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Business Needs to Take the Blinders Off

By Howard Gleckman Back in the 1930s, American Communists found themselves in an awkward spot. Convinced that workers of the world would soon unite, party members would brook no criticism of the world's leading exponent of Marxism. Unfortunately, the working-class hero of the time was one Joseph Stalin.

Left-wing intellectuals found themselves defending the Soviet dictator's murdering of millions of his own people. They even rationalized Stalin's brief alliance with Adolf Hitler -- until the Germans ended the relationship by invading Russia. After that, American Communists spent years denying the two countries ever really had an alliance. Their view was simple, though stupid: Communism was good, therefore, all Communists had to be good. Conceding error wasn't acceptable.

FINGER-POINTING. Business apologists have been doing much the same in the wake of the wave of scandals afflicting Corporate America. Since Enron's collapse, the litany of rationalization has been similarly predictable: The media is overblowing the scandals, which are caused by just a few "bad apples," as President Bush has insisted for months.

Or, they're the fault of government regulation, Wall Street greed, or careless investors. Some apologists have even concluded that it's all the fault of former President Bill Clinton -- that somehow his personal moral lapses led some corporate execs to commit financial fraud.

Facing troubling poll numbers and angry voters, Bush and most Washington pols are now turning up the rhetoric and denouncing corporate corruption -- in theory. On July 8, the Business Roundtable took out a full page ad in The Washington Post criticizing crooked CEOs. On July 9, Bush will give a tough-sounding speech. But all of this has the slick-polish feel of a PR campaign. And, of course, nobody is naming names.

SAME IDEA. The apologists are all repeating the same simplistic, but fatally foolish, syllogism that made the Old Left look so bad. They're just substituting capitalism for communism. Capitalism is good, therefore all capitalists are good. Or, the variation: Markets are perfect, therefore all criticism of markets must be wrong.

One would think that the angriest folks out there today would be true capitalists. After all, the markets are suffering mightily. As stocks plummet, honest companies must pay more for capital. Investors are demanding a risk premium for all corporate securities, unsure who else is lying to them about earnings and who isn't. This should be no surprise. Last December, Wharton finance professor Jeremy Siegel told BW Online that this is exactly what would happen (see BW Online, 12/18/01, "Enron's Contagion Effect").

Privately, many CEOs are furious at the book cookers. And they wouldn't be a bit unhappy if some of their sleazier colleagues get tossed in the clink. But publicly, most remain either defensive or mum.

TEST OF TIME. Rebuilding confidence is going to take time. Investors will have to believe that the government is going to enforce the securities laws and crack down on the crooks. Companies are going to have to prove by the test of time that their reported financials resemble the real thing.

Eventually, the markets will readjust, distinguishing the bad actors from the good. But in the meantime, CEOs and free-market thinkers have a role to play. They can help the healing process by publicly acknowledging that earnings manipulation ran deep through Corporate America. And they can tell us just how they'll change a business culture that made such corrupt behavior acceptable in too many boardrooms.

If they don't, they shouldn't be surprised if their credibility ends up in the dustbin of history. Gleckman is a senior correspondent in BusinessWeek's Washington bureau. Follow his views every Tuesday in Washington Watch, only on BusinessWeek Online

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