It all started with exquisite beautya beauty that was coveted, first by the wealthy and soon by everybody else. What began as a national pastime became a fever. Fever turned into frenzy. Frenzy caused scarcity. Scarcity spiked prices. Prices rocketed. Then, reality set in. Such is the strange tale of the 17th-century love affair with the tulip as told by Mike Dash, author of Tulipomania: The Story of the Worlds Most Coveted Flower and the Extraordinary Passions It Aroused.
Tulipomania is now a part of the jargon of economics, along with panic, bubble, and, more recently, irrational exuberance, which was coined by Federal Reserve Chairman Alan Greenspan in 1996.
Manias that roil markets have been called different things through the ages, but the idea is pretty much the same. An idea woos investors. They are seduced by dollar signs. So are many business leaders. Production skyrockets, whether its tulip bulbs or fiber optic cable. The boom drives prices ever higher. And then it all comes crashing down.
During the past two or three years, more than a few of us have experienced our share of despair from irrational exuberance, our modern-day Tulipomania. We have watched our net worths shrink amid the nations stock markets free fall.
In the wake of the technology market mania and collapse, a cross section of Pitt faculty have taken a close look at what has happened in the business sector. They have plenty to ponder.
Back on August 3, 1998, stock market doomsayers were in the minority. In fact, Time columnist James J. Cramer wondered how investors could not afford to snap up highflying Internet stocks. He wrote that Internet portal America Online was among his favorites. It was trading at $14.50 a share. By the end of 1999 it was trading at $75.87, not a bad return on investment. As for the technology-laced NASDAQ Composite Index, it finished 1999 up a record 86 percent.
What no one at the time seemed to contemplateperhaps not even Cramer or his editors at Timewas the title of his 1998 column: TulipMania.com?
We all should have looked a little closer at that headline. Between March 2000 and December 2002, nearly $7 trillion was erased from investors portfolios, owing largely to the collapse in technology stocks. At the end of 2002, AOL was trading at $13.39, a fraction of its peak value.
As technology and energy-trading giants fell, the business pages began looking more like a police blotter. Allegations of accounting fraud and indictments at a number of big companies understandably shook investor confidence. In the tradition of Tulipomania, a new economic term was coined. It became shorthand for all the double-dealing, the corporate shenanigans, the accounting system of winks and nods that was blamed for the broader stock market woes: Enron. He really pulled an Enron there, or He was Enroned last Thursday, might describe questionable accounting practices or job loss owing to corporate mismanagement.
The December 2001 bankruptcy of Enron, one of the worlds largest energy companies, and the disintegration of telecommunications giant WorldCom six months later drew swift calls for reform. Lawmakers claimed that investors needed more protection from greedy executives and accountants. Best known of these reforms was the Sarbanes-Oxley Act, which became law in 2002. Sarbanes-Oxley requires companies to adopt ethics programs and increases penalties for corporate wrongdoing. Corporate ethics cops began walking the beat in boardrooms.
But not everyone thinks this cure is better than the disease. After all, even Enron had an ethics code and a conflicts-of-interest policyat least on paper. Count Pitt finance professor Kenneth M. Lehn among the critics of a legislative fix for corporate excess. He is an affiliate faculty member in the Pitt law school and guest lecturer in law classes. Certainly some of these guys are scoundrels, Lehn tells a class of 20 students. But lets not overreact. What these rascals have done was illegal before Sarbanes-Oxley. Whats more, Lehn says, Enron and WorldCom had lost most of their value before any disclosures of alleged corporate wrongdoing. These companies were in deep water before the scandals, he says.
Lehn, who is the Samuel A. McCullough Professor of Finance in the Joseph M. Katz Graduate School of Business, is a dapper figure pacing confidently in front of the classroom. He wears gray dress slacks and a blue cotton shirt, but no tie. Hes using overhead slides to back each of his points. Heres the proof he offers students.
Enron lost almost two-thirds of its value before the first whiff of accounting problems, says Lehn, former chief economist for the Securities and Exchange Commission. Enron stock was selling at $90 a share in August 2000. It had fallen to $33 a share by October 15, 2001the last trading day before allegations of accounting fraud at the energy-trading giant. Whats more, the collapse of the telecom industry was well under way before all those silver-haired executives were paraded before the TV cameras in handcuffs. The free fall in stock prices weve been seeing in recent years is due to fundamental weaknesses in the market, Lehn tells students. From March 24, 2000, until September 24, 2002, the NASDAQ Telecom Index lost an astonishing 92.4 percent of its value, Lehn says. Whats more, the bulk of that decline occurred before the big accounting scandals were uncovered. Preventing similar debacles means enforcing laws that were around long before Sarbanes-Oxley, Lehn says. Part of the answer is more cops on the regulatory beat. Relative to the size of the market, we dont have enough policemen, he says.
The class in which Lehn lectures, Advanced Torts: White Collar Civil Liability, is believed to be the first of its kind in the country, according to Pitt law professor Tom Ross, who created the course last fall. Ive always felt that what lawyers really need is a keen sense of the world in which they operate, says Ross. The class is providing just that. Discussions, like the one spawned by Lehns presentation, jump right out of newspaper headlines. Corporate attorneys, the ones who approved the creative accounting and other questionable practices, need to share blame for corporate fraud along with chief executives, he says. Law students, too, need to be aware of how conflicting pressures of professional life will affect their decisionsand careers, he says.
Law student Jennifer Andrade, who plans to graduate in May, says she appreciates the real-world problems that are examined in class. When youre out practicing in business, all of these issues come at you all the time, says Andrade, who served as vice president of a Pittsburgh engineering firm before returning to law school four years ago.
Pitts focus on ethics in the schools of business and law began long before the business pages began looking like a rogues gallery. In fact, Katz has had one of the countrys leading programs in business and society, ethics, and corporate and social responsibility for three decades.
William C. Frederick, professor emeritus of business administration and one of the founders of the business and society field of management studies, and Jim Wilson, professor emeritus of business administration, are among the faculty who pioneered Pitts leadership in business ethics. Wilson, a licensed psychologist and psychotherapist, specializes in behavioral science and the social environment of business.
Others include Barry M. Mitnick, professor of business administration, who last year received the best article award from the International Association for Business and Society and the California Management Review. This award is widely considered the highest research honor in the field. Thirty years ago, Mitnick and another colleague, MIT financial economist Stephen Ross, then at Yale University, were the first to propose, independently, and to begin to develop the theory of agency, which continues to have wide applications in finance, accounting, marketing, management, and the social sciences. Mitnick also originated the institutional stream of work on agency theory.
His take on the recent string of corporate scandals is opposite that of Lehn. As the economy enjoyed a run-up virtually unsurpassed in economic memory, the natural constraints of business failure receded, Mitnick wrote in a recent article. In short, the corporate leaders of managerial capitalism became little different from the robber barons of a century ago.
The Berg Center for Ethics and Leadership was created at Katz in 1998, a time when dot-com stock still sizzled. Berg (CAS 23) was a successful New York real estate attorney and University benefactor whose interest was business ethics. The Berg Center promotes understanding and development of ethical leadership in business, according to Bradley R. Agle, an associate professor at Katz and director of the Berg Center.
The Berg Center sponsors a number of programs, including a visit last fall by then U.S. Treasury Secretary Paul H. ONeill. The center also supports doctoral students in business and cosponsors business ethics awards that are given by the Pittsburgh chapter of the Society of Financial Service Professionals.
In the works at Katz are plans for an innovative undergraduate certificate program in ethics and leadership. The certificate program will be one of the first of its kind in the nation, according to H.J. Zoffer, dean emeritus and professor of business administration at Katz. In addition to lessons learned from the collapse of Enron, the subject matter of the course will include business ethics studies, biographies of ethical business leaders, and a smattering of philosophy, Agle says.
In recent years, Katz has been cited among business schools nationwide for the quality and quantity of its faculty research. In 1998, the Social Issues in Management Division of the Academy of Management cited Katz for having the most research presented over 25 years in business and society. Included in the society category are business ethics, corporate and social responsibility, and business-government relations. The Academy of Management is the major professional management association in the country, and the rankings boost the schools academic reputation and may help students in choosing a business school.
More recently, the World Resources Institute and Aspen Institute Initiative for Social Innovation Through Business gave Katz a five-star rating for quality and quantity of faculty research. The only other school to receive five stars was the Wharton School of the University of Pennsylvania. The ratings, which were contained in the report, Beyond Grey Pinstripes 2001, examined leading MBA programs worldwide that incorporated social impact management studies. Pitt requires all undergraduate business majors to take a three-credit business and ethics course. More than 400 students take this course each year.
The students have been a lot more vocal about business ethics over the years, says William J. ORourke, vice president, environmental, health and safety, and audit at Pittsburgh-based Alcoa. Ive been pleased to be affiliated with the program.
ORourke is an executive faculty member at Katz, and Alcoa is the schools best practice partner for business ethics. ORourke, who is also an attorney, says he offers students real-world cases in corporate ethics. For example, I typically ask if its OK to take a pen from a supplier. If the student says yes, I make the pen a gold pen and pencil set with engraved names. If the student says no, then I make it a used Bic pen without a cover. The conversation is usually active on these issues.
As the corporate auditor for Alcoa, I have the opportunity to see corporate governance work from a front-row seat, ORourke says. Alcoa was named one of Americas safest companies in 2002 by Occupational Hazards magazine, and the aluminum manufacturer is widely regarded for its ethics program.
World economic history is rife with examples of market manias, says Pitt legal scholar Douglas M. Branson, the W. Edward Sell Professor of Business Law. Tulipomania, which prompted that headline in Time, is among the more bizarre examples. In the winter of 1637, Holland saw tulip bulb prices doubling by the week for some varieties. A single coveted bulb sold for enough money to feed, clothe, and house a Dutch family for half a lifetime. Some bulbs were worth 100 times their weight in gold. Weavers, cobblers, bookbinders, bricklayerseverybody, it seemedhad become florists. The country was abuzz with talk of easy money.
The collapse was ugly. A shortage created a market for bulbs not yet pulled from the ground. Runaway prices could no longer support speculation gone mad. Over three or four months in 1637, the value of tulip bulbs withered to 1 percent or less of their peak. Fortunes were lost. The bubble burst. Those unable to pay their debts were thrown in jail. Tulipomania wont be the last time investors get burned, Branson says.
And Branson might know. His 1993 book, Corporate Governance, was the first treatise on the subject published in the United States. In todays post-Enron era, law books and legal journals are virtually awash in articles on the subject. Good governance simply ensures that managers diligently pursue the interests of shareholders rather than those of the chief executive or others. The purpose of corporate governance is to prevent disaster, says Branson, who is one of the top corporate law experts in the country. Its like fog lights on a car. Hallmarks of good corporate governance include independent boards and auditing committees, and nominating committees that are closed to chief executives, he says.
Branson, who describes himself as a rabble-rousing Irishman, argues that corporate America had cleaned up its act long before Sarbanes-Oxley. Gone are the days when corporate directors were kept in the dark about financial details of the companies they controlled or when board appointments were reserved for insiders. Hes quick to point out that of the approximately 16,500 publicly traded companies, only 20 have found themselves in the headlines with stories of self-dealing and other misdeeds. If you take the long view, the system has improved by leaps and bounds since the mid 60s, says Branson, who, like many people, says he often winces after opening his retirement earnings statement.
Hes hardly an apologist for the corporate excesses of the last decade. Heres his take on the market boom and bust of the 1990s. What happened is that we created a new royalty in the country, he says. Rock stars, athletesand then chief executives. The result was what Branson describes as the good deal exception culture, which allowed executives to rationalize corporate greed and self-dealing. Im making the pie bigger for everybody, so whatever I do is OK. Or so went the thinking, Branson says.
And if any good comes out of the Enron meltdown, Branson says, it will be the end of the winners culture. You cant legislate good culture, Branson says, and that was the culture of the 90s.
Thanks, in part to Enron, society today seems less tolerant of white collar crime. Sandra D. Jordan, Pitt associate professor of law, a former assistant U.S. Attorney and an associate independent counsel for the Iran/Contra prosecution, says the shift is evident in stiffer penalties for white collar crime that have been adopted in recent years. Once we put a face on the crime, real people getting harmed, then people start saying, lets get serious about this, says Jordan, who teaches courses in criminal law and white collar crime. What were seeing now is a real effort to address corporate crime whereas corporate wrongdoing was barely recognized as a crime in the past.
Branson cautions, though, that the world has not seen the last Enron, the last Tulipomania, the last bubble, especially when trading in global markets is just a mouse click away.
Even the best corporate governance will not stop purposeful wrongdoing, he says. As long as the piggy bank is full, and investment money keeps flowing, corporate greed and accounting gymnastics will be easily ignored. But when the money stops, its a little like musical chairs. Not everybody finds a seat. Or that tulip-bulb ticket to the easy life.
Kris B. Mamula is a senior editor of this magazine.