On Point
Frank Strier, professor of accounting and law, first researched and wrote about business ethics in the wake of Watergate in the 1970s. Today, with the snowballing of corporate governance scandals, he examines why we continue to see new scandals, how a controversial new FASB proposal will impact companies’ bottom lines, and whether the bloodletting will ever stop.
On academia and business ethics
Business
schools were prompted to investigate business ethics after Watergate. That’s
when I first got involved. Then it faded in ’80s, and now it’s back with a
vengeance after all of the financial scandals. Now, what we’re really looking at
is corporate governance – how people run their businesses and who’s making the
decisions. Business ethics is just one part of that.
On the death of Arthur Anderson
Enron really opened the floodgates for other scandals. The biggest thing was that Arthur Anderson either condoned the fraudulent financial statement reports or they didn’t catch it. Either way, that crushed Arthur Anderson – the firm doesn’t even exist anymore. I worked for them before becoming a professor. It was the most respected firm in the country. They prided themselves on ethical standards. They sent every new employee to headquarters in Chicago for training on standards and practices. Now, 30 years later, I’m trying to remember when they told us about shredding documents.
On mutual fund
scandals
The core problem with mutual funds is this:
there’s a management company that oversees the fund and charges fees for doing
so and a board of directors for the fund itself. In the past, it used to be a
revolving door so people could be working for the management company that wants
to constantly raise fees and then, at the same time, they’re sitting or used to
sit on the board that approves such fee increases. So there was no attempt to
keep fees down, and investors were overcharged. The mutual fund industry has
something like $7 trillion invested, with some 100 million Americans
investors. In response, the Securities and Exchange Commission (SEC) passed a
rule requiring that the chairman of the board and three-quarters of the entire
board now have to be independent.
On CEOs and stock options
In the ’80s, CEOs were primarily paid with cash. Nowadays, they’re paid in large part with stock options. That creates a conflict of interest because they’ll want to manipulate reported corporate earnings, which directly influences the stock price for their personal gains, not for the good of the publicly owned company.
On the controversial FASB stock option proposal
So now the controversy is whether the
Financial Accounting Standards Board (FASB), which mandates all of the generally
accepted accounting principles by which all companies must operate their books,
will require companies to expense stock options on their financial statements.
Right now, they’re recorded merely as a footnote. If they were recorded as an
expense like a salary is now, the difference in a company’s reported worth would
be enormous – it could be as much as 30 to 40 percent less.
On conflicts of interest
My theory and the focus of my research is that
if you look at any of these corporate governance scandals and dig deep enough,
you’ll find a conflict of interest at the heart of it.
On future scandals and human
nature
I suspect we’ll see more scandals
because I think it’s fairly prevalent and now authorities are looking for it
more. But some say you can’t legislate or regulate ethics – you can’t pass laws
to make people more honest managers. They’ll find some way to get around it
unless we can create a new culture of responsibility and accountability. I think
managers appreciate long-term considerations but are more driven by short term
profits, so I tend to be skeptical whether they will really change. But it’s in
their best interest because people are losing confidence in their investments.
