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Business must work to restore Americans' faith, White says

Poor leadership, poor stewardship of American firms and "intolerably bad behavior by people in positions of trust" all have contributed to the crisis of confidence that has shaken Americans' faith in the stock market and business in general, B. Joseph White said in a speech.
White (Photo by Marcia Ledford, U-M Photo Services)

White, former dean of the Business School and the Wilbur K. Pierpont Collegiate Professor, talked about the downfall of iconic firms like Enron and Arthur Andersen and offered suggestions to restore confidence in business leadership at the 36th annual William K. McInally Memorial Lecture Oct. 23. The lecture is named in memory of McInally, who served on the Board of Regents from 1960-64.

Until recently, Arthur Andersen was the gold standard for auditor independence in the accounting profession, White said. By aggressively pursuing consulting revenues from audit clients, Andersen and other accounting firms lost their bearings, he said, and, "as consulting fees rose, Andersen became a firm that couldn't say 'no.'"

White recalled the courage of Harvey Kapnick, Arthur Andersen's chief executive officer in the 1970s, who earned an MBA from the Business School in 1948 and who died in August. Kapnick proposed spinning off Andersen's consulting business in 1979 because of concerns about the impact of consulting on auditing independence. When his partners rejected the idea, Kapnick stepped down as CEO. "I think it is not far-fetched to say that had Harvey Kapnick's proposal prevailed, Andersen would still be a thriving firm today," White said.

Financial conflicts of interest have contributed significantly to the current crisis, he said, adding that a number of executives, board members, bankers, auditors, regulators and legislators were "greedy, fraudulent, negligent, naíve and self-dealing."

"The sad truth is that in a succession of highly visible cases including Enron, WorldCom, Adelphia and Global Crossing, as well as other less visible (cases), the multiple guardians of public company wealth and the investing public failed miserably," he said. "None of us dreamed just a few years ago that the layers of protection against mismanagement, fraud and conflicts of interest in public companies, the financial industry and capital markets could fail so completely. But they did."

What will it take to restore trust in business and its leaders? White offered the following:

· Strong economic growth, better corporate earnings and an improved stock market.
· Punishment of wrongdoers, "especially the big fish and the egregiously rapacious."
· Financial reporting that is accurate, consistent and trustworthy.
· Elimination of conflicts of interest in the banking and financial services industry.
· A strong, effective Securities and Exchange Commission (SEC).
· Corporate governance that works for shareholders and with management, not for management.
· A change in values and focus of corporate leaders from the short term to long term, from selfishness to stewardship.

In his lecture titled “Post-Bubble, Post-Scandals: Restoring the Credibility of American Business
Leadership,” B. Joseph White encouraged scholars
to participate in the reform process and raised the following research questions:
Whatever happened to dividends? A 1978 study by Gene Fama and Ken French found that two-thirds of companies listed on the major exchanges paid dividends. By 1999, the percentage had fallen to 21 percent.
Why? If more cash flow were dedicated to dividends, would there be greater accountability and fewer excesses in corporate spending?
Are we on the threshold of a new era of institutional investor activism?
How can boards and management strike the proper balance between contention and cooperation? How can board members perform both roles effectively?
Public companies keep two sets of books: One to report to shareholders, the other to report to the Internal Revenue Service. Would investors be better able to evaluate corporate financial performance if data from public tax returns were available to investors?

America has a great capacity for self-correction and renewal, said White, listing among his reasons for optimism: guilty pleas and indictments of senior executives that seem likely to lead to jail terms; corporate governance reforms, including new stock exchange regulations and the Sarbanes-Oxley Act of 2002; and more balanced compensation packages for CEOs.

White said his greatest concern is that no leaders of great stature and influence are emerging to guide the reform process. The Bush administration, White noted, has been "strikingly ineffective and unenthusiastic about the task of leading the effort." He cited the administration's decision earlier this month to reduce growth in the SEC's budget from $776 million to only $568 million.

The Bush administration, dominated by former business executives, could be an impressively effective leader of business reform, he said. "No one should understand better than former CEOs and corporate board members like Bush, [Vice President Dick] Cheney and [Secretary of Defense Donald] Rumsfeld the damage that's been done to our business system and the importance of fixing and preventing it from going forward. But I sense no outrage, urgency or even much interest in these matters. I believe this is an immense opportunity foregone," White said.

He suggested citizens do two things: Refuse to do business with firms that engage in reprehensible behavior, and hold elected officials accountable to make and enforce rules so that business is conducted fairly.

White called on members of the University community to serve as constructive critics of society, a role, he noted, that former President Harold Shapiro identified 20 years ago as one of the University's highest callings.

Being a constructive critic of society "calls on us to identify faults and failings in our society, threats to our well-being broadly construed, to call attention to these problems, and to help make things better through our teaching, research and service," White said.

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