The first commandment

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(Host) The executives and directors of companies like WorldCom, Enron and Adelphia broke the one and only commandment of business, commentator Timothy McQuiston tells us what that was.

(McQuiston) I used to work at a company where the top executives, and even some of their non-employee cronies, robbed the company by trading advertising in the newspaper for personal goods and services. It took the absentee owner a few years to figure this out. And when he did, he kicked them out the door with great threats of damnation. But in the end, the owner just settled the case and presumably got as much as he could from the embezzlers.

That’s exactly what the top executives of companies like Enron, Worldcom, and Adelphia are accused of doing to their absentee owners. The difference was that, unlike my old employer, these companies are publicly traded. And the people they allegedly robbed were you, me and large institutional investors. If you have a 401(k) plan, you were robbed.

Two key rule changes by the SEC in 1991 made much of these recent corporate disasters more possible. Not that there wasn’t fraud before. But between the changes and new compensation models that were heavily based on profits and stock price, manipulation of one’s own salary became so much easier.

In the first change, an executive no longer had to wait six months to cash in his stock options. The second change, and this was much more subtle, involved selling stock back to the company itself. They don’t have to report the deal for a whole year.

There are other problems, of course. Selling assets and calling it revenue or buying products and not calling it expenses. Both artificially inflate profits.

And there’s also insider lending and configuring boards of directors to the benefit of the CEO, instead of stockholders. And if executives do all these things within the bounds of the rules, it’s not even illegal.

It goes to show you how far Bernie Ebbers, Ken Lay, the Rigas family and others went, to have allegedly broken those rules for their own enrichment. Ken Lay at one point held over $300 million in stock options, and Ebbers had a $12 million bonus hanging in the balance. No wonder they didn’t want stock prices to fall.

The legislation being worked on by Congress and advocated by the president perhaps won’t send more dirty executives to jail, but it should help clean up the system and make publicly traded corporations more honest to their shareholders. After all, at the great schools of business administration in our nation, from Harvard to Stanford, they espouse only one commandment: Maximize profits for your stockholders.

This is Timothy McQuiston

Timothy McQuiston is editor of Vermont Business Magazine.

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