When Icarus and his father Deadalus were in prison, Deadalus devised a means of escape, fashioning wings of feathers and wax. He cautioned Icarus not to fly too low (the damp of the sea would rot the feathers) or too high (the heat of the sun would melt the wax), but to keep to a middle course. Icarus, overcome by delight and defiance, flew high toward the sun. His wings melted and he fell into the sea and drowned.
As regulators, governments, investors, shareholders, creditors and the general public sift through the remains of the corporations in the US and Australia which have crashed and burnt in their Icarus-like pursuit of success, a number of common themes emerge. The first thing that becomes apparent is that large corporations do not necessarily fail because of market or economic circumstances. This is certainly a factor in the demise of smaller companies but large corporations, if well run, are remarkably resilient even in harsh economic times. CEOs and bad management are a far more lethal combination leading to failure than economic or market factors. What we are witnessing is the fraud, folly and chicanery of the latest crop of bold riders to devastate the corporate landscape. And they appear every time we go through a boom period because no one remembers history. In his book Two Centuries of Panic journalist and author Trevor Sykes penned the first detailed history of the corporate collapses in Australia over the past 200 years. Villains and corporate crooks have been with us since the first company in Australia was formed.
He was the first to put the pieces of past corporate failures together. One of the reasons is that the next boom always erodes the corporate history of the failures of the previous boom. As with disasters of any kind, the tendency is to deal with it as quickly as possible and forget it. The US Government rushed its new laws on corporate responsibility to reassure a sceptical public that the corporate theft of billions of dollars was just an anomaly and that these laws would ensure it wouldn't happen again. Corporate history does not support that view. Greed and testosterone cannot be legislated out of existence. And as long as the cult of the CEO as the chief rainmaker continues to have its followers, there will be more companies brought to ruin. According to an US executive remuneration survey of 204 executives at the 25 biggest US companies to hit the wall conducted by the London Financial Times, showed that 52 executives grossed more than $US18 million, 31 grossed more than $US46 million, 16 more than $US92 million and eight executives more than $US184 million.
William Lerach whose San Diego law firm Milberg Weiss Bershad Hynes & Lerach is suing companies such as Enron, WorldCom, Global Crossing, AT&T, Lucent and Qwest on behalf of shareholders put the issue in perspective. "Penis envy," he said. "I don't want to use the term, but that's almost what it is. It's like, 'Gee, when the CEO of that company over there is making $20 million, I ought to make $24 million.' Then the other guy says, 'Well, if he makes $24 million, then I've got to make $30 million." However, history does provide warning signs of impending doom. So what should we be watching out for when our corporate history starts to fade and we are all making money in the next boom? Prof Geoffrey Miller from the New York law school provided some useful hints in his Ross Parsons Lecture in Sydney last month. The flags to watch out for are:
1. Massive growth
2. Spectacular increase in share price
3. A complex corporate structure
4. Sudden changes in the nature of the business
5. Accounting problems
6. Political connections
7. Domination by a single individual or group
8. Public relations buzz (ie the more a CEO or company is mentioned in the AFR the more afraid you should become.)
9. Compensation of insiders
10. Lavish expenditures
11. Underlying economic conditions
12. Easy access to capital
13. Boom conditions
14. Deregulation (Enron existed because the US energy market was deregulated)
15. Corporate governance (contrary to perceptions FAI adhered to all excepted corporate governance norms as did Enron and WorldCom)
Miller may have put up some flags but as he says: "Central banks, even armed with legal independence and the best economic theories, data and models have not been able to suppress asset booms".
Irrational exuberance has been used by Alan Greenspan to describe the phenomenon of taking companies into danger zones. Icarus in his efforts to fly high with his wings of wax and feathers would have understood what that meant.
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The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.