A R T I C L E

Corporate Corruption and OtherPathologies

Joseph LaPalombaraYale University USA

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Introduction

The Oxford English Dictionary gives this as the firstdefinition for the word, "corruption": "The destructionor spoiling of anything, esp. by disintegration or decom-position, with its attendant unwholesomeness andloathsomeness; putrefaction." The second definitionrefers to contagion, taint," followed by another, whichspecifies a process and condition: "A making or becom-ing morally corrupt; the fact or condition of being cor-rupt; moral deterioration or decay; depravity."

Although apt, this term may not be strong enoughto describe the behavior that has come to light aboutAmerican corporate managers. Once considered thestandard bearers of America's vaunted market system,these persons have engaged in behavior alongsidewhich the swashbuckling Robber Barons of yesteryearappear as rank amateurs. They have lied to govern-mental authorities as well as their own stockholders.They have falsified official reports, created bogus enti-ties abroad, inflicted vast unemployment and humansuffering, destroyed pension funds, and placed theirown companies at or over the brink of bankruptcy.Along the way they have enriched themselves, theirfamilies and many of their friends.

Taint is everywhere, even in those institutions thatare designed to prevent it and, when this fails, toexpose and punish the miscreants involved. Inexchange for giant-size fees, banks have colluded withcorporate malefactors. Major auditing firms, as consult-ants, helped firms disguise some of the same accountsthat others of the same firm were then auditing, and

certifying as accurate. One such firm, Arthur Andersen,actually went out of business, after its senior managersengaged in a frenzy of shredding possibly incriminatingevidence. At least two of the remaining "Big Four" aresuspected of wrongdoing.

The need for reform is obvious. Some of it may beunder way, but it is highly improbable that whatemerges will be more than mild palliatives. The truth isthat formidable obstacles, including related pathologicalconditions in American society, threaten to turn suchefforts into window dressing. The probability remainshigh that genuine amelioration of what's wrong will sim-ply not materialize. Unless obstacles to reform are rec-ognized and overcome, the future is unlikely to lookvery different from the past.

Forms and Magnitude of Corruption.1

It will help to recall, in brief compass, the unprece-dented magnitude of recent corporate misbehavior.The Enron Corporation is emblematic of the problem.Until the scandal broke, its senior managers were lion-ized everywhere - not just in the business world but inthe mass media, the legislative assemblies and universi-ty lecture halls of the leading management schools. Inthe year 2000, Fortune magazine named Enron "themost innovative company of the year." Four years later itwould describe this same company as an organizationof criminals.

Enron's violations include not just falsified reports.Its executives also created offshore entities in blatantviolation of law, and used these instruments to enrich

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themselves and their friends, at the expense ofthe parent company. Together with managersof other energy companies, top executivesrecorded entirely bogus sales of electric power,maneuvers that were also the apparent cause ofthe equally bogus energy crisis that cost thestate of California and its citizens an estimatedthirty billion dollars.2

This astonishing behavior could not havepersisted for long were it not for the fact that, intacit collusion with these scams, as the FinancialTimes put it, "Leading Wall Street figures knewEnron was misleading investors when they tookpart in sham deals to disguise its financial prob-lems. . . ."3 Similar complicity occurred withleading banks, in the U.S. and Europe, thatencouraged fraud in many other companies aswell, by providing these errant firms with "lay-ers of financial engineering.4

The banks engaged in other morally andlegally dubious behavior as well. Like payingeach other fat fees in exchange for favorablereports that each bank would make on securi-ties being underwritten by one of its presumedcompetitors. This practice was analogous to therole of shills in scams like Three-Card Monte.Prosecuted in New York, the banks paid finestotaling over one billion dollars, a sum lament-ed by the Financial Times not to be evenremotely fitting the gravity of the misbehaviorinvolved.5

In the words of Stephen Cutler of theSecurities and Exchange Commission, the bankswere widely "committing securities fraud."6 Inthe Enron case, one of the "greatest scamsever," the banks were described by Fortunemagazine as the company's "partners in crime."7

Enron was of course only the first in a longseries of corporate scandals, many of which arestill unfolding. A life of mendacity became thenorm for corporate managers, bankers, auditingfirms, consultants and Wall Street analysts alike.There were no whistle blowers around. Onlycynics. Nothing remotely approaching thesescandals - in their spread, magnitude and nox-ious effects - has ever before afflicted Americansociety.

Furthermore, Enron represented only thetop of the iceberg. In short order, similar behav-

ior was revealed in companies like WorldCom,HealthSouth, Tyco, Dynergy, Lucent, Adelphia,Xerox, Global Crossing, IMClone and many oth-ers. The accounting fraud at WorldCom caused"the largest collapse in U.S. corporate history."8

One of the company's senior executives told theU.S. Senate's Judiciary Committee thatWorldCom was really a "criminal enterprise." 9

Nevertheless the fine imposed, of $750 million,was judged by the Financial Times to be so pal-try as to constitute "A ringing endorsement offraud."10

Early reassurances from corporate apolo-gists that the Enron and WorldCom scandalsrepresented only a few "rotten apples" in an oth-erwise wholesome business community weredimmed as evidence to the contrary pled up.11

Inferential evidence as to the depth of the prob-lem was apparent in the astonishing number offirms that, in the aftermath of the first exposes,rushed to amend their own earlier financialreports. In effect, the cream of corporateAmerica, which boasted its hiring of only thebrightest MBAs that money can buy, suddenlydiscovered internal "errors" that any beginningstudent of accounting would never havemissed.

The Myth of Self-Regulation.

Despite evidence of widespread misdeeds,there exists a powerful tendency in the UnitedStates, reinforced by equally powerful corporateinterests, to minimize the problem. The mes-sage we are hearing from corporate executivesand lobbyists is to deny any need for additionalgovernmental regulation of corporations.Because the corporate community has heard aloud wake-up call, we are assured, it will forth-with correct its own behavior. This mantra isechoed in legislative halls, in our daily newspa-pers, on radio and television talk shows, as wellas in the classrooms of our business schools.

The current buzz-phrase is "better corpo-rate governance." Deans of leading businessschools, who once sang paeans to so manyexecutives, first rushed to condemn the male-factors. Then, in harmony with the mantra,they assure us that the best approach to reform

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is self-regulation, buttressed by the introductionof much more attention to business ethics inthe MBA curricula. Almost no one is ready toadmit that the problem is structural and that forthis reason also requires surgical interventionfrom the outside, perhaps in the form of newand/or expanded governmental regulations.

To counter this impression that thesepromises of reform are so much "spin", corpora-tions are mimicking the management schools.For example, droves of "ethics officers" are nowbeing appointed. The national Ethics OfficersAssociation formed in 1992, has leaped fromten members then to over 1,000 today.12 Alongwith consultants from the outside, this newbreed lead seminars on corporate ethics, andwork to bring corporate "codes of social respon-sibility" into existence. The message is unmis-takable: We've been bad, but we will be good inthe future.

This is really an old and well-worn refrain.Forty years ago, the Senate sub-committee on"unusual payments", headed by Frank Church ofIdaho, shocked the nation with its findings ofcorporate misconduct. Corporate executivewere then hiding from their own boards ofdirectors off-book payments made overseas topromote their interests. In a limiting case likethat of Chile under Salvatore Allende, corporatemoney was used to topple a legitimate govern-ment and encourage a coup d'etat.

The scandals revealed by this committee,and later by another such body created by theUnited Nations, led to two important steps.First, the United Nations created a specialbranch on Transnational Enterprises, designedto keep tabs on the behavior of multinationalcorporations operating in the Third World, andto assist such countries in their dealings withmultinational corporations. Second, in 1976,the Federal Corrupt Practices Act was passed,which makes senior corporate officers criminal-ly liable for certain malpractices defined in theact itself.

American corporations engaged in dam-age control on this occasion as well. To ward offnew governmental regulations, they engaged ina rage of writing internal "codes of conduct". Toround out a picture of self-reform, institutions

like the International Chamber of Commerceand the O.E.C.D. also wrote "guidelines" for cor-porate conduct abroad. The idea was to takethe edge off demands made on companies bythe United Nations, with demands made onnation-states regarding the fair treatment offirms that sought to make direct investmentswithin their borders.

Obviously, these earlier codes were any-thing but effective insurance against corporatedeviancy. This was apparent as early as the1980s, when scandals emerged involving U.S.defense industries. The wrongdoing was thenso severe that the corporate community fearednew governmental regulations. To short-circuitthem, firms created the Defense IndustryInitiative (DII). Its stated purpose was to encour-age more ethical behavior in the competitionfor rich governmental contracts, and the modesof performing under the terms of these arrange-ments.13

These defensive strategies are beingreprised today, accompanied by books thatargue the case that to behave honestly and ethi-cally is actually good for business as well.14 Buteven as the volume is turned up on theseproclamations of future good behavior, news tothe contrary keeps popping up. We learn, forexample, that mutual fund managers have longindulged a wide range of unethical practicesthat make victims of their own investors.Similarly, despite the existence of the FederalCorrupt Practices Act, some corporations haveeasily found their way around its restrictions.The SEC reports that, between 1994 and 2002,474 contracts overseas, worth $237 billion, mayhave been secured through the instrument ofbribery.15

Contributory Pathologies

This leads us to note several of the struc-tural conditions of American society that aidand abet deviant corporate behavior. The mostobvious of these, examined in great depth byCharles Lindblom, involves the entrenched posi-tion of business organizations in America.16

Lindblom's analysis goes beyond the observa-tion that the political institutions of democra-

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cies tend to defer more to the business commu-nity than they do to any other segment of socie-ty, or that business organizations exercise con-siderable control over governments them-selves.17

This concentration of power and influencewhile not consistent across issue areas, is partic-ularly true of the United States. A prime reason,also explored by Lindblom, is that other basicinstitutions of civil society, beginning with theschools and including religious and fraternalorganizations, tend to inculcate or to reinforcevalue systems dominated by the rights of pri-vate property and enterprise, both individualand corporate. Against this entrenched posi-tion, the other institutions of civil society, andof government itself, constitute relatively weakcountervailing power centers.18

However, business organizations are farfrom relying only on the protection offered bythis privileged status. Thus, in the United States,they have fostered to the point of pathology thesalience of money in politics. No other countryeven remotely rivals the United States in therole played by electoral contributions in thedetermination of electoral outcomes. The sumsof money now required (or felt to be so) by can-didates are so huge that both winners and los-ers become beholden to business and corpo-rate contributors.

The existential condition created byAmerican electoral laws brings about an addi-tional irony, namely that only the independentlywealthy, if they chose to fiance their own cam-paigns, can hope to remain free of the impliedquid pro quo that typically accompany largeelectoral financial contributions. Thus, to cap-ture the office of the mayor of New York City,one successful candidate spent almost seventymillion dollars of his own fortune. One result ofthis system, says the New York Times, is that"The modern party's key allegiance is to corpo-rate America, and its tolerance for intrusive fed-eral government ends when big business isinvolved."19

The pervasiveness of this mode of influenc-ing public policy is reflected, for example, in asingular aspect of the 250 members ofCongress who sat on the nine committees that

investigated the Enron scandal: All except asmall handful of them had earlier received elec-toral contributions from Enron. Similarly, ArthurAndersen and other leading auditing firms hadfunneled millions of dollars in electoral money,and not just to George Bush and Dick Cheneyand other Republicans. Democrats like SenatorChristopher Dodd and others of that party wereequally coddled beneficiaries of their largesse.When it comes to "buying" influence in highplaces, corporations are without narrow ideo-logical considerations.

In return for these investments, the leastthe corporate donors expect to get is opposi-tion to legislation or regulatory changes thatmight hurt their interests. When necessary, theywill also expect that new formal rules will beintroduced on their behalf, concerning, forexample, fiscal matters, access to naturalresources, some protection from external com-petition, etc. The list could be very long. Thelegislative history of the Sarbanes-Oxley Actwould vividly show this process at work.

There are other ways in which those inhigh places who benefit from campaign finan-cial assistance can express their gratitude. Inthe midst of all the scandals, for example, theBush administration named Harvey Pitt to headthe SEC, a lawyer widely known as the majortax advisor to the same firms he would nowpresumably regulate. Objections to this actwere so vociferous, President Bush shifted hischoice to William Donaldson, a former dean ofthe Yale Management School, and a principal inone of the most powerful firms on Wall Street.

It took no time at all for the latter toexpress his fear that prosecutors might move sorelentlessly against corporate managers as todamage the United States by diminishing therisk-taking propensities of managers.20 AlanGreenspan, Chairman of the Federal Reserve,quickly followed suit. Having once warned thebusiness community of the dangers attaching toits "excessive greed," he now worried that therigorous enforcement of the Sarbanes-Oxley Act(see below) would create among managers a"pervasive sense of caution".21 These statementswere being issued, it should be noted, at a timewhen only a handful of malefactors had actually

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been indicted!Former and sitting Senators also got into

this act. John Danforth publicly took to task fed-eral authorities that prosecuted ArthurAnderson executives, on grounds that suchactions risked jeopardizing the "legitimacy" ofthe United State government.22 And SenatorJohn Warner excoriated federal agents who haddared to handcuff John Rigas, thus administer-ing "humiliating punishment before conviction."This is the same John Rigas, head of Adelphia,who, together with his family, defrauded thecompany, its stockholders and its creditors ofseveral billion dollars.23

And Republicans in Congress, includingMichael Oxley (the co-sponsor of the Sarbanes-Oxley Act), are actively working, with openencouragement from William Donaldson, toplace severe limitations on the authority ofstate-level prosecutors, like Eliot Spitzer of NewYork, to bring legal actions against corporatemanagers.24 It is patent that to "federalize" suchprosecutions at this time would be to renderthem crippled or stillborn.

This recitation could go on at length, butseveral other structural conditions that con-tribute to pathology should be mentioned,however briefly. For example, the industrial"hollowing out" of the country has clearly andperhaps permanently weakened organizedlabor, thereby greatly reducing its "countervail-ing" role in politics. Today, the unions ofAmerica are only pale reflections of the kind ofpolitical and electoral clout these organizationsonce wielded. By and large, they represent littlethreat to corporate interests.

Similarly blunted has been the historicallyimportant role of the mass media in exposingmisbehavior in the business community, andthen championing reforms on behalf of the col-lectivity. The media today are either big busi-ness per se, or they are divisions of even moregigantic corporate entities. The television indus-try in particular, being the principal beneficiaryof the explosion in campaign spending, isunlikely to foster any change, for example in theelectoral laws, that would reduce the cash flowit realizes from political campaign advertising.

Thus, the so-called "voice" option in

American politics has been sharply muted.25

This means that the media, like the political par-ties, are markedly less effective today as eitherinstigators of or transmission belts of demandsfor more effective regulations. Nor can citizensexercise what Albert Hirschman once called the"exit" option, as a means or registering their dis-satisfaction with existing conditions. Ironically,it is now the business firm that, when it findslocal laws and regulations unappetizing, canand will "exit" from the system - by pulling upstakes and taking its capital and its jobs else-where.

Management schools, unwittingly per-haps, are also a part of the overall pathology.The values they inculcate are basically the sameones followed by "the smartest guys in theroom" - at Enron and elsewhere. Cutting cor-ners, artful deception, evasive and complexstrategies, and the search for other competitiveadvantages are some of the things learned andadmired by MBA students. Professor of finance,business strategy, and marketing dominate thetop of the academic pecking order. At the verybottom of the pyramid one finds those whoteach courses or hold workshops in businessethics. The very fact that, as in the past, man-agement schools are again singing the praisesof business ethics is in itself a telling indicationof the nexus between the academic environ-ment and the gross misbehavior uncovered inthe corporate world.26

The toleration of corruption would appearto be endemic in America. Eminent bishops notonly do little or nothing about priests discov-ered to have been child molesters. They havegone to great pains to hide these terrible prac-tices, and to deny that they exist, until it isshown that this form of depredation is wide-spread indeed widespread, Notwithstandingthe exposes, the Vatican will issue strong reser-vations about the alleged haste with whichthese deviations have been exposed, and theguilty prelates punished.27 This sounds muchlike complaints that apologists have voicedabout moves against corporate miscreants.

Professional and amateur sports are alsotainted. The illegal use of steroids and of otherillegal substances is now widely acknowledged.

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Books revealing these practices written by ath-letes become best sellers. So does a book writ-ten by a baseball manager in which, after lyingfor years about accusations that he violatedrules against gambling, a confession finallyemerges. The consensus around the UnitedSates is strong that this malefactor will eventual-ly be installed in baseball's Hall of Fame.

Owners of professional teams, as well asuniversity presidents and athletic directors,often go to extremes to cover up violations ofrules that Pertain to their respective realms. Noone doubts that in sports too "money talks".Malefactors themselves, whether the athletes ortheir coaches most of the time can count onescaping discipline. When a few are punished,especially the "stars", they are solaced to knowthat other teams and institutions will be rushingto hire them.

The same erosion of earlier more stringentstandards now applies to the academic side ofAmerican universities. Plagiarism, once consid-ered almost automatic grounds for expulsionhas come to infect whole generations of stu-dents, who learn to copy the work of others,and represent it as their own, very early in theireducational careers. Today, even distinguishedprofessors whose plagiarism is exposed will findtheir acts rationalized by university administra-tors.

Indeed, the same thing will happen whenfaculty members are accused of much gravercrimes, as in the instance of the U.S.Government's claim that Harvard's Institute forInternational Development, in connection withits Russian program, had defrauded the govern-ment of tens of millions of dollars. Not justHarvard's president came to the defense ofAndrei Schleifer, the program's director, but col-leagues in the economics department as well,tried to put exonerating "spin" on these eye-popping revelations.28

It is clear that, even these academic fig-ures, presumably committed to finding anddivulging truth, can get away with egregiousviolation of ethics or law. In those rarest ofinstances when they face dismissal, they, likestar athletes and their coaches, will have littletrouble finding other universities who will wel-

come their presence on campus. The daily stream of media attention to

deviant behavior of all kinds would satisfy eventhe hungriest of scandalmongers. One day theworld's major petroleum companies confessthat they have greatly over-estimated there"proven reserves", thus artificially boosting thequoted stock-exchange price of their compa-nies' shares. The next day, the board of the FordFoundation finds it perfectly normal to name asits chairman a person who has just paid a onemillion dollar fine and foregone seven milliondollars more in bonus pay, in order to settle for-mal charges that he had committed fraud, ashead of the Xerox Corporation. This is quicklyfollowed by media reports that, despite theFederal Corrupt Practices Act, major U.S. com-panies have engaged in bribery abroad, withoutany apparent adverse consequences to any oftheir senior managers.

This steady diet is only part of a muchbroader daily intake that underscores the perva-siveness of corruption. American firms operat-ing in Iraq and headquartered in Texas arefound to be gauging the American governmentthat provided the lucrative contracts in the firstplace. Medical doctors are leaving the profes-sion in frightening numbers largely becauserecklessly brought legal suits about alleged mal-practice have brought insurance levels to unac-ceptable levels. Bogus or exaggerated lawsuitsin the sphere of personal accidents and injuriesare an integral part of this type of corruption. Inthis general context, why would anyone be sur-prised that general public has developed a 'ho-hum" attitude about lying, cheating and moreserious acts of corruption in the corporateworld.

Even investors and stockholders in globalfirms seem relatively uninterested in reform.The CEOs of twenty-six major American andEuropean firms were recently asked how muchinterest and attention their companies werepaying the matter of corporate ethics and goodconduct. Contrary to all the talk about wide-spread interest in "better corporate gover-nance," these persons said that this matter wasnot at all of much interest. Why? Becauseinvestors, including major institutional

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investors, are so single-mindedly interested inshort-term profits, it is almost impossible tomake a "business case" for spending money toinduce better conduct. Conclusion: "It is difficultfor managers to 'do the right thing' when beingdriven by profit-oriented investors".29

It may all boil down to what DavidCallaghan calls "The Cheating Culture".30 Lyingand cheating, he notes, actually begin in theclassrooms of elementary schools, and progressinto and through other social institutions.According to this author, the root cause of thissituation is also structural: Where the pay-offsfor successful deviancy, like cheating or worse,are very high, and the punishment for the unfor-tunates who get caught is very low, deviantbehavior becomes essentially automatic, per-haps axiomatic.

The Prospects for Reform

Despite the gravity of the scandals, only arelative handful of corporate executives havebeen indicted. One (Samuel Waksol of IMClone)was convicted and sentenced in June, 2003.Two more (Mr. And Mrs. Andrew Fastow, ofEnron) have plea-bargained for lighter sen-tences. Yet another major Wall Street figure(Frank P. Quattrone) escaped punishment inManhattan when his prosecution ended in amistrial. And in February of this year, JeffreySkilling, a former CEO at Enron, surrendered tofederal authorities, but he entered pleas of "notguilty" to the forty-two counts his indictmentcontains.

There will be a few other indictments,more of them by state prosecutors, providedhowever that William Donaldson of the SECand Republicans in Congress do not succeed inclipping their wings. It is sardonic that so muchmedia attention has centered on MarthaStewart, whose insider trading violation, if thatis what it was, retuned a paltry profit of$44,000. But, Mrs. Stewart was tried and con-victed not for this but, rather, because of allega-tions that she lied under oath about it to a fed-eral prosecutor.

Thus far, it is the Sarbanes-Oxley Act thatrepresents the most prominent effort at reform.

Enacted in 2002, this legislation set off a stormof protest that it was too harsh, and that itwould discourage risk-taking by corporate man-agers.31 Given the law's relative mildness, ren-dered so by modifications to an early draft thatSenator Sarbanes was forced by Republicansand some Democrats to accept, these protestsappear more self-serving than they are substan-tive.

To be sure, the law requires corporatemanagers, under threat of criminal prosecution,to certify that they have examined for theirtransparency and accuracy the internal modesof recording and accounting, and not foundthem wanting. Corporate boards are now mustappoint an internal audit committees, - at leastone of its members is an expert in accounting.Firms are also urged to appoint more outsidemembers to their boards, and also to writeinternal codes of conduct and social responsibil-ity. None of this appears excessively onerous.

The Sarbanes-Oxley Act also mandates thecreation of the Public Accounting OversightBoard, whose purpose it is to bring about moretransparency in corporate accounting andreporting. This is all to the good, especially if,as some anticipate, the agency will do much toassure that emerging codes of conduct aremore than rhetorical documents.

Much more should and can be done. Noone imagines that, in the short run, the privi-leged position of American business can be dis-lodged, or radically modified. Similarly, substan-tive changes in the electoral laws of the countryremain unlikely. One possible attenuation of thenegative effects of the latter may by be theapparently emergence of the Internet as a toolin electoral campaigns.

Other more demanding regulations shouldbe considered. Legislation or regulatory rulescan be enacted that clearly and neatly separateauditors from financial consultants. Firms spe-cialized in these services should be strictly pro-hibited from providing both of them for thesame client. The so-called "firewalls" now beingbuilt within such firms to separate the two func-tions obviously will not work. To cavil aboutthis will inevitably lead to another round of mis-chief.32

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Equally desirable, indeed urgent, is thatauditing firms assume legal responsibility fortheir reports, a change they are ferociouslyresisting. This seems odd. For generations,engineering firms the world over have beenheld legally responsible for their certificationsregarding the structural conditions of every-thing from bridges to nuclear power plants.Negligence or graver acts in the provision ofthese certifications may subject such firms tocivil and criminal prosecution. The best of themsurvive and prosper despite this onus. Whyshould auditing firms, whose negligence orvenality can be as devastating as we havelearned, not be similarly regulated?

Whistle blowers also require more sub-stantial protection than is currently provided.One might consider paying them a "bounty"similar to those paid informants that expose taxdodgers. Whistle blowers in the corporateworld, because they typically need to go publicwith their claims, may require material protec-tion and compensation for long periods. In the"cheating cultures" of the world, whistle blowerswill be more shunned than honored, less likelyto find gainful employment, sometimes formany years.

Other, more feasible steps are in order.There should be an absolute prohibition againstthe creation abroad of so-called "special pur-pose" vehicles whose activities do not appearon corporate balance sheets. These wereprominently used in the scams pursued byEnron's managers. Such arrangements currentlyin existence should be closed down.33

Radical change must be forced on the off-shore fiscal and banking "paradises". After longdragging its feet about this need, the U.S. gov-ernment is now collaborating with otherO.E.C.D. countries to bring about this reform.Past American reluctance was premised not toprotect individual tax evaders. It is reasonablycertain that, once made transparent, thesesecret accounts will reveal that American corpo-rations, perhaps in large numbers, have beenhiding cash from their stockholders, as well asfrom tax collectors. The U.S. government canset a new tone within the O.E.C.D. by vigorous-ly championing this needed change.

Corporations should also be compelled todo what Microsoft has elected to do on its owninitiative: Report as current operating expensesall of the stock options issued in any fiscal peri-od. Amounting as they do to hundreds of mil-lions, even billions, of dollars, options, if notcharged against current income, also create afalse impression of the financial condition of thefirm. Far from aligning the interests of mangerswith those of stockholders, the options are astrong contributing factor to the moral degen-eration of managers.34

The U.S. government should also moveforthwith to bar from any bidding on govern-ment contracts all firms found to be in violationof law, or who have paid penalties to the gov-ernment to avert or settle formal accusations ofmisconduct. Permitting such firms to bid onand actually to be granted lucrative contracts isnot only immoral. It also sends an entirelywrong signal to the rest of the corporate com-munity, namely, that deviancy really does payor, in any case, carries easy-to-carry penalties.

The need for more legal compulsion isbeginning to be recognized at the internationallevel as well. A set of revised O.E.C.D. guidelineson proper corporate conduct may include therecommendation that certain rules of trans-parency be legally mandated by national gov-ernments. Such legal compulsions may wellinclude the strict separation of the roles ofboard chairman and chief executive officer.Similar measures must be taken to give share-holders much-needed greater empowerment,such as more efficacious ways to sue boardmembers and corporate officers.

Should the O.E.C.D. actually move in thismore restrictive direction, it may also wish tore-consider its conclusion, after much researchinto the matter, that there is little or nothingthat national governments can do to disciplinethe universal corporate practice euphemisticallycalled "transfer pricing." This practice of over-and under-invoicing is well known to involvecorporate lying to at least two different taxauthorities. Management schools, in their pro-fessed greater concern with ethics, might wishto explore the moral implications involved inthis practice.35

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Implications for the Future

It is much too early to suggest that thesesuggested reforms will actually materialize. Tobegin with, many of the items we have treatedare the kinds of myths, metaphors and deepstructural conditions that experts in future stud-ies assume are present in any society.36 Thisbeing so, and with the U.S. stock market inapparent recovery, apologists are rushing toreassert the validity of these myths andmetaphors. Despite all of the deviancy, theyproclaim, the system "really works". Thus, at theconceptual level that singles out the social, cul-tural or political causes of the corporate corrup-tion, there will continue to be strong efforts todeny that there are widespread aspects of soci-ety that breed, aid and abet corporate misbe-havior.

The deeper truth is another, namely, thatno, the American system does not really workat all, or certainly not nearly as well as ispreached. Indeed, the scandals have explodedprecisely because the reality of things driftedmuch too far from what the general public wasexpected to believe about the American systemof free enterprise. Even the stockholders ofthese deviant firms, including their huge institu-tional investors, have been shocked by the deepdiscrepancy between myth and reality. The criti-cal question is whether, as a result of all of theseshocking revelations demands for ameliorationwill be strong enough to bring about substan-tive change.

The rush to new codes of conduct, and theproliferation of Ethics Officers are by not meansencouraging signs of a future scenario of thekind required. One of these Ethics Officers,employed by the bankrupted WorldCom/MCICompany, has recently issued a new set of "TenCommandments". These are little more thanplatitudes, urging managers to build trust,respect the individual, uphold the law, avoidconflict of interest, promote loyalty and, inshort, to do the right thing!37 How much cansuch urgings change the behavior of managerswho have long since been told, even explicitly,that "greed is good"!38 Members of the corporatecommunity itself warn us that "It is not hard to

realise that measuring integrity of senior man-agers on a 10-point scale may not prevent arepeat of the excesses of the last boom." Or, asa fund manager at Wells Capital puts it aboutthese efforts at self-healing, "It won't necessarilychange anything the next time.39"

An alternative approach to the crisis, andthe future scenario that would follow from it,would be a conscious and skeptical re-examina-tion of existing structural arrangements, and,indeed, in the dominant mindset aboutAmerican capitalism. For example, the prevail-ing mantra about de-regulation of governmentcontrols should be weighed against the wide-spread and still escalating negative externalitiesthat these policies have helped bring into being.More, not less, government "interference" isrequired. The depression-era Glass-Steagall Act,which kept the banks on a straight-and-narrowpath, should and could be re-instated, providingone of the building blocks of a future scenariothat would be, in a constructive way, backward-looking.

This alternative future scenario would leadto a more careful and nuanced examination ofthe dubious idea that the so-called Americanmodel of capitalism and the free market is sosuperior to anything else that it warrants beingemulated in every other part of the world. Tobe sure, Europe has also experienced a fewlarge scale corporate scandals in recent years,and the most spectacular of these, involving theItalian Parmalat Company, may well turn out toout distance any U.S. firm in the magnitude offraud committed.

Yet, the Parmalat case actually makes apoint about how different things might be inthe U.S. were some of the suggested reforms tocome into existence. In Italy, as well as else-where in Europe, the laws pertaining to thelegal responsibilities that attach to corporateboard membership are much more severe thanthose of the U.S. Furthermore, it might benoted the senior executives of the ParmalatCompany were immediately arrested, and keptin jail on the grounds (certainly not exaggerat-ed) that, on the loose, they might well work todestroy incriminating evidence. The moral herewould be that, even where certain myths and

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metaphors about the market and free enter-prise are widely shared, there can be consider-able variation in how the state treats corpora-tions.

Thus, the Financial Times, itself not rigidlytied to an American litany about the rights ofprivate property and free enterprise has littletrouble in its conclusion as to what the futurerequires. To correct existing pathologies, itwarns, "Only collective action by government,regulators and shareholders will work."40

The prospect for such a future scenario isnot terribly bright. For example, for severaldecades the European Union has for decadesbeen unsuccessful in bringing a "Company Law"into existence. Not only have corporations andtheir professional associations from membercountries been unable to agree as what such aregulation might contain. Member states havepermitted narrow nationalistic considerationsto get in the way of its enactment.

A long-debated Multilateral Agreement onInvestments met a similar fate. The proposedagreement would establish a much-needed setof rules for both multinational corporations andthe national governments of the home and hostcountries where such firms are present. Theopposition of "No-Global" movement, consistingof persons with their own thoughts as toacceptable future scenarios, was only one rea-son what the MLA failed. The truth is that nei-ther national governments nor their corpora-tions are prepared to foster a future that wouldbring only relatively mild changes to the pres-ent. Here too a qualitative leap is requiredbefore leaders on both sides will accept thenecessity and/or utility of bringing aboutchange.41

This being said, it remains apparent thatnew and/or modified regulatory regimes areurgently required, at both the national andinternational levels. Some hope for such afuture scenario may actually lie in an enlargedEuropean Union, whose members have alreadycome to learn, often painfully, the limitations ofthe American conceptions of free enterpriseand free market capitalism. Indeed, a Europeanphilosophical tradition that does not raise theconcept of "limited government" to the some-

times-destructive heights it has reached in theUnited States may also serve the purpose ofidentifying a more universally acceptable andmutually beneficial future.

Less narrow and myopic thinking aboutthe proper relationship between state and civilsociety is therefore a pressing need. One way oranother, the future require from governmentseverywhere resolute and efficacious stepsdesigned to safeguard the collectivity againstrapacious behavior, no matter from what quar-ter it may emanate.

Correspondencejoseph.lapalombara@yale.edu

Notes1. The term "corruption" carries many defini-

tions, and, when it refers to politics,requires that at least one person to a cor-rupt transaction be an elected or appointedpublic official. My usage in this essay isbroader.See, Joseph LaPalombara, "Structural andInstitutional Aspects of Corruption," SocialResearch Vol. 61 (Summer, 1994), 325-350,esp. 340-245.

2. A close look at this sordid behavior is pro-vided by Bethany McLean and Peter Elkind,senior writers for Fortune magazine: TheSmartest Guys in the Room: The AmazingRise and Scandalous Fall of Enron. NewYork: Penguin, 2003. See also an insider'saccount of what transpired: Brian Cruver,Anatomy of Greed: The Unshredded Truthfrom an Enron Insider. New York: Carrolland Graf, 2002. Cf. Mimi Schwartz andSherron Watkins, The Inside Story of theCollapse of Enron. New York: Doubleday,2003. For a short and hair-raising versionof the behavior of Enron's manager, seeRoger Lowenstein, Origins of the Crash:The Great Bubble and Its Undoing, NewYork: the Penguin Press, 2004, Ch. 7.

3. July 29, 2003, 1.4. Ibid. Cf. The Economist March 9, 2002, 21,

on this point. 5. July 29, 2003, 13. See also New York

Times, July 29, 2003, C1,5. The latter news-

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paper lists as the banks involved in payingthese fines: Lehman Brothers, Bear Stearns,Goldman Sachs, Salamon Smith Barney,Merrill Lynch, First Boston, Credit Suisse,UBS Warburg, and others.

6. Financial Times, July 29, 1. The banksinvolved in these penalties include MerrillLynch, Citigroup and J.P. Morgan Chase.

7. "Partners in Crime," Fortune Vol. 143, No. 9(October 27, 2003). 78-100. This article isan excerpt from the book by McLean andElkind, cited above.

8. Financial Times, August 6, 2003, 11.9. Ibid. The witness was George Barr, who

had been in the U.S. Attorney General'soffice during the administration of GeorgeBush, Sr. He called the government'sleniency toward WorldCom "one of themost shameful episodes I have witnessed inWashington since starting my career inpublic service." Barr also noted that,despite evidence of deliberate fraud, theU.S. government continued to allowWorldCom/MCI to bid on government con-tracts.

10. Financial Times, July 29, 2003, 13. The fineis called ludicrous because, even in bank-ruptcy, WorldCom/MCI was enjoying dailyrevenues of $500 million. Indeed, havingearlier lied about its income to the tune$11 billion, MCI was trying to collect backtaxes on it. The FT found this "chutzpah. . .breathtaking."

11. The Economist magazine, October 18,2003, 14, had no doubt whatever that "theentire barrel was tainted." It lamented that,where the auditing firms are concerned,"deep-pocketed industry lobbyists managedto water down the reforms proposed afterthe scandals broke."

12. Financial Times, December 3, 2003, 9.13. This history is nicely and succinctly

reviewed in the Financial Times, December31, 2003, 9.

14. See, for example, Marc Benioff and KarinSouthwick, Compassionate Capitalism:How Corporations Can Make Doing goodan Integral Part of doing Well. London:Career Press, 2004; Lynn S. Paine, ValueShift: Why Companies Must Merge Socialand Financial Imperatives to AchieveSuperior Performance, New York: McGraw-Hill, 2003. Cf. "Understanding Corporate

Governance," Financial Times, January 16,2004, Part 3.

15. Exxon Mobil (to finesse the Federal CorruptPractices Act) is reported to have paid anAmerican, who acted as an intermediary forthe company $51 million, to be used asbribes in Kazakhstan, to secure a lucrativepetroleum contract. IBM is accused of pay-ing $25 million to secure a contract inArgentina. Financial Times, May 8, 2003,11.

16. Charles E. Lindblom, Politics and Markets,New York: Basic Books, 1977. See esp. Ch.13, "the Privileged Position of Business."

17. Ibid. 178-185.18. Ibid. 162-167, 198-200.19. December 28, 2003, 8.20. Financial Times, July 24, 2003, ll.21. Financial Times, July 30, 2003, 12.22. New York Times, May 6, 2003, 1.23. Ibid. See, also, Roger Lowenstein, "The

Company They Kept," New York TimesMagazine, February 1, 2004, 26-32, 42-43,62. Lowenstein notes that, however venalthe Rigas family may have been, they werehelped along with their crimes by "justabout anyone whose job it should havebeen to protect the public" (28).

24. Financial Times, July 24, 2003, 11.25. See Albert Hirschman, Exit, Voice and

Loyalty: Responses to Decline in Firms,Organizations and States. (Cambridge, MA:Harvard University Press 1970).

26. See Sumantra Ghoshal, "Business SchoolsShare the Blame for Enron," FinancialTimes, July 18, 2003, 11. The author, a pro-fessor of international management at theLondon Business School delineates illus-trates how pseudo-scientific academic the-ories easily lead to corporate misbehavior.

27. New York Times, February 24, 2004, A8.28. For a chronology of this scandal, see

Johnson's Russia List, www.cdi.org/Russia/Johnson.

29. Financial Times, January 8, 2004, 8. Thiswas a report from the World EconomicForum, held in February at Davos,Switzerland. Cf. the Economist, January 24,2004, 53-54. which takes only a mildlymore optimistic view. "Greed is out," saysthis economically liberal magazine,"Corporate virtue, or the appearance of it isin." (My emphasis.) It might be added that it

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is all too easy for these executives to implythat profit-hungry investors so to speakforce their misdeeds on them.

30. David Callaghan, The Cheating Culture.New York: Harcourt Brace, 2004.

31. See John Plender, "Capitalism UnderScrutiny," Financial Times, September 5,2003, 2.

32. These "firewalls" may work more effectivelyto create a badly needed separation withininternational investment banks, betweentheir research branches and the branchesthat become involved in underwriting activ-ities.

33. The pervasiveness of these clever schemesis illustrated by Roger Lowenstein, op. cit.

34. Lowenstein, Origins of the crash, op. cit.,14-21, 165-166, 196-199, 205-208, pro-vides a wealth of evidence as to the deeplynefarious consequences of present modesof treating stock options. This changemight also be a first step in the reform ofcorporate executive salaries, which are nowso out of hand that commentators theworld over have criticized U.S. practices.See, "Where's the Stick," The Economist,October 11, 2003, 13.

35. The new and revised O.E.C.D. guidelinesare scheduled to appear in May, 2004. SeeFinancial Times, January 12, 2004, 11.Similar empowering of American share-holders is strongly advocated by LucianBebchuk, of the Harvard Law School.Financial Times, October 22, 2003, 17.

36. For a discussion of alternative approachesto analysis and to depiction of alternativefutures, see Sohail Inayatullah, The CausalLayered Analysis Reader. Taipei, TamkangUniversity Press (in press).

37. Financial Times, January 16, 2004, Part 3, 2-3.

38. The pages of Roger Lowenstein's Origins ofthe Crash, op. cit., contain chilling exam-ples of hew deeply rooted in American cor-porate culture is the concept of greed.

39. Financial Times, January 22, 2004, 17.40. July 2, 2003,8.41. The best treatment of the politics that led

to the failure of MAI is by Edward M.Graham, Fighting the Wrong Enemy:Antiglobal Activists and MultinationalEnterprises. Washington, D.C. Institute forInternational Economics, 2000. Cf. Amory

Starr, Naming the Enemy: Anti-CorporateMovements Confront Globalization.London & New York: Zed Books, 2000.

ReferencesBenioff, Marc and Karin Southwick. 2004.

Compassionate Capitalism: How Corpor-ations Can Make Doing good an IntegralPart of doing Well. London: Career Press.

Callaghan, David. 2004. The Cheating Culture.New York: Harcourt Brace.

Cruver, Brian. 2002. Anatomy of Greed: TheUnshredded Truth from an Enron Insider.New York: Carroll and Graf.

Financial Times, May 8, 2003, 11. ______. July 24, 2003, ll.______. July 29, 2003. The banks involved in

these penalties include Merrill Lynch,Citigroup and J.P. Morgan Chase.

______. July 30, 2003, 12.______. August 6, 2003. 11.______. October 22, 2003, 17. ______. December 3, 2003. 9.______. December 31, 2003, 9.______. January 8, 2004, 8. ______. January 12, 2004, 11. ______. January 16, 2004, Part 3.______. January 22, 2004, 17.Ghoshal, Sumantra. 2003. "Business Schools

Share the Blame for Enron." FinancialTimes, July 18, 11.

Graham, Edward M. 2000. Fighting the WrongEnemy: Antiglobal Activists and Multin-ational Enterprises. Washington, D.C.Institute for InternationalEconomics.

Hirschman, Albert. 1970. Exit, Voice andLoyalty: Responses to Decline in Firms,Organizations and States. Cambridge,MA: Harvard University Press.

Inayatullah, Sohail. 2004. The Causal LayeredAnalysis Reader. Taipei: TamkangUniversity Press (in press).

LaPalombara, Joseph. 1994. "Structural andInstitutional Aspects of Corruption."Social Research 61: 325-350, esp. 340-245.

Lindblom, Charles E. 1977. "The PrivilegedPosition of Business." in Politics andMarkets. New York: Basic Books.

Lowenstein, Roger. 2004. Origins of the Crash:The Great Bubble and Its Undoing. New

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York: the Penguin Press.______. 2004. "The Company They Kept." New

York Times Magazine, February 1, 26-32,42-43, 62.

McLean, Bethany and Peter Elkind. 2003. "TheSmartest Guys in the Room: TheAmazing Rise and Scandalous Fall ofEnron." Fortune. New York: Penguin.

______. 2003. "Partners in Crime." Fortune143(9): 78-100. (October 27)

New York Times. May 6, 2003, 1.______. July 29, 2003. C1, 5. ______. February 24, 2004, A8.Paine, Lynn S. 2003. Value Shift: Why Companies

Must Merge Social and FinancialImperatives to Achieve SuperiorPerformance. New York: McGraw-Hill.

Plender, John. September 5, 2003. "CapitalismUnder Scrutiny," Financial Times, 2.

Schwartz, Cf. Mimi and Sherron Watkins. 2003.The Inside Story of the Collapse of Enron.New York: Doubleday.

Starr, Amory. 2000. Naming the Enemy: Anti-Corporate Movements ConfrontGlobalization. London & New York: ZedBooks.

The Economist. October 11, 2003, 13.______. January 24, 2004. "Where's the Stick."

Pp. 53-54.www.cdi.org/Russia/Johnson

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