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| Sunday, 7 July 2002 |
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Business |  |
| News Business Features Editorial
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Biz Buzz:Business misled Every person has a responsibility to be honest toward his fellow beings and society. This obligation is heavier on corporate leaders. They have, at their disposal, vast resources entrusted to them by a trusting public and institutional investors such as unit trusts and pension funds, creditors of all forms, be they bankers, other lenders or suppliers and employees. Leaders of the corporate world include the body of people who have custody and control over company assets, who can commit their future cash flows and enter into transactions on behalf of the legal entities they manage. By definition, company chairmen, chief executives, directors and senior managers comprise this influential group. Why are these businessmen sometimes called black-marketeers, sharks, crooked men or market manipulators? Businessmen have often been misled by ill-conceived management theories and slogans or by misinterpretation of corporate objectives. Maximising value or shareholder value appreciation at whatever cost is one such notion that had turned businessmen from genuine entrepreneurs to disingenuous number jugglers. Unfortunately, the corporate world, both here and in the developed economies, is rife with the dishonest. The most recent in a series of accounting scandals in the United States unfolded at Xerox within four days following the shocking revelation of financial irregularities at WorldCom. Xerox admitted to overstating profits since 1997 to the tune of US $ 6.4 billion. WorldCom had exaggerated profits by US $3.8 billion over five quarters, beginning January 2001 by simply treating recurrent expenditure, mostly maintenance costs, as capital expenditure. They were the latest in a list, of once eminent corporate giants now before bankruptcy courts or thoroughly disgraced, which includes Enron, Global Crossing, Adelphi Communications, Quest Communications and Waste Management. Business leaders in Sri Lanka are sometimes baffled and unclear about what is best for their companies. There are some who say that one has to be aggressive and spend through a crisis to overcome it. May be so for a few lucky ones, but many would sink deeper into trouble. In difficult times, companies, like families, have to be frugal. They need to be prepared to respond fast to market and other changes and above all else, they must be honest. (A) The late Mr Lal Jayawardena, CEO of Hayleys and also much admired Chairman of the Ceylon Chamber of Commerce strengthened the Hayleys Group by following these basic rules. He insisted on the integrity of financial reporting. His annual reports to the shareholders were analytic, informative and truthful. When the economy was sluggish, he ventured into new exports and got his managers to cut costs and improve productivity to make other business lines more profitable. At that time, Hayleys accounted for 1.5% of the total exports of the country. He is a good role model to follow. Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) are invariably at the bottom of corporate malfeasance. Joined by some of the other directors and managers, they resort to what they claim, or believe to be a justifiable deferment of costs or early recognition of revenue "to tide over a bad year" and to keep intact investor and lender confidence. Such accounting tricks are dangerous and serious. They defer losses to future periods; when it becomes even more difficult to absorb past losses without repeating the accounting irregularity on a much higher scale. This is a temptation which, if yielded to, is difficult to resist. Inflating profits to manage the crisis for one year is a fatal enticement. Once started, it snowballs over the years making the magnitude of hidden losses too large to conceal. By then, many corporates have consumed all shareholder funds, eroded much of credit lending and entered a no-return path to extinction. Corporate leaders, confused by theories and notions on how best to manage a business crisis can be easily misled. The need to meet budgets and the enticement to project a healthy image, maintain share prices and to avoid criticism can tempt many a businessman to tinker with financial reporting. Where should these corporate leaders and managers look to, for solutions and direction? (A)Adapted from a Survey of Management published in The Economist, 9-16 March 2002. To those who seek direction and role models, Warren Buffett, Chairman of Berkshire Hathaway, US is a good pick. Like Lal Jayawardena, he was, and is, celebrated in his country for making honesty and financial statement integrity the hallmark of the business culture of his company. He was quoted in The Economist as saying "we do not want to maximise the price at which Berkshire shares, we wish for them to trade in a narrow range centered at their intrinsic business value". Another heartening experience was the CEO of an Australian mining company who had the courage and good judgement to announce bad news of corporate performance as soon as it was known. He also made a realistic assessment of future prospects. Public confidence in this CEO soared. Instead of share prices falling due to the drop in profits, they increased overnight. Human values taught by parents to their children, by teachers and schools to their pupils, by Universities to their students, by the clergy to their disciples and by the elders to the members of their society, have helped people to lead honourable lives and reap the benefits of such conduct. For a good corporate culture to develop, the virtues of honesty, discipline, thrift, fairness and preparedness must be extolled. The rewards of such corporate behaviour will far outweigh the short-term gains of less honourable practices. It is a public duty to support and encourage corporate leaders who guide their businesses upholding a set of high values.
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