Corruption in Corporate America Who is

Modern capitalism and political freedom rest on concepts of conscience and morality, and abhor concentrations of unbridled power. America's economic and political system has developed mechanisms designed to check and balance such power. Despite these mechanisms, there are chief executives who abuse their power in a fraudulent and self-serving pursuit of wealth and authority. How did this happen? How did the system respond? What can be done to prevent it in the future? Corruption in Corporate America seeks to answer these questions. The analysis is supported by a look ahead at the prospective results of the Sarbanes-Oxley Act of 2002, the law intended as a corrective response to corporate corruption.

Abraham L. Gitlow is Dean Emeritus and Professor of Economics at New York University.

Preface

ix

Chapter I: Introduction

1

(8)

The Context

1

(1)

Can Free Market Capitalism and Conscience Coexist?

2

(1)

Are Self-Interest and the Profit Motive Necessarily in Conflict With the Moral Claims of Conscience?

3

(1)

Welfare Capitalism: Capitalism With a Conscience

4

(2)

Welfare Capitalism and Checks and Balances at Work

6

(3)

Chapter II: Management

9

(18)

Management as the Repository of Organizational Power in the Public Corporation

9

(2)

The Separation of Shareholder Ownership and Management Control: The Relocation of Power

11

(2)

The Centralization of Power in the Imperial Executive

13

(3)

Power and the Self-Perception of the Imperial CEO

16

(1)

B-School Education and Business Behavior

17

(2)

Are Shareholder Interests and Management Incentives Aligned Through Performance Based Compensation Plans?

19

(2)

The Impact of the Sarbanes-Oxley Act

21

(6)

Chapter III: The Board of Directors

27

(24)

Who Holds the Power?

27

(3)

Clouding the Picture: Majority Control

30

(4)

Board Composition: Impact of Sarbanes-Oxley

34

(2)

Board Structure: Impact of Sarbanes-Oxley

36

(2)

The Director's Job: Then and Now

38

(4)

Examples of External Pressure: NYSE, Disney, and MBNA

42

(9)

Chapter IV: The Accountants

51

(18)

The Nature of the Profession

51

(3)

The Financial Accounting Standards Board

54

(2)

The Importance of Estimation

56

(2)

The Auditing-Consulting Conflict

58

(2)

Would Disclosure Ease the Problem?

60

(2)

The Impact of Sarbanes-Oxley

62

(7)

Chapter V: The Lawyers

69

(16)

The Concept of Law

69

(1)

The Code of Conduct

70

(3)

Confidentiality, Fraud, Disclosure, and Sarbanes-Oxley

73

(3)

Conflicts of Interest and Disclosure

76

(2)

Independence From External Power

78

(1)

Zeal and the Adversarial Nature of the Judicial System

79

(1)

The Class Action Suit

79

(3)

The Opinion Letter

82

(3)

Chapter VI: Investment Bankers, Financial Analysts, and Institutional Investors

85

(16)

Investment Bankers

85

(5)

The Financial Analysts

90

(2)

Institutional Investors

92

(5)

The Impact of Sarbanes-Oxley

97

(4)

Chapter VII: The Regulators

101

(22)

The Regulatory Objective

101

(1)

The Regulatory Structure

101

(2)

The SEC and the PCAOB (Also Fannie Mae and Freddie Mac)

103

(9)

The States' Attorney Generals and Regulatory Agencies

112

(4)

The Securities Exchanges

116

(2)

The Professional Associations

118

(5)

Chapter VIII: Protecting the Public Interest

123

(10)

Behavior Modification

123

(1)

Enhancement of Shareholder Influence Over Corporate Directors

124

(1)

Improvement of Regulatory Consistency and Enforcement of the Law

125

(1)

Reduction and Containment of Political Pressure by Special Interests

126

(1)

Revival of a Sense of Individual Responsibility

127

(1)

Strengthening the Ethical Component in B-School Education

128

(1)

The Danger of Over-Regulation

129

(2)

Speaking to Power

131

(2)

Appendix I: In Defense of Sarbanes-Oxley by Paul Volcker and Arthur Levitt, Jr.

133

(4)

Appendix II: Threats to Sarbanes-Oxley: The Outlook by Abraham L. Gitlow

137

(24)

An Omnibus Look at Sarbanes-Oxley

137

(18)

Costliness of Sarbanes-Oxley

155

(2)

Modifying the Impact of Sarbanes-Oxley

157

(1)

Protecting the Public Interest: The Defenders of Sarbanes-Oxley

158

(3)

Index

161

(16)

About the Author

177

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Corruption in Corporate America Who is Responsible? Who Will Protect the Public Interest?

Summary

Author Biography

Table of Contents

Supplemental Materials