By Dr. Nagendra Rentala
First Enron, ImClone, then WorldCom, Xerox and now Merck – what is going on in Corporate America? With the WorldCom top brass invoking the fifth amendment following Enron’s (mis)lead and also filing for bankruptcy, there arise some serious, fundamental questions in an investment dominant economy. Are we on the verge of another explosive crash of the economic structure, have we reached a decisive fork in a critical onrush of events, from where the wrong turn this time means a definite point of no return?
Are these astonishing corporate disclosures merely a few hiccups in the vast financial organ of the free world? Is this just a process of readjustment and evolution of an otherwise robust economic system from which the corporate administration, investing public and regulating Government are learning a few precious lessons? The atmosphere in which these financial crises are bursting forth with so many critical events taking place in rapid succession – the Internet boom and bust followed by the recession, the September 11th attacks and the continuing war, the disgusting Church scandals and a magazine like Time running cover-page article on apocalypse – call for some serious, fundamental thinking. These are not isolated events – not in a world so well connected as it is today and together they can cause a calamitous domino effect unless they are clearly perceived and checked. Things unfortunately follow the path of entropy when left to themselves and do not evolve for the better without a deliberate, conscious human intervention and a process of rational, objective analysis.
Do these cover-ups call for more, or less governmental controls on corporate dealings? There is a widespread debate going on in the country – employees of Enron, WorldCom and the investors who lost heavily in the wake of these debacles are clamoring for corporate reforms, a euphemism for more controls. Even to utter the word laissez faire is to invite intense public wrath under these circumstances. Has something seriously gone wrong with capitalism and free enterprise? Is there a simplistic explanation for all this and hence an evolutionary pointer in the right direction or is it too mind-boggling to fit into any one single coherent thought capsule?
There are two scenarios in which one can lose sight of the true perspective of an event – either by being too far removed in space or time from the event, in which case one does not really care much about what is going on. Alternatively, for those who are caught up in the thick of the events and completely overwhelmed, the tendency would be towards wishful thinking that somehow things will get better sometime, with the complementary cynicism that if they don’t, we all go down the drain and it does not matter anyway. Cynicism leads to sheer frustration sweeping everything under some ill-defined carpet, which in this case happens to be “Corporate Greed”.
America epitomizes enterprise. Taking risks, investing in potential, not harboring a mere arm-chair optimism but a firm conviction that the situation tomorrow can be made better than what it is today and the resolve, the hard work to make it happen are the hallmarks of a great nation built by entrepreneurs who flocked to this country from all parts of the world. Shake the roots of the optimism, the spirit of enterprise and what is left is an empty shell, a catastrophic failure of a glorious experiment. This laboratory is not only the free world’s but mankind’s greatest achievement. Explaining away the events with a fatalistic viewpoint like cyclic economic prosperity of a nation is doubly ridiculous in this context. This edifice is built on the firm foundation that economic prosperity is not a randomly driven entity like waves in an ocean but the realization of entrepreneurial principle of human intellect and America is unlike any other nation – it is a microcosm by itself. Any flaws have to be summarily removed from the free world – from their most fundamental level based on objective analysis before they can cause a ripple effect and topple the economic and as a consequence the social structure altogether. There is no way this glorious experiment can be allowed to fail.
In the aftermath of unprecedented economic debacles, the clockwork salvage operations have already begun – congressional hearings, ongoing debate for more controls, the usual rhetoric and assurances from the government in the backdrop of a public outcry for 401K protection and investment security against malfeasance in a turbulent market. Most significantly, the corporate world itself is coming out with a set of revised norms for their standard accounting practices – executives are slowly raising their hands with the echo “me too”. This is a timely and welcome self-regulatory mechanism spurred on by self-preservation that is infinitely more effective than any external, Governmental controls. A drastic rethink is required to benefit from this astonishing joining together of internal and external controls and to strike an optimum, objective balance between the two – more importantly to identify where that balance should eventually lead so that tiny flaws do not rear their ugly heads once again as mammoth beasts.
It is never easy to answer the question as to what is the right direction to take but in retrospect at least we know what directions should not be taken and learn precious lessons by using the principle of negation. Who can best provide us an insight into what went wrong with the corporate world? Not surprisingly, the people who traveled that path of wrong-doing. A drunk driver in a stolen van with a load of marijuana in the trunk on a Los Angeles highway, chased by half a dozen police cars and a hovering helicopter has a better shot at not being caught compared to the corporate executives who thought that somehow 2 and (-3) can be shown to add up to 4. Not withstanding the fact that the drunk driver in comparison is totally reckless, why did these executives resort to the kind of malfeasance that has landed them in an almost tragicomic, pitiable situation?
Astonishingly, how could these intelligent people and doyens of enterprise ever think that they could get away with it? No one believes even for one fleeting moment that when he founded WorldCom, Bernard Ebbers thought that his vision of enterprise would be that one day he would run away with a few billions of dollars of personal loot from the corporate coffers and then hide under the cover of the fifth amendment. When Scott Sullivan graduated from an accounting school, he would hardly have imagined that the high point of his career would soon turn out to be a balance sheet, which would have guaranteed him a flunk in the freshman years. Try this hypothesis – Kenneth Lay and company wanted to create history by discovering axioms of equality in elementary arithmetic that would confound the most brilliant number theorists.
At what point in their careers did these people start making a bend here and a bend there in their accounting practices and at what point did these bends metamorphose into grotesquely twisted works of modern art with numbers? What canvas did they paint on and which tools did they use? At what point and more importantly, why did their integrity break down? When did they recognize once again the truths from their elementary learning – no matter how much you twist and turn, you cannot escape the objective fact that 2 and 2 always add up to 4? At what point in the collapse of their edifices did they think of the “fifth amendment”? Equally significantly, why did they do it? What is the inflexion point in the chronological history of events, at which the norm of acceptable falsehood turned into downright malfeasance? When did their cooked books started looking more like crooked books? When did they first realize that their petty actions are reaching the alarming proportions of grand larceny? Why? Why were these actions triggered by intelligent minds of responsible individuals? What would these people have done differently if only they could go back in time? Was it peer pressure? The pressure to win at all costs not knowing what victory means in the long run? Was it shortsightedness or the cynical perversion that others are doing these things and getting away with it and why not us?
To get the right answers, we need to ask the right questions. No one seems to be asking them though. Just imagine what precious insights into the flaws in our economic structure could be gleaned from the revelations of executives who took the low road – the ones caught on the radar as well as those now volunteering. The entire nation could scream and shout for a corporate lynching but what has been done is done and we cannot turn the clock back nor alter the cause and effect relationship coupling the chain of events. No serious analyst would doubt even for one moment that these executives are sincerely regretting today for their actions that landed them personally and the economy collectively in a terrible mess. Untangling their reasons through routine hearings would take so much time, energy and public expense that at the end of the inquisition the findings would be utterly irrelevant. Alienating them in such a process would push the precious recipe for real remedy for this malady so deep into the inner recesses of these people that the initial diagnostic symptoms of the disease would be lost forever.
Don’t give them the cage in a congressional hearing room, don’t even think of a place for them behind the bars – give them the pedestal in a conference hall instead and listen to them with ears pricked and capture every nuance of their testimony with eyes agog. Don’t ask them to explain their books – implore them or even beg them if necessary to articulate in their own words the principle behind their actions and what corrupted that along the time line. Provide them with every conceivable kind of unconditional legal, social and economic immunity and request in return for one single favor – at least a glimmer of an insight into this principle. Offer them the highest-ranking positions in the SEC and give them this one chance to redeem themselves and the society at large because that is our only hope.
Of course none of this is ever going to happen. Not because it is too revolutionary, but because we are afraid of what they are going to say – an indictment of no one in particular and everyone in general. An indictment of how, in this specific context, non-objective accounting norms and by implication their non-objective cousins of legal enforcement have found their way into our administrative structures despite the best, bona fide intentions of all concerned. Man discovered language to articulate and exchange his ideas with others as precisely as possible. A grotesque mutation of this idea that has evolved in a diametrically opposite direction of obfuscation instead of clarification is legalese. The structures around which such a mutation has thrived are the non-objective laws. Mathematics was invented to facilitate quantification, i.e., language stretched to the very asymptotic limit of precision. Accounting practitioners found a way to confound even this by hanging their numbers in myriad niches (provided by non-objective government regulations), which are neither positive nor negative and assume no sign in-between.
Ever tried to dust a cupboard with a host of bends, corners, twists and turns, nooks and crannies and numerous tiny appendages? There lies a fertile ground, a maze of opportunities for a wily spider to spin its web, an accounting wizard to park his numbers with suspended signs and a legal genius to obscure his client’s true intentions even unto himself. Walk into any legal and / or accounting practitioner’s lair and you will find rows of neatly stacked bookcases with thick bound volumes of their trade. The bigger the collection, the greater the firm’s reputation: reflects erudition – read smacks of obfuscation. In any organization, the legal and accounting departments do not add any value per se to the company’s products. And yet, astonishingly these are the highest paid individuals / consulting firms. Ever wondered why? If a company’s books are clean, why does it need accountants with millions of dollars of pay packets for consultation and if a firm is righteous, why does it need lawyers with equally huge retainers?
Surprisingly, these questions are not even being debated seriously in a corporate environment where the focus in recent times has shifted from mere value addition to great and innovative efficiency improvement concepts such as Kaizen, Six Sigma, Re-engineering towards adaptive business models and others. The fundamental issues related to the role of accounting and legal practices in the business world do not seem to have been addressed at all despite significant advances in other spheres of business activity. Is this a reflection of the implicit acceptance of one serious structural flaw – an element of the form appeasing itself rather than adding value to the substance it carries?
Companies need to hire (dis)reputable firms like Anderson to unearth the superficially exceptional in a maze of controls and regulations. A firm that specializes in taxation laws airs a commercial that proclaims with unabashed cynicism (I mean this as a compliment) – “Only God can understand taxation laws better than we do”. This is not an indictment of lawyers and accountants – far from it, the cynicism in that ad is pointed at you and me and everyone else. This is the kind of canvas, the brush tools, colors, shades and myriad hues provided to a thinking mind. Any point in blaming the artist? What usually starts as an earnest attempt to create a masterpiece occasionally mutates into a grotesque and abrupt failure like Enron or WorldCom, shaped synchronously by the non-objective norms or (f)laws in the ambient structures.
A clean, straight, airy and objective structure in which every element has a specific and non-redundant purpose, which in turn is subsumed by the single polarizing principle of the structure, does not permit ghastly, self-contradictory mutations like Enron or WorldCom. That unique principle is deterministic, convergent evolution within the dictums of which every aspect of social, economical, legal, administrative and other structures has to be understood, monitored and guided. Deterministic because the foundation of such evolution or change is rational human thought process and not chance occurrences in nature, and convergent because it is a principle that integrates seemingly disparate components into a harmonious whole. Applying this principle is the only way to untangle the puzzling contradictions within the trinity formed by the Public, the Government and the Corporations and identify the course of action open to each party.
The Course of Action
As an entity with the lowest pain threshold, the investing public should initiate measures of reform. Currently, the knee-jerk reaction on the part of the public is to call for transparency in accounting practices. Ever heard of the art of impenetrable candor or that too many facts can be mind boggling and are as useful as too few of them? With the kind of divergent structures to which the current accounting and legal practices are attached (recall the taxation law firm’s ad campaign), is it physically possible for any single individual to fully grasp the economic health of a corporation at any given moment? The few wizards who might be able are hired for not disclosing the verdicts publicly, particularly the unfavorable ones.
Clamoring for more controls, monitors and reprisals can only appease the immediate need for palliating the symptoms but will not eradicate the deep-rooted malady. These measures will only exacerbate the disease in the long run. The only kind of corporate reform the investing public can bring about and the only type of discipline they can impose on executive boards is by demanding a value-add justification for the accounting and legal departments. Like the impressionist painters, the multi-million dollar paycheck accountants who give the impression of health to the corporation and do very little to fortify the same will not find their current niche in an optimal economic structure based on objective norms.
President Bush recently made the axiomatic observation that the element of risk cannot be eliminated altogether from investment. This remark emphasizes one fundamental aspect of governance – observatory and mediatory roles take precedence over regulatory ones. The government should do what the wise Chinese sage Confucius said long ago – to rule as unobtrusively as possible. Shift the focus towards laissez faire in all aspects of governance, asymptotically evolving towards self-redundancy. Any other course of action is beset with contradictions. A case in point is the recent idea of trying to arm the SEC with greater powers denying any more funds at the same time. We all have to accept at some point that one cannot have the cake and eat it too. Another idea is that of demanding corporate executives vouch for the sanctity of their accounting statements. With the physical impossibility of any one individual being able to comprehend all the subtleties and nuances of every entry in the account books, tangled within divergent laws and regulations, there will definitely be the escape clause “to the best of my knowledge and belief”, that makes the entire exercise futile. In a highly advanced democracy like the US, political parties and their erudite leaders can afford to take objective decisions and make an indelible, positive personal mark on history rather than be driven by petty, short-term political pain / gain equations.
While the investing public has a reactive or secondary role to play and the government has a regulatory or tertiary role, the onus of assuming the proactive or Prime Mover’s mantle rests with the entrepreneurs and the visionaries in a tripartite economic structure. For the corporate executives whose vision of enterprise is based on a firm foundation of integrity for its own sake (not because it is the best policy), the current market turbulence is a precious opportunity to take control and steer its evolution in the correct direction. There is no escaping the ruthless consequences of axiomatic facts – “A is A”, “2 and 2 make a 4”, “one can make money only by adding value” and “bad money throws out good money”.
When the principle of deterministic, convergent evolution is projected into the realm of economic activity, all the current clamor for transparency and accountability is reduced to one fundamental, primary assertion, viz., “compensation commensurate with value addition”. By emphatically propagating this common sense dictum at every available opportunity – through actions, advertising, discussion forums and the like, executive boards can ensure that economic structures evolve asymptotically towards perfect market equilibrium – public trust, laissez faire and self-regulation.
Man, the thinking organism has taken over the reins of evolutionary direction from Nature and gave it an entirely new impetus – from the stochastic or chance mutations to deterministic or goal oriented improvement. Man still continues to imbibe one more aspect of natural evolution though and that is divergence. The evolutionary structures or forms such as social, economic and administrative, constructed by Man around himself as the substance have reached a critical mass. A decisive fork has been reached in the evolutionary history of mankind – one path diverging towards runaway explosion eventually ending up in complete chaos and the other converging towards absolute harmony. All the critical and rapidly happening events of the present day (cited at the beginning of this article), of which the economic indicators are the most significant, are pointing to this cusp. A process of thought, i.e., logical, objective analysis is the only tool available to Man to identify it as such and prepare for a course of action. Man has by and large striven to remove the stochastic element from evolution. Now is the time to control the divergence.
Nagendra Rentala (b. 09/23/1953) holds a Doctorate degree in Geophysics. A member of the New York Academy of Sciences and recipient of the Young Scientist Award of the Indian National Science Academy (1982), he worked for over 20 years teaching and researching in the field of Computational Geophysics in Osmania University, Hyderabad, India. He was a Visiting Scientist at the following institutions – Dept. of Geological Sciences, University of Birmingham, Birmingham, UK – 1986/87; Dept. of Earth Sciences, Christian Albrechts University, Kiel, Germany – 1992/93; Dept. of Disaster Research, GeoForschungsZentrum, Potsdam, Germany – 1996/97. A keen Chess enthusiast, he visited Switzerland (playing in the Chess Olympiad in Lucerne – 1982 as a member of the Indian team), Russia, Spain, Germany, Slovakia and Hong Kong in various capacities like player, coach and organizer. Fascinated in 1990 by reading the works of Ayn Rand, he started practicing Objectivism. He has to his credit numerous radio and TV presentations on popular science topics, articles of topical interest and articles in Computer Science / Geophysics journals. An Indian by nationality, for the past 3+ years he is working in the US as a Senior Programmer / Analyst specializing in the development of Lotus Notes / Domino based Internet business applications. He currently lives alone in Bellflower, CA, USA. He may be contacted directly at firstname.lastname@example.org but the-vu encourages feedback through the feedback page so that readers can share in the debate.