Strong reform measures targeting Wall Street's stock analysts are clearly needed. Biased investment advice serves to misallocate capital by moving investment dollars from deserving companies to unworthy companies. The investing public no longer trusts Wall Street. According to a survey conducted by the Securities Industry Association, “ Investors' levels of satisfaction with their individual brokers (have) declined to new lows.” The Federal Reserve Board recently estimated that $8 trillion in stock market wealth has been lost over the past two and a half years. Wall Street itself is responsible for some portion of this decline and stock analysts must take their fair share of the responsibility for the loss of both capital and confidence.

Investors have a right to expect ethical behavior. No one expects perfection. Recent disappointments with American capitalism have more to do with a betrayal of ethical and social principles, and with a failure to learn from recent history. Apparently, regulators and politicians learned little from the S&L, junk bond and treasury market scandals of the 1980’s. These incidents were precursors to the biggest fraud yet: the systematic looting of shareholder value by people who didn’t really need the money and really should have known better.

Not all of us were blindly cheering the market on. Even during the height of the new economy market mania, we called for diversified stock portfolios comprised of old economy stalwarts – utility companies, and new economy companies whose businesses you could understand, specifically Netscape and AOL.

(See: http://www.creativeinvest.com/cirminvadv/netnoir.html)

Expensing stock options, appointing independent directors who meet regularly with or without executive directors, more disclosure..these “reforms” will not help. Given the complexity of business life today, determined thieves will succeed, especially if their efforts are bankrolled by shareholders, sanctioned by politicians, protected by regulators and hidden from the public by a distracted media.

There is simply no substitute for honesty and common sense.

A (Very Brief) History of Corporate Irresponsibility and Malfeasence

It is entirely appropriate that we seek to determine just how irresponsible companies have been in the past. As James Baldwin noted, “the past is what makes the present coherent.” But Mr. Baldwin also noted that the past "will remain horrible for exactly as long as we refuse to assess it honestly."

Determining how irresponsible companies have been in the past cannot be done without revisiting what has been called “one of the largest and most elaborate maritime and commercial ventures in all history,” the Atlantic slave trade. This venture was financed and implemented by Anglo-Saxon companies.

Further, determining how irresponsible companies have been in the past requires we review their behavior on the other side of the Atlantic. As early as 1831, the US Government recognized, in Cherokee Nation v. Georgia, that “The Indians are acknowledged to have an unquestionable, and heretofore an unquestioned, right to the lands they occupy.” These rights meant little to corporations, like railroads, so prominently cited as good corporate citizens in the past.

Until we can truthfully incorporate these facts into the analysis, the criticism of those who seek to make corporations (and markets) more responsible will remain incoherent and tragically flawed. In other words, horrible. A fairer, more just society is in everyone’ best interest over the long term. History has shown us that.

Recent Media Coverage of Corporate Malfeasance

Some have indicated that politicians were not focused on corporate malfeasance. This may be true, but the media also missed the boat. On May 16, 1996, the Clinton Administration sponsored a conference on Corporate Responsibility. The conference was held at Georgetown University.

Most of that days news focused on the Whitewater scandal.

Politicians on both sides of the aisle have tried to focus on corporate responsibility. Representative Richard H. Baker, R-Baton Rouge, chairman of the House Subcommittee on Capital Markets, repeatedly called for increased standards of corporate responsibility. His efforts, too, were ignored, drowned out by the sound and fury of scandal.

Major media outlets were busy making celebrities of CEOs, too busy to reporting the latest scandal or to investigate company fundamentals. And, make no mistake about it; the information was there, right below the surface. According to an article published in the Washington Post on Monday, July 15, 2002, “As far back as 2000, WorldCom Inc. employees challenged the company's accounting and in at least one case raised those concerns with auditor Arthur Andersen LLP, according to internal documents released yesterday.”

When a company becomes publicly traded, it also becomes subject to short term market pressures. Senior management at these companies become reluctant to criticize Wall Street for fear that investment banks and analysts will drive their stock price down, or, worse yet, cut them off from the capital market entirely. More importantly, management becomes so focused on cutting costs (so that they can report growing quarterly earnings) that they do not make the long term investments in people that might allow them to investigate complicated business stories. In so doing, they “joined in the game of stoking short term stock price increases, regardless of long term consequences for the company and its shareholders” or the country. Some media companies, thus become “entrepreneurial agent(s)” of Wall Street investment banks, not objective, independent observers.

“All Whitewater, all the time” indeed. Now we know what we missed.

January 27, 2003.

Frequently Asked Questions about Corporate Malfeasance

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