Hawai'i feeling effects of WorldCom fraud suit

By Frank Cho
Advertiser Staff Writer

The announcement yesterday that WorldCom, the nation's No. 2 long-distance company, had disguised nearly $4 billion in expenses from investors came as just the latest in a string of such revelations.

From the massive bankruptcy filings of energy giant Enron and cable provider Adelphia to the obstruction-of-justice conviction of accounting behemoth Arthur Andersen, allegations of improper behavior by executives have shaken investors' trust in the nation's business leadership and prompted criticism that a new era of greed has poisoned corporate America.

"It has put a taint on every public company," said Robert Clarke, chairman and chief executive officer of Hawaiian Electric Industries, one of the state's largest publicly held companies. "We are competing for the same investor dollars as everyone else, so investor confidence in our company is important."

That confidence appears to be taking a beating from the size and number of recent corporate scandals. A CNN/USA Today/Gallup poll yesterday found that about 20 percent of the public has a lot of confidence in big business, down from 28 percent a year ago.

And while Hawai'i executives say the types of businesses in the Islands make similar scandals here unlikely, they fear high-profile flameouts could make it more difficult to attract investors, borrow money for capital improvement projects and do business.

"Every investor is going to have to ask, can I believe these financial reports?" said David McClain, dean of the University of Hawai'i's College of Business Administration. "So for some time to come, investors are going to attach an extra risk premium."

Several Hawai'i financial experts said yesterday that local investors appeared to be absorbing the latest news with few qualms, but they have grown more wary.

"Clients have not had to change their strategies, but it has affected their attitudes," said Jerry Schwartz, a principal with Arista Investment Advisors Ltd. of Honolulu. "It undermines our confidence, both in the ethics and quality of corporate leadership and in the reliability of the information we base our investment decisions on."

Business experts and chief executives say Hawai'i companies are less likely to fall victim to reporting scandals because they have less complicated structures, generally, than those implicated in wrongdoing. Local companies also have typically avoided highly leveraged financing and have not seen the meteoric growth common to one-time bellwethers of the new economy such as WorldCom and Enron.

"There are relatively few public companies in Hawai'i, and they have not been the kind of companies with helter-skelter growth that WorldCom had," said Mike O'Neill, chairman and chief executive officer of Bank of Hawaii.

The state's largest publicly traded companies are in real estate, banking and utilities — heavily regulated sectors that emphasize slow, predictable, long-term growth, said Rod Romig, dean of Hawaii Pacific University's School of Business Administration.

"Corporate boards everywhere now are under suspicion, but ultimately this will prove to be very healthy for all stakeholders," said Romig, who said there has been no evidence of a crisis of confidence in Hawai'i.

"I think a factor that has not been considered is the responsibility of the shareholder. We have been very lax in reading the annual reports and financial statements. We need to assume responsibility of our investments."

David Heenan, a trustee with the Estate of James Campbell and a director of Bank of Hawaii, Maui Land and Pineapple Co. Inc. and Aloha Airlines, said yesterday that public cynicism may not be so easily assuaged. Skepticism about institutions across the nation — from government to business to religion — has been growing for years and will likely continue.

"I don't think this is confined to the business world — as the Catholic Church has found out," Heenan said. "I think anyone who is on a public board of directors is re-examining the whole meaning of stewardship. People who are put on a pedestal one day and who are presented to all of us as heroic figures, in a very short time can have it all come crashing down."

Local executives say Hawai'i companies will have to take responsibility.

"There is just a great deal of skepticism and lack of confidence. It's like waiting for the next shoe to drop," said Clarke. "I think every public company has to take a fresh look at its corporate governance and look at ways we can restore investor confidence."

Advertiser staff writer Susan Hooper contributed to this report.

Reach Frank Cho at 525-8088, or at fcho@honoluluadvertiser.com.