Stand for Something

by John Kasich

  The scandal wiped out the pension accounts of thousands of Enron workers, and ate away at the portfolios of mutual fund managers who had taken a substantial position in the company. It destroyed Arthur Andersen, and hurt dozens of partners in the accounting firm who were nowhere near this mess. Moreover, it led to intense scrutiny of corporate accounting practices, which in turn led to a separate but not totally unrelated scandal that eventually eclipsed the Enron mess in scope and scale. And just how did that happen? Well, down at WorldCom, chief executive Bernard Ebbers was forced to resign in disgrace in April 2002, after being hailed as yet another visionary for building his regional telephone service into the nation’s second-largest long distance provider. This guy Ebbers, a former milkman and junior high school basketball coach, had somehow built his small Mississippi-based company into a telecommunications giant, and at first blush it was a remarkable story. At one point, Wall Street valued WorldCom at $184 billion, but it soon spiraled into bankruptcy—leaving 18,500 employees across the country without jobs, and erasing untold billions from the ledgers of pension fund managers who had been unlucky enough to take a large position in WorldCom shares. (Unfortunately, the pensions of those loyal WorldCom employees were also wiped out in the collapse.) Ebbers was eventually found guilty on one count of conspiracy, one count of securities fraud, and seven counts of false regulatory filings, all the while claiming innocence of any knowledge of wrongdoing in WorldCom’s accounting practices and pointing the finger at his former chief financial officer, Scott Sullivan.

  The two bankruptcies left investors reeling, and created a sense of unease and mistrust in the markets. This was understandable. The public trust was tapped out—and rightly so, it seemed. The ripple effect was devastating, and it will most likely remain so for a while, all because of the monumental greed of a few individuals. Here again, I looked on as Lea and Andy Fastow negotiated their plea bargain deals and tried to figure out who would take care of their kids if they both served concurrent sentences, and I couldn’t keep myself from wondering what the heck these people were thinking. What kind of world were they making for their children? What kind of values had they inherited from their own parents? How could they possibly have imagined that things would have turned out differently? And at what point, precisely, did they decide to place everything on the line? It makes no sense to me, to put your whole life at stake on the back of a house-of-cards-type scheme that runs so completely counter to an ethical society—one that threatened the security of thousands of innocent employees, and the retirement accounts of millions of trusting investors—and yet there we were, cleaning up after the two biggest messes in the history of corporate America, and having to live with a culture of criminality that seemed to have taken hold in the minds of individual investors who now had good reason to mistrust our business leaders. The only silver lining, I guess, was that there were real consequences to those involved—with the guilty parties made to endure the public shame of “perp walks” and substantial prison sentences and (in some cases) seven-figure fines—even as the consequences reached to millions of innocent victims, through the pension and mutual fund fallout.

  THE MUTUAL FUND MESS

  A word or two on that fallout, because it hits us where we live, and chases individual investors to the sidelines. More than one hundred of the country’s largest mutual funds were examined by the enforcement division of the Securities and Exchange Commission, in an attempt to root out instances of market timing and late trading, and preliminary findings revealed that more than 50 percent of funds had participated in some type of suspicious market timing activities, while 10 percent reported possible late trading violations. (Market timing, although not itself illegal, is the art and practice of moving in and out of mutual funds on a same-day basis, in pursuit of short-term gains; while short-term day-traders can profit handsomely with such moves, returns for other investors who stay in the fund long-term suffer in correlation, so most mutual fund companies discourage the practice and some bar it in their prospectuses. Despite this prohibition, some mutual funds broke their own rules and let the client time their own funds, if the client generated sufficient fees for the mutual fund company.) Even more troubling, more than 30 percent appeared to have disclosed details about specific holdings to select investors, rigging the game against investors who were out of the insider loop.

  Mutual funds, which were established in the early 1900s and first regulated under the Investment Company Act of 1940, were intended as a way for the average investor to participate in the markets without the benefit of deep pockets or unlimited institutional resources, have lately been operating under such a cloud of suspicion that many people have taken their investment dollars elsewhere. “It’s not one or two bad apples,” noted one state prosecutor leading the investigation, reaching for the same analogy I used earlier in predicting a big shake-out in the mutual fund industry. “The whole crate seems to have gone rotten.”

  The cleanup continues, and frankly I don’t think we’re doing a good job of it. The Sarbanes-Oxley Act, signed into law in July 2002 and hailed as the most significant change to federal securities laws since the New Deal, has had a deleterious effect on American business. I’ll take a lot of heat for this position, I know, and to be fair there have been some real benefits to some of these new provisions, but I see it as a clear case of the government overreacting to what is admittedly a serious, far-reaching problem, one that can’t be solved through legislation. Why? Well, for one thing, you can’t legislate ethical behavior; you either know the difference between right and wrong, or you don’t. And, for another, you can’t make innocent people pay a toll for the transgressions of their less-than-innocent colleagues.

  On the positive side, Sarbanes-Oxley has established a strong set of internal controls that have been embraced by many businesses, and has pushed corporate executives to be more accurate and accountable than ever before. But while the stiffer rules and regulations regarding accounting and auditing procedures sound great in theory, there are many who believe that in actual practice they’ve been a deterrent to legitimate American businesses. They’ve put many honest businessmen and women on the defensive. They’ve discouraged risk taking and entrepreneurship. They’ve tied the hands of our top executives at a time when they might need to search like never before for creative solutions in an increasingly competitive global marketplace. They’ve been costly, and duplicative, and have left a great many of our business leaders looking over their shoulder when they should be looking ahead.

  The upshot? More and more, companies are taking themselves private, in order to avoid the excessive regulations facing public companies. In recent months, companies like Fidelity Federal Bancorp, Niagara Corporation, Corfacts, Anacomp, and KS Bancorp have “gone dark,” delisting their stock from the Nasdaq market, in hopes of finding a less restrictive environment in the private sector. Donald R. Neel, chief executive of the Evansville, Indiana, based Fidelity, reported that the delisting would save his small bank about $300,000 per year in additional filing and accounting costs. “Sarbanes-Oxley was designed to provide additional corporate transparency and safeguards for the investing public,” he told the New York Times in explaining his bank’s decision. “Instead, it is prompting companies like ours to become less transparent.”

  Too, it’s becoming harder and harder for top companies to get good people to serve on their boards, or quality executives to apply for top positions—due to the risks and attacks on reporting and financial well-being, and the mounting fear of frivolous litigation. And so we’re beginning to see that this so-called corporate reform act, meant to protect the American investor, is in many ways stifling the progress of American business.

  THE 60 MINUTES PHENOMENON

  There’s a phenomenon at work in this country that I call the “60 Minutes Syndrome,” and it’s all over this one. There are people in government—well-meaning, honest, and nevertheless misguided people—who have a knee-jerk tendency to see some outrage or
other on 60 Minutes on Sunday night, and then to introduce a bill to counter that outrage on Monday morning. Too often, it seems, the bill is just a Band-Aid to a much deeper problem, or a grandstanding grab at some publicity, and here I think we’ve lost the forest for the trees. Think of it: Would a sweeping set of new laws to help safeguard and watchdog the accounting practices in publicly held companies have prevented the sweeping irregularities at Enron and WorldCom? Probably not. Would they prevent such as this from ever happening in the future? Again, probably not. Why? Well, it’s been my experience that when folks are determined to cheat the system, they’ll go out and cheat the system, no matter how many times you change the rules or create a new system, so why reinvent the wheel in such a way that it effectively punishes those honest, hardworking business leaders who would never have dreamed up any such wrongdoing in the first place?

  Here we are, railing about all the jobs we’re losing overseas, about the competitive edge American businesses seem to have ceded to their international competitors, and we’re putting up all these impediments to doing business in this country. It’s counterproductive. Do you think there are all these impediments facing corporate executives in China? Not at all. In every other free, industrialized society, entrepreneurs are free to think outside the box while we have boxed ourselves into a corner with a blizzard of unnecessary paperwork and regulations. And the most agonizing piece to all this is that the regulators don’t seem to know the first thing about business, operating from a presumption of guilt on the part of all business leaders and leaving the good guys hamstrung.

  I realize, of course, that it’s far easier to highlight a solution that isn’t working than it is to come up with a better solution, but in this case I don’t think we can fix the problem with a new set of rules and regulations. I’m not even sure we need a solution but to return to our traditional ways of doing business and let the enforcement folks at the SEC sort this mess out—and, in the sorting, let the American public take the time to heal and move on. Sure, what these folks did over at Enron and WorldCom and all these other companies was wrong. Dead wrong. It had a cataclysmic impact on corporate America—not just at the companies involved, but across the board. We’ve all been affected by it. It was terrible. It hurt people. It hurt communities. It slowed job creation. It destroyed families. It wounded our economy. All because a few people wanted to earn another couple million dollars. And, of course, it’s destroyed those few people as well. If any one of them had a chance to do it all over again—Ebbers, Sullivan, Lay, the Fastows—they’d do whatever they could to get their reputations back, I’m almost sure of it. How much would they pay to pull the videotapes from the daddy-cams and the mommy-cams that should be monitoring their behavior, and have those tapes destroyed?

  Yes, the individuals involved in these scandals have been variously punished. They’ve been stripped of their reputations, and their positions. They’ve been substantially fined. They’ve been sent to prison. There have been consequences all around—and yet no punitive damages or reparations can ever restore stability to the pension funds and mutual funds and individual shareholder accounts that were trashed by their actions, just as no corporate reform act can set things right in a vacuum. If anything, the one encouraging piece to these scandals is that in a society where an apology too often passes for consequences, the guilty parties in our business community have been soundly punished. Justice is being done. It might not be as swift as we’d like it to be in certain cases, but our system of checks and balances appears to be working.

  And yet what I find most amazing is that businessmen and -women continue to break the law and push the boundaries of ethical and moral behavior, even as these scandals make headlines. Some people just don’t get it, do they? I mean, we’ve had all these accountants and financial officers carted off to jail, and publicly disgraced, and every week it seems there are bulletins of yet another transgression, in yet another corporate office, and I get to thinking that no amount of negative reinforcement will ever set everybody straight. In any case, justice alone cannot set things right, and it comes back yet again to our core values. We don’t need the Sarbanes-Oxley Act to tell us the difference between right and wrong. We don’t need the government to step in and tell us how to behave, because in the end it comes down to human nature. We don’t need to see these shady accountants and CFOs carted off to jail to turn us away from illegal acts that might set us down the same path.

  Let me explain what I mean by sharing a recent experience. I lectured at a business class at Ohio State, and during one of my classes the talk turned to ethics. One of my students raised his hand and politely said, “No offense, sir, but why should I believe anything you say when it comes to ethics? You’re a former politician.”

  Everybody had a good chuckle at my expense—myself included.

  “Okay,” I said. “Point taken, but what are you majoring in?”

  “Accounting,” the young man replied.

  At this, I raised my eyebrows and said, “Accounting?”

  Everybody had another good chuckle, this time at the student’s expense, this being in the wake of all these accounting messes.

  The student shrugged it off good-naturedly, but I had stumbled upon an all-important point and I was determined to make it. “Why do you think some of these accounting firms have gone down the tubes?” I asked. “Why do you think we’ve had all these scandals?”

  The student mumbled something about a lack of clarity in some obscure accounting regulation.

  “No,” I said, shaking my head. “That’s the answer I’d expect from a government regulator, but that’s not it at all. It has to do with people. Human nature, that’s the bottom line.”

  I went on to paint a scenario that didn’t seem all that far-fetched to these jaded young students. “Let’s say you’re working for an accounting firm,” I continued, “and let’s say you’ve been assigned to a client, and after six months or so you realize that somebody was cooking the books. What do you do? You go in to the senior partner and you tell him the numbers aren’t adding up and he tells you that if you want to go somewhere in this firm you had better look the other way and keep your mouth shut. That’s the proverbial fork in the road, and it’s the same fork these Enron guys must have faced, at some turning-point moment before everything got out of hand. It becomes something more than just the mere question of whether or not you can get away with it. For some people, in some situations, it becomes a question of whether or not you can go along in order to get along. It’s about doing what you have to do to keep your job, and going against what you know to be right and true just to appease your superiors, and finding a way to live with yourself and your duplicity, and what rules and regulations are we going to come up with to take care of that?”

  To be honest, I don’t know that my students had the first idea what to make of my diatribe, judging from the open-mouthed looks I got back at the other end, but in the back-and-forth I had stumbled across a compelling distinction—namely, the longer we keep painting all business leaders with the same brush as our disgraced business leaders, the longer we’ll be digging out from under.

  There’s a perception out there that our corporations are run by crooks, and that we’re just waiting for the next one to get caught, but that’s clearly not the case. Anyway, it hasn’t been my experience. Most people I know in business work terribly hard at their jobs. They devote themselves fully and wholeheartedly to whatever it is they’re making or selling or doing, only to be second-guessed by industry analysts and shareholders at every turn. The overwhelming majority of them are ethical, law-abiding, moral people, with a clear sense of right and wrong, and I find it appalling when people suggest otherwise.

  And yet I’ll be the first to admit that it’s tough to stand and do the right thing when you find yourself in a situation where your boss expects you to stray from the straight and narrow. Let’s all recognize that this is a difficult situation and that our lives are shot through with diffic
ult situations. It’s tough to tell your boss at the accounting firm that your client is a shady character because you might lose your job. In sports, it’s tough to blow the whistle on your steroid-using teammates when your team is winning and selling out all its home games. In politics, it’s tough to take a position when your entire party thinks it’s a bad idea. It’s tough to be a teacher and challenge your own school district to do a better job educating its children. And it’s tough to stay in an unhappy marriage for the sake of your kids when all around you friends and colleagues are selfishly setting their marriage vows aside in exchange for a glint of happiness with another partner.

  Life is tough. That’s a given. Business is tough—another given. But there’s no reason to bend to every base impulse, or to conveniently misplace our moral compasses, just to cover our own backsides. That, friends, is not leadership at all—that’s being led, down the wrong path, for the wrong reasons, and securing a legacy that will haunt you for the rest of your life.

  THE ACTIVISION STAND

  No, it’s never easy to stand alone or buck the system, but it is within reach, and here I’ll shine a positive light on a business leader who’s made a successful career out of rejecting the base impulses of his industry. Bobby Kotick—or Robert Kotick, to his shareholders and board of directors—is chief executive of Activision, one of the world’s leading video game developers and distributors, based in Santa Monica, California. He’s also a friend, and from time to time our talk turns to his sense of responsibility, providing video games to a market that is made up almost exclusively of impressionable young people.