The Hindu Business Line : Do violations of business ethics deserve crime status?

MOST newspapers have a junior reporter on the `crime beat.' She is the one who reports on those car thefts, break-ins and murders as part of what is happening in the city. Reading those reports makes us squirm and complain that crime is increasing, but also, in a macabre way, makes us believe that life is normal.

Such normalcy has come to the business world also. It seems the time has come for the business papers or the business pages to set apart a separate section called `scandals'.

They have become such a regular feature of business news reporting with all the titillation of mystery, investigation, suspicion, and court-room drama of crime as we know it.

The latest in the series, for those who like whodunits involves Computer Associates, a large back-office software company in the US. Two former senior officials of the company, CEO, Mr Sanjay Kumar, and head of sales, Mr Stephen Richards, were indicted end of September.

Mr Kumar's primary crime is that he personally backdated contracts to meet the quarter look good and meet market expectations of company performance.

For example, one contract that was actually entered into on July 8, 1999 was backdated to June 30, so that the quarter looked good.

Is this a crime, you might wonder. Sure, for we are not dealing with a kirana merchant who suddenly finds a sales slip in his pants while dropping off the laundry and books the sales in a different date.

The system of market capitalism and stock exchange as one of the pillars of that system requires free and correct flow of information. So several thousands of people expected a certain performance of CA and read meanings when it does or does not achieve that performance.

When an executive manipulates that information, he is misleading the market and may be causing personal loss for others who are making decisions based on it.

The problem is that it is difficult to make a leap between that argument of a crime having been committed and the punishment that the crime deserves.

Even in sophisticated market systems such as in the US, there are several people who feel that we have over-eager prosecutors who are chasing ghosts instead of the `real' criminals who are holding up banks and stabbing old women in their apartments. So, they would argue that Mr Kumar's actions should be deplored, and he should probably be denied that extra club membership for a few months. But jail?

I turn the television on and find Ms Martha Stewart on the screen, with a very homely and calm voice, telling me how to make apple pies.

Just a few days ago, the same Martha Stewart, referred to as the diva of good living, was on television telling a throng of reporters that she had decided to go to prison.

Hearing her you may have thought she was going away to a required military training camp for she said she wanted to get it over and be back in time `for spring gardening'.

Briefly, Stewart had been given a sentence of six months prison term and five months house arrest. The sentence had been suspended pending her appeal.

Now, she decided she may as well do the term so she can get on with her life. Wouldn't it be nice if all criminals could pick how and when they would serve their punishment?

The case against Ms Martha Stewart was that she indulged in insider trading of stock in ImClone based on information she had from the head of that company who was her friend.

Finally, unable to find enough evidence to convict her of insider trading, she was convicted of lying about it. Her decision to dump the stock saved her from losses that many others who did not have the information suffered.

She did not play by the rule of the market economy. Yet, eggs are not being thrown at her when she walks the streets. The media is unsure how to deal with this kind of crime.

Ms Stewart's own company, Martha Stewart Living Omnimedia Inc., that deals with the business of home-making and good living, just last week announced a new five year employment contract for Stewart of $900,000 (Rs 4.14 crore) per year, as well as other perquisites and bonuses.

Of course, they will suspend the payment during the duration she is in prison. Clearly, the company she founded does not see her ethical violation as a major crime and neither does the `market' that she defrauded by her act of insider trading. The company's stock went up by 12 per cent.

A somewhat similar twist in being found guilty on a lesser charge took place in the case of Mr Quattrone when he was sentenced to 18 months in prison in early September.

Mr Frank Quattrone was a star employee of investment banking firm Credit Suisse First Boston. In the heady days of the technology market bubble, he managed stock offerings, and was considered powerful enough to `make' both markets and companies.

He was charged with giving stock in hot initial public offerings to the personal accounts of executives of potential client firms in the hope that his firm would get their business in return.

The executives who received these chunks of stock made large sums of money when the company went public and the stock price rose.

Without the sophistication of financial engineering, we would call this corruption. But the case was declared a mistrial as the charges were difficult to prove given the existing standards of law and evidence.

Subsequently, the prosecution managed to get the conviction on another case on grounds that he obstructed justice. The main piece of evidence was an e-mail that he had sent to his subordinates to delete files.

Commenting sarcastically at the conviction, an editorial of the Wall Street Journal, the business daily, proudly proclaimed that the non-financial nature of the conviction shows that the financial markets were generally honest. People will see only what they want to see.

Greed, or `self-interest' as Adam Smith called it mildly, drives the business world.

Society sets the rules specifying the conditions under which some greed is acceptable and some others are not. Mr Kumar's drive to show his company's performance is as good as people wanted it to be got him into trouble.

Ms Stewart's desire to cut her losses based on private information, and Mr Quattrone's ambition to keep his firm as the leading banker for technology offerings got them into trouble.

An entrepreneur friend of mine who made many a questionable ethical decision as he grew his firm theorises that ethical violations fall in the grey area where the rules of business are yet to catch-up with society's expectations. Or, are society's expectations far behind business practices?

Business persons feel the need for different standards in judging ethical violations. The string of illustrious business persons who spoke at Mr Quattrone's trial asking for leniency in the judgment said the world needs more such people, and that he created thousands of jobs.

Society is also in a phase where it is trying to understand if business fraud causes as much harm as other kinds of crime.

The executives of Enron are now queuing up in court to find out. The expensive clubs in the country are full of officials from Tyco, WorldCom and other companies waiting their turn. In a sophisticated economy, corruption is also sophisticated.

I doubt if all these instances make any dent on the ranking of the US in Transparency International's annual rankings of corrupt societies.

The policeman in a poor country who stretches his hand for a dollar to let you off your traffic violation is embedded in the minds of all as part of life in the third world.

What about the business executives in the first world who delay accounting for expenses so as to hit their bonus targets? That is the charge against some officials at Fannie Mae, a large mortgage re-finance institution in the US.

White-collar crime titillates as much as the regular garden variety but is more difficult to prove.

A larger concern is that many in the business community do not seem to think of this as crime. Ethical violation, perhaps, and needing a rap on the knuckles, but not jail term.

Revising laws and corporate codes alone is going to do little to convince our business leaders.

There needs a more fundamental re-evaluation of the role of business in society to understand whether the pin-striped CEO dipping his fingers in the company's till is as guilty as the street thug who lifts a watch out of the shelf from the store.

(The author is professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

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