Corporate integrity suffering black eye

By Adam Geller
Associated Press

NEW YORK — Months of corporate scandals might have raised the threshold for what Americans consider alarming, but charges of executive and company missteps this past week were nonetheless jarring.

First, Tyco CEO Dennis Kozlowski resigned and was indicted on charges of evading sales taxes. His company's stock — already pummeled by allegations of financial shenanigans — plunged anew.

Knight Trading, biggest market maker in Nasdaq stocks, said it was being investigated by securities regulators because of allegations of improper trading behavior during the tech boom.

Adelphia Communications' stock was kicked off the Nasdaq because of the company's failure to file required financial statements.

And that was just by Tuesday.

Calls continued during the week for reform to help restore the confidence of investors, consumers and workers in U.S. companies. But, at least based on the stock market, the public hardly seemed reassured by that sentiment, and with fresh headlines renewing doubts about corporate integrity, that's not too hard to understand.

"In my lifetime, American business has never been under such scrutiny. To be blunt, much of it is deserved," said Henry Paulson Jr., CEO of The Goldman Sachs Group. His remarks came during a speech in Washington, in which he outlined recommendations to help rebuild credibility.

"Our economy is not full of Enrons," Paulson said. "But the Enron debacle and subsequent revelations have revealed major shortcomings in the way some

U.S. companies and those charged with their oversight have gone about their business. And it has, without doubt, eroded public trust."

For observers who thought, perhaps, the drumbeat of corporate scandal might be quieting, the week's developments proved such notions were misconceived. Instead, the new wave of headlines left some observers predicting such revelations could continue for months.

The concerns, though, are how much long-term impact such scandals will have on marketplace psychology, and how broad that impact will be.

On the latter count, observers say there is almost certainly a large gulf between the impact the headlines have on investors with a direct stake in the stock market and on the broader audience of consumers, who are probably only vaguely aware of the scandals.

Investors are clearly troubled by developments. When UBS AG and the Gallup Organization surveyed investors in May, the issue of suspect corporate accounting was the leading cause of concern, with 84 percent saying it was negatively impacting the markets.

"If you look at the accounting issues raised by Enron, the corporate governance issues raised by Tyco, it's really caused a big erosion in confidence on the part of investors," said Mary Farrell, senior investment strategist at UBS Paine Webber.

Farrell said those concerns, compounded by worries about geopolitical crises in the Middle East and South Asia, won't soon ebb. It seems reasonable to think the scrutiny being applied to companies will turn up at least a few more scandals, continuing to depress investor confidence in coming months, Farrell said.

But the damage to confidence is almost certainly not permanent, and investors will shake their fear once they see a couple of good quarters of earnings by companies, she said.

Consumers are more difficult to figure. Their attitudes and behaviors are shaped by many factors, and while many are paying at least some attention to the corporate crises, it's doubtful the crises are weighing on them.

"I would guess that they're paying more attention to these stories than they are to the events in Korea and Japan for the World Cup, but I don't think it's of much more interest," said Ken Goldstein, an economist with The Conference Board, a New York research group that tracks consumer confidence.

The most recent reading on confidence shows consumers showing the kind of optimism usually seen only during the middle of a boom, although the country's economy has only recently emerged from a recession, he said.

That could signal that, while consumers are aware of scandals — both of the corporate variety and the brewing storm in Washington over bureaucratic dysfunction preceding the Sept. 11 terrorist attacks — it doesn't shake their underlying confidence, he said.

"Did we really believe back in the '80s, before we had any of this stuff, that nobody ever lied to us?" Goldstein said. "I don't know that there's a big impact, per se."

In the end, whether for consumers or investors, the impact on confidence might not be longstanding.

"Just as investors don't want to focus on anything bad when stocks are going up all the time, now they don't want to focus on anything good," Farrell said. "I don't consider that a permanent condition."