Crime Cheaters often prosper
Perp-walks, prison spells, crusading politicians or a whole new raft Of Rules — What’s It Going To Take To Curb Corporate Crime?
The ones who didn’t get away: from left, Jeff Skilling, John Rigas of Adelphia, Enron’s Andrew Fastow, Tyco’s Dennis Kozlowski and World Com’s Bernard Ebbers.
Chris Sorensen, Financial Post, Saturday, December 30, 2006
Jeffrey Skilling will need some time to get used to his new digs. The former Enron CEO, who once lived in a US$4.7-million Houston mansion, will soon be bunking in a converted college dorm room on the outskirts of Waseca, Minn., 120 kilometres south of Minneapolis.
For would-be white collar criminals, Skilling’s punishment punctuated a rising wave of intolerance for corporate malfeasance in the wake of several high profile U.S. scandals. For investors and the general public, the event had a more visceral meaning: It seemed to prove that the Armani-clad Fortune 500 set lives under the same set of rules as the rest of us.
Aside from offering a sense of retribution, however, it’s unclear whether the get-tough approach will deter anyone from crime. New rules and regulations have boosted compliance requirements for U.S. and, to a lesser extent, Canadian companies, but those who follow the issue closely say what’s really needed is a fundamental shift in the culture of big business — a goal that remains elusive despite the popularity of talking about the need for ethics in the boardroom.
Indeed, some observers argue that piling on more rules and regulations will serve only to make future corporate crime more complicated and more difficult to detect.
“If somebody is motivated to cheat, they’re likely going to be bright enough and have smart enough attorneys and accountants to help them do it,” says Joe Des Jardins, the director of the Society for Business Ethics and a philosophy professor at the College of Saint Benedict and Saint John’s University in Minnesota.
“As corny as it sounds, I think the change has to come from within.”
Skilling’s sentence provided a sense of closure to the string of corporate scandals, beginning with Enron, that shook the public’s confidence in Corporate America in recent years.
While other white collar criminals have received harsh sentences — Edmonton- born World Com founder Bernard Ebbers received 25 years, former Tyco chairman Dennis Kozlowski got eight to 25 and John Rigas of Adelphia received a 15-year sentence — Skilling’s was the most-watched because Enron was the poster child of corporate greed. When the Houston-based energy trader collapsed in bankruptcy in 2001, it wiped out 5,000 jobs, US$2-billion of employee retirement funds and US$30- billion in investors’ money. Moreover, it had the dubious distinction of taking out what was once considered one of the world’s premier accounting firms, Arthur Anderson.
“The actions of the Enron people destroyed the retirement savings of thousands of employees,” said Thomas Hurka, a philosophy professor at the University of Toronto. “They just lost everything. I mean, if somebody stole that amount of money in a bank robbery, they would get a huge amount of time in jail.”
For many the harsh sentences handed down to Skilling and others were necessary to convince people that corporate crime was at last being taking seriously.
But while many argue that the high profile trials and convictions of Skilling and others prove the criminal justice and regulatory systems are working, it’s certainly not the first time authorities have pledged to crack down on white collar criminals.
Similar pledges were made in the wake of the savings and loan scandals of the 1980s, as well as following the trial of Michael Milken, “The Junk Bond King” who served a fraction of his 10- year prison sentence and remains on Forbes magazine’s richest people list with a net worth of US$2-billion.
“When I was writing a newspaper column in the early 1990s everybody was talking about the 1980s as being the decade of greed and, thankfully, that’s all behind us no w,” Mr. Hurka says. “Then all of this chicanery happened in the 1990s.”
So, has anything really changed?
The official U.S. response to Enron, World Com and other scandals came in the form of the Sarbanes-Oxley Act, passed in 2002. SOX aims to shore up firms’ accounting and reporting practices and help restore investor confidence in capital markets.
The new rules included a requirement for companies to set up independent audit committees and whistle-blower programs, as well as having their CEOs and CFOs sign off on financial statements, among other things.
Many in the business world have mocked the concept of more regulations, arguing companies are wasting a substantial amount of time and money on compliance, but there is little dispute that oversight of executives and employees has increased substantially as a result.
But a more effective tool in the arsenal of regulators may ultimately prove to be a handful of crusading politicians, including Eliot Spitzer, the attorney general for the state of New York, who effectively made it his mission to put Corporate America on notice. (He was elected governor in November.)
“These guys are very able and don’t have to do a lot of consulting before they launch their lawsuits,” said Len Brooks, the executive director of the Clarkson Centre for Business Ethics and Board Effectiveness at U of T’s Rotman School of Management. “It’s one thing to be dealing with a national regulator in the U.S. Securities and Exchange Commission, but you are also dealing with these folks that are incredible aggressive and gifted litigators. You know that it’s going to cost you a ton of money even if they don’t get you.”
Mr. Brooks believes U.S. executives are now less likely to commit fraud simply because they fear being subjected to the humiliation of a “perp-walk,” as the parade of hand-cuffed executives into U.S. courthouses came to be known.
In Canada, however, it’s a different story. “The level of fines is dramatically less than in the U.S., never mind the fact that very few people go to jail,” he says.
Mr. Brooks thinks the Ontario Securities Commission, the country’s largest securities regulator, has been much less aggressive than the SEC when it comes to pursuing corporate criminals.
It may be that Canadians will have to live vicariously through the U.S. legal system as Patrick Fitzgerald, the U.S. attorney for the Northern District of Illinois, attempts to prosecute Conrad Black, the former Hollinger International Inc. chairman, who is accused of looting his company. The trial is set to begin in March.
Corporate crime is notoriously difficult to detect, let alone prosecute — regardless of how much regulatory oversight has been put in place.
In the case of Enron, it took investigators months to unravel the company’s convoluted business structure. Even then, the case against Enron’s executives was far from being a certainty since
many of the things they were accused of doing — fancy accounting manoeuvres such as off-balance sheet transactions, for example–aren’t necessarily illegal. But are more rules the answer?
Ethics professor Mr. Des Jardins argues that most MBA students are taught that business is a high-stakes game that occurs within set rules, but that the rules can be bent and stretched with few meaningful consequences. “It’s all no harm, no foul. It’s just a big game that we all play to win.”
A better approach, he says, is to focus on creating a culture of ethics at universities.
After teaching the subject for nearly 25 years, Mr. Des Jardins says he’s pleased to at last see the field be taken seriously by students and educators, with more courses being offered and more ethics content being added to existing class materials.
That said, Mr. Des Jardins says there will always be a need to vigorously prosecute and punish offenders such as Enron’s Skilling and others. “I mean, these kids want ethics, but they are also skeptical. And if those guys walked, then the skepticism would have won.”
csorensen@nationalpost.com
© National Post 2006
© 2006 CanWest Interactive, a division of CanWest MediaWorks Publications Inc.
Ed. This is article is very appropo for me as I just started reading “The Corporation: The Pathological Pursuit of Profit and Power” written by Joel Bakan and first published in hardcover in Canada in 2004. The book is an extended look at the corporation and follows the same themes discussed in the documentary “The Corporation” (which I have seen).
