Yesterday I read a fascinating take translated from an Iraqi newspaper about a tendency in that region to blame "others" for negative events and conditions -- that everything bad that happens is due to some conspiracy concocted by powerful outsiders to exploit and make the regular people miserable.
(Please, while I love getting reader email responding to my articles, don't write me about Iraq. I won't read it. Promise.)
It's a powerful bromide -- the thought that we can wipe our hands of things that make us miserable. As I read the article, I thought that while the author may have nailed down what he believes is a central intellectual crisis in his own culture, I don't think for a second that there is any monopoly on the art of deflecting blame.
Think about what's happened here in the last three years. The stock market has cratered, and we've been hit by scandal after scandal. We're up in arms about weak boards of directors, obscene pay packages for executives, mutual fund scandals, corporate theft, confiscatory stock option programs, trade deficits, the federal deficit, job losses, and every other thing that hangs over our economic lives. In most of these cases, some bad people have done some very bad things. But the fact that these scandals all broke at a time when many Americans have suffered substantial economic losses is no coincidence. We started paying attention about the time that we needed someone to blame.
Who are the candidates for this? A look at the front page of yesterday's Washington Post business section gives us a strong hint. Above the fold we learn of the criminal charges prosecutors are about to file against former HealthSouth (Pink Sheets: HLSH.PK) CEO Richard Scrushy for his part in accounting fraud at the company. We also see complaints coming against managers and brokers at Prudential for allowing wealthy clients to loot their fund customers. Just below that we see Congress getting into the act, chastising the mutual fund industry. Sen. Peter Fitzgerald (R.-Ill.) called the mutual fund industry "the world's largest skimming operation." Wow. Inside we can read about former Tyco (NYSE:TYC) CEO Dennis Kozlowski's trial for thieving millions from company coffers. Both MCI and Enron still make headlines on near-daily bases, though things were quiet on both fronts yesterday.
Let me be clear here: The fund managers, the people in charge at Tyco, MCI, Enron, HealthSouth, and so forth are no better than common criminals. They deserve every single bit of the scorn being heaped upon them. Many deserve to go to jail for a long time. And because crimes committed in the corporate construct are so hard to pin on individuals, many of them won't.
But there's something else at work here. Using my nearly infallible email inbox anger detector, I've noticed that the level of indignation that people have toward the mutual fund managers is dramatically lower than their anger toward any of the other big scandals from the last three years. We're talking about widespread bold-faced theft here, something that, when all is said and done, I'm wagering will dwarf the amounts lost in any of the corporate collapses. Sure, some people are up in arms, wondering where the heck the SEC has been, pulling their money from the offending fund companies -- Strong Capital, Janus (NYSE:JNS), Bank One (NYSE:ONE), and Marsh & McLennan's (NYSE:MMC) Putnam chief among them. But by and large, the overall furor over this blatant, widespread abuse of trust has been fairly muted. Could it be that we're not that angry simply because the market is going up at the moment? Are we shaking off this sign of total rot right now simply because we're not in need of someone to blame?
Past performance would point to this being the case. While Enron, MCI, dirty analysts, spectacular executive overcompensation, and a crooked IPO market have all become part of the collective consciousness in the last three years, there should be no mistake that they largely took place in the 1990s. This is not political commentary, it is psychological: They were able to do it in no small part because our collective guards were down. Vanguard's John Bogle pointed out in a June speech that the average compensation of CEOs at large public companies rose 443%, from $2,025,000 to $11,000,000 from 1988 to 2001. Do any among us recall a big hue and cry about this at any point prior to the bubble's burst? I sure as heck don't.
Nor was there much anger in 1999 when several writers at the Fool and elsewhere warned about massive stock options overhang at public companies -- it wasn't until 2002 that the fact that insiders had granted themselves large chunks of their own companies took on the whiff of a conspiracy. It seems that we're right back where we started, too: Last week the Financial Accounting Standards Board announced its intention to require options expensing by 2005, and you could have heard crickets chirp for all of the public reaction this move received. People just don't care. Again.
Machiavelli had it right when he said, "People are fickle by nature; and it is simple to convince them of something, but difficult to hold them in that conviction." Last year we were convinced that the markets were crooked. This year, despite some overwhelming evidence of people in power over our money doing some very bad things, we're much less concerned. While we should not absolve these people from taking advantage, let us be very clear here: That we ignore wrongdoing when times are going well is directly linked to the willingness of others to take advantage. When things are great, questions and doubts tend to lose their importance. That's dangerous.
Why would a board, mostly appointed by the CEO, care about his compensation when not a peep is heard from company shareholders? Why would the SEC get interested in going after obviously crooked IPOs of garbage companies when the average investor on the street is desperate to get in on the action of easy riches? Why shouldn't an analyst hype a stock to the heavens when doing so and being right is what made other analysts into stars, wealthy beyond their wildest dreams? They should do the right thing because they have an obligation to do so. Sometimes, though, this isn't enough. And if investors don't particularly care because they're getting fat and happy, then why shouldn't these folks pay themselves a wee bit more? I mean, except for the fact that it's wrong, and in many cases illegal.
This past Saturday, the New York Observer ran a spectacular review on the life of Henry Singleton, longtime CEO of Teledyne. Back in 1982, the media and investors roasted Singleton from pillar to post for his decisions to use company capital to buy back stock and purchase equities. The common impression, that this was the wrong thing to do, was completely mistaken. Just before he died in 1999, Singleton mentioned that he was no longer very fond of stock buybacks, stating "too many companies were doing these stock buybacks, [so] there must be something wrong with them."
The issue here is simple for investors, whenever the public at large becomes unconcerned with a certain type of risk, that's the exact moment when it should become of supreme interest to you. In the last six months, much of the anger over corporate wrongdoing seems to have subsided. Rest assured that this is the exact type of environment in which more and more abuse of shareholders will take place. Just as the problems with MCI and Worldcom started almost a decade before anyone cared, the trigger for the next crisis will be in place long before people notice, and in most cases that notice will only come after the damage is done.
I've cited an old Arab proverb many times, but will do so again: "Trust Allah, but tie up your camel."
Fool on!
Bill Mann, TMFOtter on the Fool Discussion Boards
And you might find me living in a shotgun shack. Bill Mann owns none of the companies mentioned in this article. For a current list of his holdings, view his profile. Bill appreciated feedback on his columns at [email protected]. The Motley Fool's disclosure policy can be read here.
