Authors Leonard Sayles and Cynthia Smith, respectively an economist and antrhopologist, offer their notions of how and why corporate America's leadership has become regularly rocked by scandal in their new book Rise of the Rogue Executive: How Good Companies Go Bad and How to Stop the Destruction. Tecnical and academic bookseller, Informit is offering a sample of the book chapter here. A snippit:

Today’s threats to American capitalism are primarily internal to the corporation, very different from efforts to monopolize external markets. Management has been changing, not always for the better. The change started with modest deviations from accepted good accounting practice, pushing the limits, such as not expensing stock options. When no resistance was forthcoming, sophisticated number games and executive self-serving became a ground swell of malfeasance. Modest dithering with the accounting tipped over into flagrant fraud. For example, technically, Enron had been bankrupt for years before its bankruptcy filing in December 2001. As we shall see, many other companies were running on fumes generated by financial engineering.

When chief financial officers privately asked the head of the Security and Exchange Commission (SEC) to make rules harder so it would be easier for them to resist the orders of their CEOs, it became obvious that some things needed to change in the 1990s.¹ They didn’t, and Americans paid a heavy price.

Concurrently, executive compensation became obscene, scandalizing Europeans who saw their executives adopting American values. Top management can be earning 1,000 times the average worker’s pay versus 50 or 100 times not so long ago, if American trends are followed. More extraordinary and more troubling, executive pay is taking a significant bite out of the net earnings of many companies—10% of the shareholder’s stake in one study!²

It appeared that the system had been rigged to favor the very few on top. They had become the beneficiaries of corporate largess, reflecting what appeared to be soaring profitability or shareholder value. We learned too late that many executive performance measures were hollow successes, highly rewarding to executives and short-lived for employees and investors. For many companies, reported earnings were more myth than reality.

These changes in executive values and decision making have consequences more serious than the loss of investor confidence and portfolio profits. What has emerged threatens the future vitality and global competitiveness of their companies. Chapters to follow look closely at the major players in this flight from excellence. Included, of course, are senior executives, corporate boards, auditors, investment bankers, and the investor community. It is also important to understand why business journalists were so slow to spot corporate deception and executive fraud, and business academics and consultants so slow to spot the failure of theories.

The following is a preview of the major forces that led to the misshaping of executive decision making and many high cost failures—to employees and investors, not executives....

Continue reading here.

- MDT

Labels: Enron