Misdirections on a Broader Scale


Misdirections on a Broader Scale

My own experience provides a clear case of a mistake of purpose. Another type of purposeless business is a company set up to do only sham transactions. A so-called Ponzi scheme, named after the 1920s swindler Charles Ponzi, pays a return to early investors out of money collected from later investors, until eventually the pool of potential clients dries up and the whole thing collapses. Contemporary pyramid schemes work in much the same way, like a temporarily lucrative chain letter. Such dealings may seem like the stuff of sitcoms or B movies, bait for suckers but hardly a threat to serious-minded investors—unless, that is, major banks and pension funds all over the world are considered to be less-than-serious investors. Imagine the surprise of these sophisticated investors when some of the largest holdings in their portfolios admitted that portions of their earnings came from sham transactions with no more solid purpose than Mr. Ponzi’s fancy charade.

It works this way: A trading company sets up round-trip trades for the sole purpose of booking revenues. Nothing is sent to anyone, nothing is actually received for the deal. The only consequence of the trade is an increase in activity and cash flow that the company can report to investors and lenders, creating the appearance of rapid growth. This is a “take the money and run” way of doing business. Rather than working to contribute something of value to its customers, the company’s efforts focus on raising its share price. Some in the know may be able to grab quick profits before the artificial growth is discovered, but most investors lose out in the end. Meanwhile, customers end up paying higher costs, because the sham trades cause expenses that must be passed on. It is hard to imagine a business plan with a less elevated purpose.

As one of the trading companies that got entangled in such a deal was imploding, its CEO noted that the company’s business plan and financial statements were “opaque and difficult to under- stand.”[2] It is not known whether this CEO was aware of any deception hidden in these “opaque” statements, but complexity itself, whether intended or inadvertent, can be a way of hiding the truth and confusing observers. It also can confuse those who run the companies themselves. This confusion adds to the loss of coherent purpose essential for every worker in every company. It reminds me of a line from a Raymond Chandler screenplay, voiced by one of his hard-bitten characters: “Don’t let yourself get too complicated, Eddie. When a man gets too complicated, he gets unhappy, and if he stays that way, he loses his sense of direction.”[3]

Accounting firms have their own problems of purpose regarding their complicity in these schemes, both past and present. Historically, they have been the “enablers” that provided the financial support and counsel essential to the pursuit of these phony trades. Certainly the firms had some knowledge about what was going on, and certainly someone in these organizations must have realized that such deals have little to do with the reasons why banks and accounting firms exist in the first place. Did the founders of these firms have nothing more of a purpose in mind than to help clients avoid taxes and deceive investors and customers?

Accounting, in particular, has a proud tradition as a profession dedicated to establishing truthful accounts of complex financial matters. Arthur Andersen himself was a pioneer in finding ways to give the public open and “transparent” reports of obscure bookkeeping matters that some companies would prefer to hide. He did not allow his firm to act as a hired gun or company shill, but rather Andersen insisted that it serve the public interest and adhere rigorously to ethical standards. This, in fact, is how accounting became a respected profession: it kept its mission of truth-telling in mind even while selling its services. The original, and still valid, assumption of the profession was that, in the long run, truthful reports best served both the public interest and the company interest.

But the profession has lost its way in recent years. In too many cases, its leaders have seen their jobs as merely maximizing profits by letting clients get away with anything they can squeeze under the lowest legal barrier. One former Andersen partner, Barbara Toffler, protested her firm’s negligence of its profession’s true purpose: “All that was ever reported [at a partner’s meeting] . . . in terms of success was dollars. Quality wasn’t discussed. Content wasn’t discussed. Everything was measured in terms of the buck.”[4] Money, as I have written from the outset, is necessary for business success but it is not sufficient. By losing sight of the purpose of their enterprise—in this case, the accounting profession’s important contribution to an honest reckoning of financial transactions—the accountants let the true value of what they were doing slip away.

When, inevitably, this short-sighted approach finally led to scandal, public outrage, the collapse of the Arthur Andersen firm, and the implementation of new legal restrictions on other firms, many lead- ers blamed everyone but themselves: the media were at fault for producing sensational stories that worried investors, lawmakers were at fault for not preventing the shady activities through better laws, and so on. Commenting on Andersen’s demise, one industry expert noted that Andersen’s CEO “never said he took full responsibility for this. That was the problem with everyone at Arthur Andersen. They are all so arrogant that none of them wants to take responsibility.”[5]

Honesty and humility are the two prime business virtues, and both seem to have been sorely lacking in many of the accounting debacle’s key players. But the more fundamental problem was the lack of moral purpose in the activities that got them all into trouble. The spurious trades were not about getting energy to people, the banks’ loans were not about helping a real enterprise grow, and the accountants’ analyses were not about revealing the real financial status of the companies that they audited. In fact, in each of these cases, the purposeless transactions interfered with the necessary work that these outfits were chartered to do. Not only were the bogus activities without noble purpose, they also diminished the capacities of important organizations to provide the valuable goods and services that their customers wanted to purchase. Apart from the dispiriting nature of such misdirected efforts, this is surely no way for a company to grow and prosper.

Industry after industry has drifted into this false path in recent years, only to discover that the way leads to rags rather than riches. To cite one other highly visible example, the music entertainment industry has been disappointed to see its profits decline precipitously in recent years, despite the clear demand for its products by consumers of all ages.

The answer, according to one trenchant analysis in the Economist, is that the industry’s chieftains have neglected their core purpose, in particular the creative work (or “content”) that consumers wish to purchase: “Perhaps the deepest explanation of the industry’s woes,” concludes the article, “and one where the media moguls are the most to blame, is that it has been distracted from its core competence of manufacturing something that people will pay for. Amid dizzying talk of convergence, so much talk (and cash) was devoted to securing and developing new forms of distribution that the critical importance of content has been neglected . . . ; instant commercial returns were favored over long-term investment in creativity.”[6] Like people, industries that lose sight of their true purposes risk becoming empty shells.

Much has been made in recent years of corporate fraud, corruption in the executive suite, and other abuses of trust by those in managerial roles. Although the revelation of scandals is always a healthy act, necessary for cleansing the system and discouraging further abuses, there is often a cartoonlike quality to the revelations. Politicians and the mass media, in particular, have ways of reducing such revelations to oversimplified stories of good versus evil. In such accounts, the corporate world is made up of good guys and villains; politicians tend to say mostly good guys and a few villains, and the media say just the opposite. The damage, in either account, is done by the villains (be they few or many), and so the cure must be to expel the villains and let the good guys take over. But such simplistic accounts diminish people’s understanding of what goes wrong and hamper the efforts to avoid similar problems in the future.

In truth, there is no Great Wall between the saints and sinners of the business world. All persons in business are subject to constant temptations to cut corners, bend the rules, and feather their own nests at the expense of their clients and companies. Some people hardly ever give in to these temptations, while others do so occasionally, in small ways; still others do so regularly, as a matter of course, and a few people actively pursue every scam they think they can get away with. These are different responses to the same desire—the urge that everyone feels to promote his or her own self- interest. The differences in response do matter—in fact, they are all that matter in the end—but they are distinct shades of gray rather than separate colors of the rainbow.

Throughout their careers, corporate heroes and corporate villains have faced similar choices and have been lured by the same rewards of riches and power. In some cases, both the heroes and the villains even may have made similar moral mistakes early in their careers. But at some point their stories part. Those leaders who go on to serve themselves and their businesses well learn from their mistakes and find ways to avoid illegitimate temptations—perhaps not 100 percent of the time but often enough to preserve their honor and their reputations. Those leaders who end up as targets of investigative reporters and congressional hearings have failed to recognize the direction that their self-serving behavior is taking them. Small acts of corruption grow into bolder ones, a corner cut here metamorphoses into a law blatantly ignored there, and almost without awareness, ambition has turned into criminality. “Time wounds all heels,” as humorist Dorothy Parker once remarked.

[2]New York Times, November 16, 2001, p. C1.

[3]Raymond Chandler, The Blue Dahlia, Paramount Productions, 1946.

[4]Business Week, August 12, 2002, pp. 55–56.

[5]Arthur Bowman, founder of Bowman’s Accounting Report, quoted in ibid., p. 54.

[6]Economist, January 18–24, 2003, pp. 11–12.