The University Record, April 22, 2002

Baker shares ideas on business climate

By Martin May

Baker (Photo by Martin Vloet (U-M Photo Services)
“Our economy, like our political system, is a self-correcting system,” said former U.S. Secretary of State James A. Baker III at the Hansen-Wessner Memorial Lecture of the Business School April 12. Baker stressed that while reforms in corporate business practices are necessary, particularly in the aftermath of the Enron bankruptcy, these reforms should not be inconsistent with the U.S. system of free-market capitalism.

Baker, who also served as the U.S. Secretary of the Treasury 1985–88 before serving as Secretary of State 1989–92, currently sits on the board of directors of Electronic Data Systems (EDS), is a senior partner in the law firm Baker Botts and is a senior counselor to The Carlyle Group, a merchant banking firm.

“Enron is a reminder that we live in an imperfect world,” Baker said. Although there was unethical conduct at Enron, Baker argued that it was a series of bad decisions that led to the company’s collapse. “I can’t remember a big failure that happened with such rapidity,” he acknowledged.

“The conduct of businesses requires prudent skepticism on the part of the investor, employee, officer and board member,” he said. Such discerning skepticism was lacking in Enron.

In spite of recent bankruptcies, Baker argued that free market capitalism is a good system because “it turns a destructive human characteristic—greed—into benign self-interest.” He recalled how during his tenure as Secretary of State, most communist nations ousted Marxism and embraced free-market capitalism and republican democracy. Baker said he recognizes that some vital reforms are needed.

“We need to take a look at our system of executive compensation,” Baker said. He argued that executive stock options oftentimes are a “hoax” since they are re-priced many times. Executive pay should correlate more closely with company performance, he said.

Baker also argued that current accounting practices should be revised since they are “so esoteric and hard to understand.”

Company directors should take a more assertive and accountable role, Baker said. “You cannot serve effectively as a director unless you are willing to tell it how it is, and that means crossing management if you have to.” Baker also said that directors must not forget that their main purpose is to represent shareholders.

Coimbatore K. Prahalad, the Harvey C. Freuhauf Professor of Business Administration and professor of corporate strategy and international business, also spoke at the event.

Prahalad took a different stance from Baker and argued that bigger reforms may be in order. Instead of fearing too much reform, it is perhaps better to overcorrect in order to find the right balance, he argued.

Enron is only one example of a much larger problem in the corporate community, Prahalad said. “Enron is just the lead player.” Other major companies’ accounting practices also have been called recently into question. Prahalad pointed to Xerox, which recently paid a fine to the Securities and Exchange Commission, and to Global Crossing, Tyco, General Electric and IBM.

Prahalad said that some of these problems may have arisen from the complexities of business, but he also said that a lack of values and ethics plays a major part.

“As a business school, I do hope we’ll continually uphold the values that have withstood the test of time,” Prahalad said.

The lecture was sponsored by the ServiceMaster Foundation and was moderated by professor of organizational behavior Noel Tichy.