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 / Fourth Quarter 2002 / Issue 29(originally published by Booz & Company)


Best Business Books 2002: Ethics

According to Martin, short-term management seems to require some fairly commonsensical principles: Quantify whatever you can, in order to set goals and align objectives; move forward in incremental steps that deliver results progressively; and make sure everyone in the company knows what the management is trying to do. All well and good. But a tiny note of alarm should creep in halfway through the book, when he lists which corporate departments present his executive interviewees with the greatest impediment to “change” (disturbingly, he fails to define precisely what he means by change). Fifteen percent of them pointed to the legal department; another 23 percent said finance. But sometimes, thwarting injudicious change is exactly what the legal and finance departments ought to do. Indeed, it seems neither department has done enough thwarting in some companies.

All too often in the past year, the chief financial officer has emerged as the boss’s accessory in massaging earnings or creating special off-balance-sheet hiding places for losses. At Xerox and Global Crossing, WorldCom and Enron, far from advocating intelligent management reforms, the CFO has notably failed to deter the sort of “short-termist” attitudes and actions that cheat investors and destroy wealth. Martin’s advice on making managers more effective and efficient is sensible enough, but it would have been much more reassuring in a book appearing at this time to see a chapter on the dangers of the short-term management approach.

Making Capitalism Work
In the aftermath of Enron, many people wonder whether there are ways to make sure that executives stay honest in the future, given all the pressures they face to stretch and bend the rules. The introduction of yet more corporate rules is unlikely to achieve very much. But there are some interesting suggestions for ways to reduce the short-term focus that makes life difficult for so many bosses.

For instance, Elliott and Schroth propose getting rid of 90-day reporting and replacing it with a “semiannual comprehensive review and report of audit.” The relentless reporting cycle currently forces executives to manage their stock first and their business second. “They don’t have the time to do both,” the authors write. Well put. The authors also call for more independent boards and more active communication between directors and investors. They want consideration of a provision that would allow directors to reject a takeover that is in the interests of shareholders but not of other stakeholders such as employees and host communities. (In the U.S., legislation passed by Congress in July 2002 to crack down on corporate abuses and increase shareholder protection begins to address some of these ideas.)

All this is radical stuff. Still, we live in radical times, when the only American president ever to have earned an MBA denounces executives for “breaching trust and abusing power,” accuses them of “cooking the books, shading the truth, and breaking our laws,” and demands “a new ethic of personal responsibility in the business community.”

The scandals at American companies have been particularly egregious, but capitalism has stumbled in Europe too. Any doubters should follow the tale of Asea Brown Boveri, the Swiss–Swedish engineering group that was once held up as a model of good governance and is now dealing with fraud affecting its results for 1999 and 2000. However, European authors sometimes seem more comfortable asking awkward questions about the basic morality of capitalism than American authors. That is certainly true of Charles Handy, a distinguished British observer of corporate life, and the only non-American writer represented in this selection.

Handy is no anti-American: Indeed, there are many aspects of American capitalism that he relishes. In his latest thoughtful and insightful book, The Elephant and the Flea: Reflections of a Reluctant Capitalist (Harvard Business School Press, 2002), he argues, “The idea that the future can and should be better than the past is one of the most invigorating aspects of American culture.” And he adds, “The envy that can be corrosive in other capitalist societies seems in America to fuel ambition and hope.” But he is realistic about the aspects of capitalism he does not relish. It is, he points out, “the only game in town. Even if we wanted to, there is no way to stop it.”

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