Group's Report Highlights Bad Corporate Habits of Top Companies

Kansas City Star • April 12, 2002

By Diane Stafford

Plenty of U.S. companies engage in legal behavior that is more like Enron than, well, Enron, according to research by United for a Fair Economy.

The Boston-based advocacy group, which exists to focus public attention on economic inequality, this week published "The Ten Habits of Highly Defective Corporations," and bestowed "Enny" awards in each category.

The overall winner -- or loser, as perspective has it -- was General Electric, which tallied more bad-behavior points than even Enron in the study of 392 large public companies.

The report noted that GE typically ranks at the top on "most admired company" polls undertaken among top executives, corporate directors and stock analysts. Enron ranked second behind GE, according to Fair Economy's overall tally of bad corporate habits. The report also gave individual Ennys to 10 other companies.

Fair Economy co-director Scott Klinger, an author of the report, focused criticism on "the cold betrayal of employees by rapacious executives" who get rich while laying off workers and on the "multimillion-dollar stock option scam" undertaken at taxpayer expense.

The report explained:

"In the income statement shown to shareholders, stock options are invisible. Unlike cash salaries and bonuses, stock options are not counted as an expense. But when executives cash in their stock options, reaping their own fortunes, the set of corporate books shown to Uncle Sam reflects a full deduction of the engorged value of the option, not its much smaller worth at the time it was granted. The stock options represent a power tool for keeping corporate earnings artificially high and taxes legally (but artificially) low."

The complete report may be downloaded at www.faireconomy.org.

Here is a summary of the 10 "highly destructive habits," as defined in the Fair Economy report.

• Piling retirement eggs in a broken basket, also known as rewarding executives while employees shoulder 401(k) plan risks.

When employee retirement funds are heavily tied to company stock, employees may "take the fall when the stock tanks --while executives diversify their holdings and cash out before bad news goes public."

According to a study published last year in DC Plan Investing, 27 large companies had greater shares of company stock in their employees' 401(k) plans than did Enron. Eighty-five percent of 401(k) plans place restrictions on the sale of company stock, the study said.

Winner: Coca-Cola.

• Providing excessive executive compensation and incentives that encourage overstated profits for personal gain, labeled the "Kenny Enny" after former Enron executive Kenneth Lay.

  Salaries, bonuses, exercised stock options, life insurance and other executive perks fill the CEO ranks with multimillionaires, despite corporate profit squeezes and plummeting stock prices. That creates a rogues' gallery of CEOs who "gave shareholders the least for their pay."

  Winner: Citigroup.

• Laying off employees to cut costs while increasing executive pay for implementing this cost-cutting strategy, named the Chainsaw Al Dunlap award for the executive who in the 1990s laid off thousands of workers at Scott Paper and Sunbeam.

  This widely used "payoff for layoffs" strategy gave many remaining Enron executives six- and seven-figure bonuses to stay on board, while laid-off workers got $4,500 in severance pay. Enron last month petitioned the bankruptcy court to allow it to pay $130 million in retention bonuses to 1,700 managers _ about 17 times the severance given each laid-off worker.

  Winner: Lucent Technologies.

• Stacking the board with corporate insiders, family and friends.

  The Council of Institutional Investors, a pension fund coalition, thinks corporate boards should be composed of at least two-thirds independent directors. Fair Economy said a board that had a simple majority of outside directors would meet its fairness standards.

  Winner: EMC.

• Paying board members excessively, especially with company stock, which might make them less likely to blow the whistle on business practices that might cause the stock price to fall.

  Each of Enron's outside directors received $353,140 in compensation in 2000, with about 80 percent of the compensation in stock awards, the report noted.

  Winner: AOL Time Warner.

• Giving the company's independent auditor nonaudit consulting work, an award given for "outstanding performance in shredding auditor integrity."

  Enron's collapse and the downfall of Arthur Andersen's accounting practice highlighted the problem. In February, the Walt Disney Co. became the first Fortune 500 company to forbid its independent auditor to engage in nonaudit consulting work at the company.

  Winner: Raytheon.

• Giving campaign contributions to gain access to decision-makers, an Enny awarded for "casting politicians as supporting actors."

  Enron spread political contributions widely. Still, it was the biggest corporate sponsor of George W. Bush's Texas gubernatorial campaigns and a major backer of his presidential run.

  Winner: Citigroup and MBNA.

• Heavily lobbying lawmakers and regulators, with an eye to reducing regulatory oversight while gaining tax breaks, subsidies and lucrative contracts.

  Enron disclosed after filing for bankruptcy that in the first six months of 2000 it spent $2.5 million on lobbying, not the $825,000 it previously reported.

  Winner: Boeing.

• Getting government financial backing for overseas investments, thus shifting costs and risks to taxpayers.

  The Institute for Policy Studies found that since 1992, at least 21 government agencies approved $7.2 billion in public financing for 38 Enron-sponsored projects in 29 countries.

  Winner: Halliburton.

• Avoiding taxes, wherein the Leona Helmsley "only the little people pay taxes" Enny is given to corporations that use deductions, credits and "clever accounting to pay little or no tax" or get tax rebates.

  In the five years ending in 2000, Enron reported $1.8 billion in profits. Instead of paying $625 million in corporate income taxes at the federal rate of 35 percent, Enron received $381 million in tax rebate checks. The Institute on Taxation and Economic Policy said the average tax rate for 250 of the nation's largest companies was 20.1 percent for the 1996-98 tax years. Of the 250 companies, 41 paid no federal taxes in at least one of the three years.

  Winner: WorldCom
  

Copyright 2002, Kansas City Star.