After the series of corporate frauds that rocked the US a few years back, the public mood there is turning against business leaders. They are perceived as villains taking jobs overseas in search of corporate profits and caring only for their personal fortunes which are often linked to stock prices.

Alok Ray

REMEMBER the days when scandals tumbled out of American corporate closets with monotonous regularity, involving some of the biggest names such as WorldCom, Enron and Tyco. Now, it appears, is time for punishment.

The first big conviction has been of Bernard J. Ebbers, former Chairman of WorldCom. His crime involves $11 billion of accounting fraud, whose objective was to project an artificially rosy picture of the company.

He and several others with inside information personally gained from this. Some of them sold their huge stockholdings at artificially inflated prices, while others (including ordinary workers of the company) were left holding stocks and bonds that were reduced to junk.

Basically, costs were misclassified as capital expenses, which inflated the cash-flows and profits. Eventually when the truth came out, the telecom giant crashed, causing the biggest ever bankruptcy case in US history.

The worth of the firm fell from $175 billion at the height of the stock market boom to $7 billion when the company finally filed for bankruptcy.

Ebbers has been found guilty by a board of jury. Though the final punishment has not been announced, he may well be jailed for life. Scott Sullivan, former Chief Financial Officer of WorldCom, has also been found guilty of fraud.

Possibly, the most interesting aspect of this case is that Sullivan implicated his former CEO Ebbers as personally instructing him to fudge the accounts. By all but becoming an approver, Sullivan has reduced his own sentence.

Further, he is the only witness against Ebbers no one else had any knowledge that Ebbers directly ordered him to resort to "creative accounting".

The jurors, selected from a cross-section of common people, thought it right to believe the single witness and found Ebbers guilty of the crime. Perhaps, the primary reason for the jury to believe Sullivan is that the CEO had the motive (supported by circumstantial evidence) to ask his finance officer to doctor the accounts.

The Ebbers case has sent shivers down the spines of several other corporate bosses, awaiting trial for similar crimes. The entire episode has raised a number of interesting issues.

First, should the CEO of a company be held responsible for all corporate crimes in his organisation? Ebbers claimed that he was not a finance person, had no knowledge of accounting practices and, therefore, should not be held responsible for accounting malpractices.

Further, there is no proof that he personally ordered the fraud, except for the testimony of only one witness who himself was found guilty and had a clear interest in implicating others in order to reduce his own punishment.

Possibly, at other times, such testimony by just one person would not have carried so much weight with jurors. But the members of the jury drawn from ordinary workers who themselves (or their friends and families) have suffered loss of jobs or wealth as Corporate US resorted to all kinds of unethical business practices and the CEOs did not suffer any personal loss (except resigning from their positions) possibly took it as an opportunity to teach the corporate bosses a lesson.

Second, the current public perception is that corporate bosses earn astronomical salaries and commissions because they are primarily responsible for a company's profits.

If so, they must then be held accountable if the company goes bust, no matter whether they had any direct role in, or knowledge of, wrongdoing. You must have it both ways.

It also shows how public perception about leaders changes when their fortunes fluctuate. For instance, Ebbers had a modest beginning, with poor schooling in technology and finance. Yet, he was instrumental in raising WorldCom from a small company to a global telecom giant through aggressive mergers and acquisitions.

In the US (and possibly in most other countries) such people become heroes of lores though only so long as the going is good. Then, as the company bites the dust, they are recognised as models of fraud and greed.

Third, it pays to assist the prosecution even if you are guilty. This is a classical example of the standard "prisoner's dilemma" game (that is used in game theory modelling). Two accomplices in a crime would both be better off if no one confesses to the crime. But each acting alone (and without knowing what the other may be doing) would generally find it profitable to confess. This was true of both Sullivan and Ebbers, as they did not try out a cooperative strategy.

In this case, possibly they could not do either, as it was not possible for both of them together to pass the blame on to a third party and claim innocence. So, each would try to shift the maximum blame to the other.

Already, speculation is rife that other CEOs waiting for their trials will now think of cooperating with the prosecution and strike a deal to reduce their sentences.

Fourth, the Ebbers case may bring about more civil suits against WoldCom's former bankers and underwriters who sold the company bonds to public at high prices, even when (allegedly) they should have known the real financial position of WorldCom at that time.

Already, Citicorp and Bank of America have agreed to pay substantial amounts of money to settle class action lawsuits by some WorldCom creditors. So, the effect may spread to the banking sector.

Finally, the roles of the state, the media, the academia, the prosecution and the courts. The political leaders and the administration under their control generally try to move with the times. In the corporate scandals, the images of many politicians and regulators got tarnished before the public and the media. Some of them may now consider it an opportunity to redeem their image by going after corporate crimes.

In the US, the lower court judges are primarily elected by the people, whereas the higher court judges are nominated by the administration. Currently, the public mood against business leaders is rather bad. They are perceived as villains taking jobs overseas in search of corporate profits and caring only for their personal fortunes which are often linked to the price of the stock of the company.

In fact, the American business model is identified as maximising the value of stocks (or shareholder value) as the only goal rather than balancing the interests of all stakeholders (such as shareholders, workers, consumers and society at large).

The European, or the Continental, model of business, which presumably looks after the interests of other stakeholders to a greater extent was regarded by US academicians as less efficient. But after the series of corporate frauds, many regard the US model of maximising shareholder value and rewarding corporate bosses correspondingly as lying at the heart of the problem of inflating share prices by hook or by crook (literally).

So, the political leaders, the administration, the academic opinion and popular media have all changed tack. With the bursting of the stock market bubble and the public mood turning against Corporate US, the so-called captains of industry never had it so bad for a long time.

(The author, a Professor of Economics at IIM Calcutta, is currently a Visiting Professor of Economics at the University of Rochester, US. He can be contacted at

(This article was published in the Business Line print edition dated March 30, 2005)
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