Rebuilding Trust in Corporate America

A recent Conference Board public opinion survey ranked corporate CEOs only one notch above car dealers, who I assume came in somewhere above bank robbers and child molesters.

Not since the days of J.R. Ewing – that greedy, conniving oil tycoon from the hit television series "Dallas" – have America's business leaders been held in such low esteem. Enron – another villain from the state of Texas – gets considerable credit for that, but certainly not all.

In retrospect, the adventures of the Ewing clan seem like great fantasy. In 2002, however, we didn't need Hollywood to bring us shady characters like J.R. because CNN, CNBC and Fox News did the job quite nicely.

A wave of corporate accounting scandals and other misdeeds – not to mention California's continuing power problems and the debacle in the Catholic Church – have cast a dark shadow over America's institutions.

Public confidence has taken a dramatic nosedive. The public's loss of trust is a real wakeup call for business leaders. A skeptical, cynical America creates serious problems for the business community.

Despite these recent setbacks, I remain an unrepentant capitalist. In my opinion, the system is not broken. But it could use a little mid-course correction, adding more transparency and accountability by corporate management.

A lot of people have lost large sums of money in the market. That's partly the fault of corporate management. But investors aren't blameless.

In my view, the dot-coms never made economic sense. They never had earnings, only projected revenues.

Security analysts were making absurd calculations. They were projecting revenues 5-to-10 years out for a company, computing earnings on estimated revenues, discounting those earnings back to get a net present value for the projected earnings, and then applying a multiple to the earnings to derive a share price.

What a preposterous practice!

Some of the people running corporations did the same thing, but when their pie-in-the-sky assumptions didn't pan out, they played accounting shell-games and tried to hide their mistakes.

As a result, many investors were defrauded. The corporate bad actors who did this need 15 to 20 years of free room and board – in a federal rest home. I'm told the food there doesn't rate even half a star, and the wine list is lousy.

Free markets need trust in order to work properly. Investors need to have confidence in the information on which they base their decisions.

Consumers want to trust the quality of the goods and services they buy. Corporations need strong bonds with the communities they serve. Corporate wrongdoing threatens those bonds.

Generally speaking, the damage has been widespread. It has transcended specific companies or industries.

Restoring credibility is going to take time, patience and hard work on many fronts by business leaders and the rank and file as well.

A Leadership Failure

The way I look at it, companies fail for one of three reasons: either their business plan is flawed, the execution is flawed, or their leadership is flawed.

Most of the dot-com failures of the past few years and the problems in the energy industry can be blamed on flawed business models or flawed execution. Unfortunately, the current crisis is more about flawed leadership.

Leaders at the top have to set the tone for the whole organization. Values and expectations have to be explicit.

Most corporations are run by women and men who are honest, hardworking and have integrity. But, as in any group, there are a few bad apples. I'll use my company to illustrate.

Back in 1988, Dominion had a joint venture with Enron that lasted a few years. We terminated the relationship because we thought our corporate cultures were too different.

Enron chided us for being too staid and conservative. I recall them using the word "gummy." On the other hand, we thought they wore their six-guns strapped around their knees.

Their corporate philosophy was different from ours, too. For example, they rewarded people for signing contracts or conceiving projects. It didn't make any difference if it was a terrible contract or a dumb project.

Their people got big bonuses up front even before it could be determined if the contract or project was profitable. That's an adverse incentive – an incentive to enter into contracts or develop projects just to collect large bonuses.

I don't think running a successful corporation is all that complicated. The key is not to do anything big and dumb. Enron did many big and dumb things.

They thought they had cornered the market on intelligence. What hubris!

Because they were smarter than mere mortals, they didn't have to play by the rules. That attitude got them into projects they knew nothing about in places they did not understand.

I recall, for instance, a big, dumb electric project in India; the acquisition of a major water company in the U.K., despite a lack of operational expertise; similar projects in China, Indonesia and Latin America; and of course, efforts to game the electric market in California.

As each of these projects started losing money, corporate management got creative in hiding the losses. They created off-balance sheet entities to mask losses and the debt they incurred.

They booked fictional revenues and earnings, and moved assets and debt among their various subsidiaries in an attempt to cover up their big, dumb decisions.

Were they immoral? Yes. Were they unethical? Yes. Were they illegal? Yes!

In my opinion, Messrs. Lay, Skilling, Fastow and others should also be given free room and board at the federal rest home I mentioned earlier.

Looking at Enron reminds one of what William Makepeace Thackeray said he wanted to do when writing Vanity Fair: "What I want to make is a set of people living without God in the world, greedy, pompous men, perfectly self-satisfied for the most part, and at ease with their superior value."

A few bad characters ruin it for all of Corporate America.

The Key Questions

Any corporate chieftain who wants to avoid the fate of Enron's Ken Lay or WorldCom's Bernie Ebbers has to be able to answer a variety of important questions:

  • Are we disclosing all the information shareholders need to know?
  • Is our outside auditor helping us do it right?
  • Do our board members have all the information they need to ask the right questions?
  • Do we encourage them to question our actions?
  • What's our typical response to a crisis?
  • Do we deal with it openly and pay the price? Or do we cover it up and try to hide it?
  • Am I, as CEO, setting a proper, ethical and moral example for the people who work in the corporation?
  • Do I encourage people to be open with me about any concerns they may have about the way the corporation conducts business?
  • Do I take action immediately to correct or alleviate their concerns?

There are more than 11,000 publicly traded companies in the U.S. The vast majority of their CEOs understand and act on the premise that corporate responsibility pays.

Unfortunately, there are also some who prefer to believe that corporate irresponsibility pays.

As President Bush said in a speech to Wall Street last summer, "the American system of enterprise has not failed us. Some dishonest individuals have failed our system."

The perks of leadership – including money, power and influence – have to be balanced with a clear sense of accountability to shareholders, employees, customers and the public.

Otherwise, greed and ego can wreak incredible havoc, as we've seen.


Some legislative and regulatory solutions make sense. One example is the improvements to the financial disclosure system contained in the accounting reform bill passed by Congress last summer.

Clearly, investors need to be protected from fraud, error and undue risk. But the pendulum can swing too far.

Overzealous regulation is counterproductive. It stifles economic growth, threatens innovation and hinders flexible decision-making. As I said earlier, I'm a true believer in free-market capitalism.

Over the long haul, capital markets do a much better job of disciplining corporations than the legal or regulatory system ever could.

As "Exhibit A," I point to the way the global marketplace has responded to last year's accounting scandals. Whenever a company released suspect numbers – names like Tyco, Bristol-Myers Squibb, Enron and Dynegy come to mind – their stocks and bonds got crushed.

And many more CEOs have been axed by boards of directors concerned about collapsing share prices than through new laws or governmental investigations.

The point is, markets punish wrongdoing by hammering stocks and throwing managements out the door. And management today lives and dies with stock prices.

Free Enterprise Is Tops

No economic model is perfect. But I'll carry the torch for America's free enterprise system any day. When business is at its best, we fuel economic growth, improve the standard of living and meet consumer needs and expectations.

We invent, innovate, problem-solve and pioneer. We also give back to the community through the arts, education, and health and human services.

These and other positive virtues of American business cannot be overlooked. We can – and will – weather the current crisis of confidence and restore the public trust.

But it won't happen by imposing controls and passing more laws and regulations. Those are short-term fixes that bandage the wound without curing the disease.

In the end, there's no substitute for personal integrity. Corporations and their leaders must be good, and they must do good.

Organizations must earn the trust of their stakeholders, day in and day out. America's business leaders must be consistent in their words and in their deeds.

They must recommit – and communicate – their organization's dedication to ethical performance.

In the near term, homeland security and the war on terrorism may get top billing over economic growth and wealth creation. But capitalism faces a clear and present danger.

It's nursing a black eye. Its credibility is on the line. It's going to take repeated demonstrations of corporate character and institutional integrity to get back on track.

In the words of Thomas Jefferson, we must "lay down true principles and adhere to them inflexibly."

Thos. E. Capps is chairman, president and CEO of Dominion, headquartered in Richmond, Virginia. Since joining the company in 1984, he has led the transformation of Dominion from a regulated electric utility into one of the nation's largest diversified energy companies. He holds undergraduate and law degrees from the University of North Carolina.