At the end of July 2002, President Bush signed the Sarbanes-Oxley Act, a corporate corruption bill designed to reform business practices and reassure employees and shareholders. The president declared, "This law says to every American: there will not be a different ethical standard for Corporate America than the standard that applies to everyone else." Among other items, Sarbanes-Oxley requires that publicly traded companies institute a code of ethics for their executive teams. As of this writing, large companies are scrambling to comply with the new inch-thick legislation, ostensibly enacted to restore public trust in American business.
Enron. WorldCom. Arthur Andersen. These names and others are now associated with greed, mismanagement, and dishonesty. And despite claims to the contrary, it now appears that the few "bad apples" have tainted the bunch—at least when it comes to public perception. In a poll conducted in the summer of 2002, people ranked stockbrokers and CEOs of large corporations down at the bottom of the list of individuals who can be trusted, joining HMO managers and car dealers.
How did we get here? In trying to make sense out of the crisis of confidence in American business, many point to the greatest stock market boom in U.S. history—capped in the late 1990s by the dot-com bubble. "Corporate responsibility is mainly a matter of attitudes, and the attitudes got corrupted by the mentality of the markets in the 1990s," former Federal Reserve Board Chairman Paul Volcker told BusinessWeek. "We went from ‘greed is good’ being said as a joke to people thinking that ‘greed is good’ was a fundamental fact." Everyone wanted to join the party, and with good reason. The Dow more than tripled in five years, rising from approximately 3,600 in 1994 to a peak of over 11,700 in January 2000. The tech-heavy Nasdaq rocketed from just over 1,000 at the end of 1995 to break 5,000 in March 2000. Alan Greenspan's warning of "irrational exuberance" became something of a rallying cry.
It seemed like there was nowhere to go but up. I certainly wasn't immune to the euphoria. I founded my company in 1994, just as the market was really blasting off. I remember watching what was going on with mixed emotions. One part of me was envious—I watched the insta-millionaires sprouting up around me like weeds and wondered why I couldn't be one myself. I also was disappointed that going it on one's own, embracing the adventure of entrepreneurship, wasn't such a unique thing anymore. Everybody was doing it.
My company, FWI, is a provider of medical information services. FWI has always been privately held, with no angel investors or venture capital. Don't think, however, that the Internet frenzy didn't make me consider it. There was the rise of health care portals such as MedScape and http://Dr.Koop.com (the latter of which, once valued in the millions of dollars, was later sold for under $200,000). There was also the potential increase in competition—suddenly, anyone with a computer and an Internet connection was a publisher. The pressure was so great that at one point I considered changing the name of my company to http://FaxWatch.com.
At the same time, it was quite a rush. I bought stocks such as http://Amazon.com and watched them fly. But the party couldn't last forever. The pundits who said that the old rules of business and economics didn't apply anymore—after all, look at those valuations!—were wrong. It's not that society wasn't changed by the Internet, or that consumers didn't behave differently in this new environment. It's just that business is business. At some point, you need to make a profit or the market will punish you. Investors won't wait around forever as you hope to make money.
And in 2000, investors stopped waiting around. After reaching 5,000 territory in March, the Nasdaq composite index closed the year down by half; meanwhile, the Dow ended the year down 1,000 points from its peak. By midsummer 2002, the Dow had tumbled 32 percent from its high while the Nasdaq was down a frightening 74 percent. In the wake of the corporate scandals, both indices dropped below their post–September 11 lows.
During the meltdown, Alan Greenspan coined another phrase to sum up the times: "infectious greed." The Fed chairman noted that it was a difference of opportunity, not a fundamental shift in human nature, that was responsible for the scandals. "It is not that humans have become any more greedy than in generations past," he said. "It is that the avenues to express greed had grown so enormously."
Greenspan's words aren't very comforting. According to him, greed will likely win, given the opportunity. And, according to the cynics, opportunities will always be found. But the Internet boom also has affected the direct relationship between consumers and companies. Consumers are now much better educated about the products they purchase. Rumors and bad news are spread instantaneously. Consumers have access to a truly global marketplace, vastly increasing competition. Finally, the promise of a new kind of workplace—embodied by the dot-com company and widely covered by the media—has gone largely unfulfilled.
"President Bush Signs Corporate Corruption Bill," press release/transcript of speech issued by the White House press secretary's office, the East Room, the White House, July 30, 2002.
Jeffrey M. Jones, "Americans Express Little Trust in CEOs of Large Corporations or Stockbrokers," Gallup News Service, July 17, 2002.
"Volcker on the Crisis of Faith," interview by Mike McNamee. BusinessWeek, June 24, 2002, 42.
Testimony of Chairman Alan Greenspan at the Federal Reserve Board's semiannual monetary policy report to the Congress before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, July 16, 2002.