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Interview with Lawrence Mitchell - 2002-07-24


Concerns about WorldCom and other corporate accounting scandals continue to wreak havoc in world markets. The stock markets continue their volatile slide and many investors wonder if they’ll have any money left. We spoke with Lawrence Mitchell, a professor of law at George Washington University, and author of the book "Corporate Irresponsibility". He spoke with “NewsLine” host David Borgida about the WorldCom bankruptcy, the current business climate focusing on short-term profits, and the need for better business ethics.

MR. BORGIDA:
Joining us to discuss all of this, George Washington University Law Professor Lawrence Mitchell. Professor Mitchell is the author of a book called "Corporate Irresponsibility," the emphasis I believe on irresponsibility. Professor, the gist of your book and your views, is it irresponsibility that is driving so many things in this corporate abuse context?

PROF. MITCHELL:
Well, yes, it is, except that the most important thing to emphasize is the source of the irresponsibility and why it's happening now. Because many people ask, we've had this great bubble market, we've had a healthy stock market, for the most part, since the Great Depression, why all this now?

And the answer to that, it seems to me, is that over the past couple of decades, for a variety of sometimes related and sometimes unrelated reasons, what we have seen develop among the American investment community, as well as among corporate executives -- and that is not unrelated -- is an extraordinary emphasis on short-term stock price maximization, a need to get the earnings up every single quarter, to get the stock price up every single quarter. And you cannot do that the old-fashioned way. You cannot do it just by earning money. No business can do that over a sustained period of time.

MR. BORGIDA:
Professor, in the business schools around the world, is the pursuit of the dollar and the yen and whatever currency we're talking about the driving force in the business world today?

PROF. MITCHELL:
Well, yes, actually. I think maybe business ethics will have a comeback, but yes. In fact, my colleagues in the business schools tell me, and people I talk to, business students and people coming out of business school, tell me that they almost don’t talk about ethics at all; they all talk about the bottom line. And that is something that has become increasingly true over the years.

MR. BORGIDA:
Now, let's take the other side of that view, which is to say that businessmen, indeed the President of the United States and others, have said this is really just a few bad apples in the cart and it really does not represent all of the business world. What is your view about that?

PROF. MITCHELL:
I think that's true when you're talking about things like the kind of outright fraud and crime that we saw in the case of WorldCom, in the case of Global Crossing apparently, in the case of Enron apparently, Tyco -- the list gets a little long. But I think that is right. I think, for the most part, it's true that most business people, just like you and me, go to work every day and try to do their jobs the best they can. They're honest, decent people. So, in that narrow respect of criminal activity or borderline criminal activity, he is right about that.

The broader problem, though, is this short-term profit push is not just about crime, it's about stretching the accounting rules within legal limits but somehow distorting them. Managed earnings -- nobody ever talked about managing earnings 20 years ago. This is a new concept. You find it, too, for example, in promiscuous layoffs. One of the best ways to get your quarterly numbers up is to lay off a bunch of people.

The great Jack Welch partly made his name firing 125,000 workers -- 125,000 workers -- over the course of his tenure at G.E. That is an enormous amount of people. And it's incredibly dislocating. You wind up with environmental short-cutting. You wind up sometimes with product short?cutting. We saw that in the auto industry, both with Ford and Firestone. We saw it in a couple of other cases where a few dollars here or there spent would have made a slight difference in the bottom line but it would have saved lives.

MR. BORGIDA:
Let's talk for a moment or so -- we have about a minute left in the segment -- about the news, which is to say, Wednesday, the markets are surging back. How do you explain it? I know the conference committee on Capitol Hill has worked out some new legislation that would impose new penalties on corporate fraud. Is that part of the psychology that led to the surge today?

PROF. MITCHELL:
I think so. I'm tempted to say it's because the President didn't talk today, at least about this.

MR. BORGIDA:
I'm sure he would have another view on that.

PROF. MITCHELL:
I'm sure he would, and we could disagree. I think this was predictable in some respects. You've seen over the last week people talking about the market trying to find its bottom. At this point, P/E ratios are below historical averages, and there is a point at which I think, even with the uncertainty, Wall Street says, “Enough, it's time to start buying again.” All I can say is, wait till tomorrow.

MR. BORGIDA:
All right, we'll see. Professor Lawrence Mitchell, of George Washington University Law School, thanks for your views. Professor Mitchell, thanks so much for being with us.

PROF. MITCHELL:
Thank you for having me.

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