This isn’t the first time in history that the public’s confidence has been betrayed by corporate executives and business leaders and directors. One need only to open the pages of any American history text to read of the exploits of the late nineteenth-century railroad and industrial robber barons who took advantage of legal loopholes and the lack of regulatory oversight to confound investors and secure their own wealth. The Roaring Twenties ended in the stock market crash of 1929, which wreaked financial ruin on corporations and individuals alike and triggered the Great Depression of the 1930s.
In these historical instances when investor trust has been betrayed, legislators and regulators have intervened, for example, by passing laws to thwart the robber barons of the Gilded Age or by creating regulatory systems to ensure that corporations report their financial performance accurately and fairly. The Securities and Exchange Act of 1934 put into place such a system to protect investors from securities manipulation and fraud. Yet, as history has proven, any set of rules and regulations can be circumvented. The tax code, health care reimbursement, Generally Accepted Accounting Principles (GAAP), and air and water pollution regulations are routinely stretched. Lawmakers often spend months debating and passing new regulations, but it takes bankers and lawyers only a matter of days to find ways to avoid their intent.
Over time, capitalism was adapted to recognize that companies were increasingly owned by a dispersed group of shareholders trading in developed capital markets. Companies were run by professional managers who were not necessarily owners and therefore had different interests than owner/managers of the past. As a result, to protect investor interests, a governance system developed modeled on old English law, based on integrity and trust, and enforced by new laws. The premise was that integrity and judgment were more difficult to finagle than rules, regulations, and laws.
In that system, boards of directors are supposed to represent shareholders’ interest as fiduciaries and have oversight responsibility for executive management. Directors are responsible to shareholders. Independent auditors are to provide assurance that reported financial performance is consistent with accepted accounting principles. But directors are responsible for ensuring that investors not only are not misled, but also are given all the information they might need to assess the risk and performance of the companies they own or might own. Directors are proactively monitoring management’s actions for investors.
New laws, new regulations, and new checklists of best practices will all be helpful in restoring public trust in the markets. Whether more stringent regulation, stricter enforcement, and harsher penalties can solve the current crisis in investor confidence remains open for debate. One thing is sure: Without dramatic changes in behavior in executive suites and boardrooms of corporations large and small, laws and regulation will exist only to be circumvented and broken again. Shouldn’t investors and the public expect that business leaders would police themselves to avoid a repeat performance somewhere down the line?
Abuses have not been the result of one big lie, but rather of many small, relatively inconsequential shadings of the truth that have compounded into much larger offenses.
- Adelphia discloses that Rigas family has borrowed $2.3B through off-balance sheet family-owned partnerships.
- Company acknowledges that it may be liable for additional $5MM in contingent liabilities borrowed by Rigases.
- Adelphia delays annual report filing as it needs more time to review financials.
- Adelphia says it expects to restate 1999, 2000, and 2001 financial results.
- Company announces it is subject of informal SEC inquiry.
- Trading of Adelphia stock is halted.
- John Rigas announces he is stepping down as chairman. Nasdaq halts trading.
- Company announces resignation of CFO Timothy Rigas.
- Adelphia misses $44.7MM in bond interest payments.
- Trading of stock resumes.
- Rigas family relinquishes control as John Rigas and sons Timothy, Michael, and James resign as directors.
- Company estimates it is liable for $3.1B in family’s debt.
- Nasdaq delists company stock, which trades at $0.75 on OTC market.
In the summer, Adelphia files for bankruptcy, and in September, a federal grand jury indicts five former executives (including three members of the Rigas family) on charges including conspiracy and securities and wire fraud.