CEBC IN THE NEWS

No More Boardroom Fun and Games

Published Friday, June 28, 2002 in the Star Tribune.

By Neal St. Anthony

For a while this week, I thought we were going to have to call in Federal Reserve Chairman Alan Greenspan, who used to sweat over sky's-the-limit investor exuberance, to caution against "irrational pessimism."

Regardless of the market's rebound from its worst levels of the week, the stench wafting from the financial pages is depressing. Consider that:

• WorldCom brass set the fieldhouse record for cooking the books in order to produce hundreds of millions in phony profits.
  
  
• Some CEOs and their advisers might be headed for tours of Club Fed.
  
  
• The secretary of the Treasury is lecturing not about the strength of the dollar but on ethical leadership and valuing employees.
  
  
• Wall Street analysts, who are supposed to render independent investment opinions, look more like fee-hungry investment bankers in drag.
  
  
• Last but not least, USA Today reported that a lot of CEOs cheat at golf. So much for shareholder-paid country club memberships!

This is the gut-wrenching, flip-side, finale to the boom-time investment bubble of the 1990s, an era that will be remembered now mostly for excessive telecom spending, dumb dot-com investing and bogus bookkeeping to "make the numbers."

"Old-fashioned greed set in, a casino mentality," said Jim Mitchell, the retired chief executive of IDS Life, and a fellow at the Center for Ethical Business Cultures at the University of St. Thomas. "Some of these managements, their incentive was to consider only the short-term interest of shareholders."

Still, the sky is not falling. Most companies will continue to make a profit, add jobs and grow. Many beaten down stocks, like the sun, will rise again.

"The vast majority of corporate executives are trying to do the right thing," said Jo Marie Dancik, managing partner of the Minneapolis office of Ernst & Young. "They have very good moral compasses, and they form pretty good partnerships with employees and get them pointed in the right direction.

"Unfortunately, a few people lost their way in the late 1990s. Some of those Enron executives who testified before Congress should get an Oscar, and then be sent to jail. There will be tough medicine for some people. It may be what we need to get back to recovering investor and public confidence and stable financial markets."

No excuses

The tax-and-accounting rule books are littered with interest-driven loopholes and nuances that are legal, but have little to do with the long-term interests of shareholders, employees, communities and other "stakeholders."

Let's try the smell test. If you don't want to tell your mom what you're really doing in the boardroom or read about it in the press, don't do it.

"There are some things that are just morally not correct going on. Clearly, more than we thought," said Neil Lapidus, a partner at the accounting firm Lurie, Besikof Lapidus & Co. "Management is out of sync. The accountants and lawyers aren't helping.

"There has to be a renewed definition of business ethics," Lapidus said. "I could be the best auditor in the world and you could still fool me. It's more than that. Our profession needs to spend time on the qualitative side as well as the numbers. On what's right. Management, accountants, lawyers, business advisers -- they may be spending too much time advising how to get around the law."

'Walk the talk'

Bill George, the retired CEO of Medtronic and widely regarded as a strong leader, is angry about these debacles that have scorched CEO Land.

Too many board members at Enron, Kmart, Global Crossing and a lot of other outfits proved more CEO lapdogs and golf pals than probing, independent corporate governors looking out for the long-term interests of shareholders, employees and communities.

"They fail to challenge management about how earnings are generated, what the risks might be, whether investments are sound, or if the accounting accurately reflect results," George told the Harvard Business Review. "Or they're ignorant about these things. When the company collapses, it's no excuse for a board member to say, 'I didn't know what was going on.'

"Some boards don't have the will or the courage to challenge a powerful CEO who is reporting good numbers. They let him run roughshod over them, which is what apparently happened at Enron."

Ron James, a veteran business executive and president of the Ethical Business Cultures group, and Mitchell have been talking about the center's little-noticed research paper last fall that concluded that executives who "walk the talk" on ethical leadership and balance stakeholder interests also are the best long-term financial performers.

All businesses have their ups and downs. But you're not not reading about major scandals at Medtronic, Toro, Tennant, Graco, Fastenal and hundreds of other companies headed by CEOs who know how to make a buck and grow the enterprise without looting the joint.

Increasingly, James is speaking to larger groups, at universities and in the corporate world.

"We've got to deal with these issues," he said. "Not just live through this time. The incentives, will and procedures need to be there for the CEO and board to consider all the stakeholders and not just quarter-to-quarter financial performance."

What is the ethical advantage used by the most successful companies?

• A commitment to performance for all stakeholder groups.
  
  
• Leaders who "walk the talk" in their personal behavior.
  
  
• Institutional integrity, so that employees feel free, even obligated, to do the right thing, even if it has a short-term cost.

Otherwise, capitalism, as we've seen in cases from Enron to looted savings and loans and insider-trading scandals, is reduced to short-term warfare that ends up claiming a lot of innocents' jobs and money before Marshal Dillon arrives on the scene.

The author

Neal St. Anthony reports on companies, people and trends in the Twin Cities business community. His column appears Tuesdays and Fridays.

© Copyright 2002 Star Tribune. All rights reserved.

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