ARCHIVES :: SEPTEMBER 2002 :: INTERNATIONAL

Decade of Greed?
Wave of Corporate Scandals Could Tilt World Business Away From American Model

A WALL STREET JOURNAL NEWS ROUNDUP

The wave of scandals in corporate America is roiling world stock markets. But the controversy may have an even greater impact in the marketplace of ideas, where the U.S. economic model is coming under attack.

The fall of communism and the U.S. boom of the 1990s fueled a belief, mainly in the U.S. but also among many abroad, that America is a business model for all nations. It was an idea abetted by others' failings -- Europe's high unemployment, Japan's "lost decade" of slow growth, and financial crises in Asia, Russia and Latin America. And it was turbocharged by U.S. success. American stocks soared and jobless rolls withered.

So Americans lectured: about the need to increase shareholder value, follow tougher U.S. accounting standards, do mergers and acquisitions, deregulate most industries, enrich star executives with stock options, create Nasdaq-style markets for start-up companies and embrace the Internet, which was about to change everything. A 1997 story in The Wall Street Journal about the American mood summed it up in the headline: "Super Model: Asia's Financial Foibles Make American Way Look Like a Winner."

Many Japanese, Frenchmen and Brazilians gnashed their teeth, but it was hard to argue with success. And many found merit in aspects of the American system. Germany built its Neuer Markt, a bourse for new businesses. South Korea, its government and financial system nearly bankrupt, accepted a U.S.-orchestrated bailout from the International Monetary Fund and then put its huge conglomerates through workouts that threw legions out of jobs. In Tokyo, the Ministry of Economy, Trade and Industry, once a bastion of industrial planning, spearheaded a string of U.S.-inspired changes that eased corporate spinoffs and mergers and tightened accounting standards.

But these days, critics of American ideology are having a field day as reports of alleged malfeasance pour out of Enron Corp., ImClone Systems Inc., WorldCom Inc., Adelphia Communications Corp., Tyco International Ltd. and more. "You tell us to do this and do that, but look at your own house," says Rizal Ramli, the former chief economic minister of Indonesia, whose country four years ago was compelled by the U.S. and the IMF to promote better corporate governance in exchange for a $5 billion bailout. "The moral power of the one who lectures developing countries will be much reduced."

So it goes in Europe. In America, "all that glitters is not gold," said Rolf Breuer, former chief executive of Deutsche Bank AG, in a speech to German bankers Tuesday night. The long list of scandals shows that the U.S. "isn't the home of corporate governance" it is cracked up to be.

Far more than gloating is at stake. The loss of faith by American and overseas investors in U.S. corporate books is churning global financial markets: Share prices are plunging in America and the dollar is losing value, setting off stock-market plunges in Asia, Europe and Latin America. If the flow of foreign capital to the U.S. is disrupted as a result, the world economy could be jeopardized, because the U.S. relies on overseas money to finance its huge current-account deficit, and Asia and Europe rely on America to buy imports.

Longer term, the debate over the U.S. model could have an even deeper effect. The triumph of the American economy in the 1990s triggered the adoption of U.S.-style rules, deregulatory steps and business practices in countries around the world. Additional changes are now being promoted -- and resisted -- from Germany to Japan to India. Will companies do their accounts by complex American rules or simpler European ones? Should CEOs in London and Paris get the huge paychecks and stock options reaped by top executives at Enron and WorldCom? Will Germany and Japan follow America's lead in making takeovers easier to finance, as the U.S. is urging, thus laying their businesses open to more buyouts by American firms?

The answers to such questions will determine the tilt of the global business playing field, and thus influence the prosperity of companies and countries. A move to American rules gives an edge to the Wall Street investment banks and Midwest manufacturers who have long lived by them; a backlash would serve the status quo.

Yet it is too early to say the genie of American capitalism will be stuffed back in the bottle. American ideas have great momentum, as companies from Germany's Deutsche Bank AG to Japan's Nissan Motor Co. (under the tutelage of a French investor, Renault SA) embrace U.S. generally accepted accounting principles or boost profit with American-inspired asset sales and cost cuts. And for all the schadenfreude over America's woes, other countries have had their own scandals in recent years, including the accounting irregularities that pummeled Belgium's Lernout & Hauspie Speech Products NV.

But America's woes give new ammunition to foes of laissez-faire capitalism. Malaysian Prime Minister Mahathir Mohamad told a business conference this month: "The Enron case . . . makes nonsense of the belief that the markets can regulate themselves and even discipline governments."

Such sentiments will challenge those who have used American success as a wedge for forcing through pro-market changes in their own societies. Hidehiro Konno, vice minister for international affairs at the Ministry of Economy, Trade and Industry, dismisses the notion that the U.S. scandals should deflect Japan from cleaning house. "Of course, we must recognize that the U.S. system needs improvement," he says, "but it does not give us an excuse not to improve our own corporate governance."

One early testing ground will be France. A new center-right government seeks to pursue a structural-reform program, which includes rolling back state influence in key sectors, through privatizations and an overhaul of the unwieldy bureaucracy. "In France and in Europe generally, recent events will reinforce certain a priori ideas that people have about what they call America's `jungle capitalism,'" says Ezra Suleiman, a professor in international studies at Princeton University who follows France closely.

The likely impact on policy makers, he says, isn't so much that it will halt the European push toward greater deregulation of national monopolies such as energy utilities, postal services or public transport, but that it will increase pressure to create stronger regulatory bodies.

Labor unions, the most outspoken opponents of deregulation in France, see the turmoil in the U.S. as helping their cause. Most notably, the California power crisis last year and Enron's collapse should serve as a warning not to dismantle France's state-owned utilities, Electricite de France and Gaz de France, says Philippe Apaty, a member of the left-wing CGT labor union's energy committee. "We think that what happened in California and to Enron is the proof that a competitive system without strong public mastery of the situation doesn't work. Energy isn't a form of merchandise like any other," said Mr. Apaty.

Even in Britain, one of the most market-oriented countries in Europe, there are signs of dissent against U.S. corporate ideology. Institutional investors are increasingly critical of huge pay packages for executives. Vodafone Group PLC's chief executive officer, Sir Christopher Gent, is under fire for his GBP 2.42 million ($3.7 million) annual salary, even though that is modest by the standards of U.S. companies of similar size.

Until recently, there was wide acceptance of the argument that British companies needed to pay executive salaries much closer to U.S. levels because the competition for talent was global. Now, some fund managers are insisting there is no need to follow what are seen as the excesses of the U.S. market, especially when executives aren't delivering stellar results.

The stakes over the U.S. model debate are especially high in Japan. The Japanese have the world's second-largest economy, the one that in size and breadth is closest to America's. They have troubles -- slow growth, falling international competitiveness, a banking crisis -- that parallel those America suffered and overcame in the 1970s and 1980s. They have a history of selectively adopting aspects of U.S. and European capitalism.

Japan also has been one of the last, and most reluctant, rich-world countries to embrace Western corporate methods. Even after more than a decade of stagnation, companies are still reluctant to appoint outside directors and disclose many financial transactions. And yet change is gathering steam.

Shareholders, particularly foreign ones, are gaining more clout. The system of interlocking stakeholdings between companies and their banks, suppliers and customers is coming undone. Japan in recent years has adopted accounting laws that are among the world's most strict.

"There are a number of executives in Japan that have expressed doubts of American-style corporate governance," says Yoshihiko Miyauchi, chairman and CEO of Orix Corp. and president of the Japanese government's Council for Regulatory Reform. "I personally don't think the American system . . . is necessarily perfect, but I think it is fundamentally better than in Japan," he says. "One of the good things . . . is the ability to address problems quickly and change things that should be changed."

One reason Japan is likely to continue to adopt aspects of American-style capitalism is that Westerners own an increasingly large stake in Japan Inc. Foreigners held 18.3% of Japanese stocks by value in the year ended March 31, up from about 4% a decade ago.

There have been some victories for those rooting for Western-style corporate governance, and some setbacks. Shareholders of Chugai Pharmaceutical Co. yesterday approved a takeover by Switzerland's Roche Holding AG, one of the first takeovers of a healthy Japanese public company. But shareholder pressure before the vote pushed Roche to increase its offer price by 31%, which is good for shareholders and extremely rare in Japan.

However the U.S. model debate turns out, countries like Japan are never going to turn themselves into foreign versions of America. Computer maker NEC Corp. has cut jobs and spun off divisions to revive its earnings and its share price. But, says NEC President Koji Nishigaki, "the American way isn't the only way."

Instead, 100-year-old NEC will maintain values that Mr. Nishigaki says are inherently Japanese, such as retaining workers despite pressure to shed them. "In the U.S. some companies, even very famous companies, are eliminated in 10 years. Such companies when they get a profit, they pay it to shareholders and so they provide a very short-term return. But in Japan we think very long term."