Commentary: A Few Bad Apples Spoil...Not Much
When it comes to U.S. corporate scandals, the bad news never stops. In the past few weeks alone, former WorldCom Chief Executive Bernard J. "Bernie" Ebbers was convicted of fraud, the Securities & Exchange Commission filed a civil suit against ex-head of Qwest Communications International (Q ) Joseph P. Nacchio, American International Group (AIG ) CEO Maurice R. "Hank" Greenberg was forced to resign, and Time Warner (TWX ) agreed to pay a $300 million fine for accounting violations. Meanwhile, powerful CEOS continue to get huge pay packages.
Yet despite their magnitude, these sins are of the venial rather than the mortal variety. A venial sin, in economic terms, is an expression of greed that's reprehensible enough to warrant punishment but not so serious that it significantly undercuts the country's long-term growth. A mortal sin, by comparison, has the potential to impede innovation, condemning a nation to years of stagnation.
The fact is, CEOs in the U.S. lack the power to drag down entire industries or the economy as a whole. An executive like Michael Eisner of Walt Disney Co. (DIS ) may be able to exert total control over his or her company for decades. Yet the impact is limited to a single corporation. Company heads cannot hold back competition, and they cannot keep small companies from having access to capital. The imperial CEO, then, is much less pernicious than an entrenched government bureaucracy, an economy dominated by a few large families, or a single-party political system.
Such roadblocks to growth are far more common in Europe and Japan than they are in America. In Germany and France, for example, government protection of retailers has held down productivity gains in that sector. And in Japan, the ruling Liberal Democratic Party has dragged its feet on reform, making it harder to shed bad loans and shift resources to new growth areas. That has held back Japan's recovery.
Despite all the scandals and the pay funneled to top executives in the U.S., corporations have done quite well for both investors and workers -- unless, of course, you happen to have been employed at WorldCom or Enron Corp. Over the past decade, the stock market has risen an average of 10% per year, outpacing the markets in other major developed countries. Real wages have risen by a total of 8.6% over the same period, compared with only 0.6% over the previous 10 years.
Moreover, the gains have been surprisingly well distributed. When productivity began accelerating in 1995, employees -- hourly workers, salaried managers, and professionals -- were reaping 65% of the nation's total income. Today they earn the same percentage, a sign they have received their fair share of gains. Corporate profits have remained steady at just under 11% of national income, suggesting that investors, too, on average have gained from faster growth, even if some lost their shirts.
Just as important, the U.S. regulatory system has been more than willing to deal with corporate excess and fraud. The passage of Sarbanes- Oxley put some teeth in the audit process, while federal prosecutors have gone after high-profile corporate miscreants -- albeit slowly. And in the U.S., it's only the rare company that gets a government bailout. When Enron faltered in 2001, political connections enabled its head, Kenneth L. Lay, to get Federal Reserve Chairman Alan Greenspan on the phone. But that did nothing to stop Enron from going under.
This ability to fix problems when things go wrong is one of the great virtues of the U.S. economic system, from the New Deal to the savings and loan bailout of the 1980s to the recent scandals.
That's tough for other countries to match, especially those with entrenched elites controlling entire industries. The U.S. pattern of "sin and repent" means it's a sure bet there will be shameful periods of scandal. But it also means the U.S. economy has the ability to right itself. It may not always be smooth, but it seems to work.
By Michael J. Mandel