the media radar, people are organizing across the country–from established organizations engaging in grassroots work like Public Citizen, Common Cause, Global Exchange, the Center for Public Integrity, the Pension Rights Center, Workingassetsradio.com and United for a Fair Economy, to newer groups like Citizen Works and Junction-City.com, to Jim Hightower’s traveling road show, “The Rolling Thunder Down-Home Democracy Tour.” And there’s a lot happening at the local and state levels. Last July, for example, California State Treasurer Phil Angelides released a list of twenty-three companies–including Tyco and Ingersoll-Rand–the state has blacklisted because of their use of offshore tax havens.
The government needs to reward socially conscious companies with tax credits, incentives and subsidies while levying higher taxes on polluting and wasteful companies. The business press needs to stop running adulatory cover stories on America’s most cutthroat CEOs and replace them with glowing profiles of the most forward-thinking ones. And, most important, the public has to keep the heat on, recognizing that corporations’ anti-social behavior couldn’t have flourished in a vacuum. During the 1990s it was as if denial had replaced baseball as the national pastime. We buried our heads in the sand–unwilling to question the integrity of the bulls rushing down Wall Street for fear it might jeopardize the 30 percent rate of return we had come to see as our birthright. And the buoyant pronouncements of our political leaders only served to hammer home the communal delusion that the party would go on forever. This shared denial provided convenient camouflage for corrupt CEOs. In America, we keep score with money and the trappings of wealth–so the psychopaths fit right in. They were nothing more than the winners of a game we all wanted to play–a game that we knew rewarded certain aberrant tendencies.
So, as well as prosecuting all the crimes these Wall Street wolf boys committed, and instituting all the major reforms needed, we should take the opportunity as a culture to lie down on the couch and see what it was in our collective unconscious that created these nightmares. But only for a little while. Because we have work to do. We were told again and again during the 1990s that our unprecedented prosperity was fueled by consumer spending. Well, the time has come for the shoppers to leave the malls and take to the streets–to go from invigorating our economy to reinvigorating our democracy.