Interference for business
How to prevent abuse of official position and public trust in the future? For this you need to revise the current system. Of course, people are responsible for their behavior. But, it seems to me, the ethical foundations of corporate America have been shaken largely for the following reasons.
1. Changes in the principles of remuneration. Over the past 20 years, the remuneration system of senior executives has changed, prompting them to inflate the stock price of their company. The sad consequences of these actions we saw in examples of high-profile corporate scandals – for example, in Global Crossing and Tyco Industries. Paradoxically, the shareholders were partly to blame for this: after all, they complained that the generous remuneration of many managers was incommensurable with their modest achievements. Congress agreed and passed a law prohibiting the deduction from the taxable income of the amount of remuneration of senior managers in excess of $ 1 million and not based on the effectiveness of their work. In response, companies began to introduce incentive pay schemes in which stock options and performance bonuses played a significant role in order to increase the managers’ responsibility for the results of their work. This trend intensified in the 1980s and 1990s. According to the consulting company Towers Perrin, the main salary1 CEO in a medium-sized American company now makes up about 27% of the total wage. (For comparison: in England and France, the basic salary accounts for 43% and 40% of the total income of CEQ, respectively, and only 35% and 41% for incentive payments). Perhaps companies would not provide as many stock options if the new tax law did not give them a tax rebate every time the option was used. A situation in which more than 2/3 of the remuneration of a senior executive depends on the financial results reported by the company is fraught with trouble. I’m not talking about blatant precedents, when corporations created the illusion of tremendous profitability by manipulating accounting data, but about perfectly legitimate business decisions that caused the stock price to jump for a short time, while harming the company’s long-term growth. However, all these cases should not be surprising: after all, sometimes the manager is personally benefited by the actions that contradict the interests of the company. Most of the top leaders found moral strength to resist this temptation – but, unfortunately, not all. The board remuneration, which is largely focused on options, can damage the effectiveness of its control over senior management. Judge for yourself: the directors should prevent the abuse of the head, but turn into his accomplices, taking advantage of the results of his machinations that are favorable to him. Therefore, some companies have canceled incentive payments for directors, replacing them with salaries without any tricks. This example is worthy of imitation.
2. The discrepancy between the interests of analysts and investors. According to Fortune magazine, a Wall Street analyst costs his firm $ 1 million a year, and income from orders he brings in investment banking and from stock exchange transactions as a result of his activities are $ 500 million. If you believe these numbers, here there is a confrontation of interests. Analysts understood: the more orders they bring to their company, the greater their bonuses; consequently, they did not have much incentive and desire to make recommendations with due account of the interests of investors. Unfortunately, the measures taken to solve this problem have significantly reduced the labor remuneration of analysts: after all, their value to the company decreases if they are not allowed to bring orders to it. The result was a general decrease in the level of qualifications of analysts, as many of the best on Wall Street found other, more profitable areas of work.
3. Unreliability of GAAP criteria. The US Securities and Exchange Commission also had a hand in creating such an unfavorable situation. Previously, companies were allowed to disclose only one type of earnings per share, approved by its auditors, and no hypothetical profits, operating profits, or recurring profits, which are not counted on some costs. And then the US Securities and Exchange Commission allowed companies to publish not only financial statements based on generally accepted accounting principles (GAAP), but also a different set of indicators. In theory, these figures should reflect a more accurate picture of the state of affairs in the company than the corresponding GAAP indicators, which do not so much clarify the situation as they confuse. And the emphasis in the work of the auditor shifted from assisting the company in drawing up accurate financial reports to determining whether the company adhered to GAAP. Fortunately, these two goals are not mutually exclusive.