InReview – Issue 32

The End of Shareholder Value: Corporations at the Crossroads by Allan A. Kennedy; Cambridge, MA, Perseus Publishing, 2000; xiii, 237 pp.

Allan Kennedy is a Boston and London-based management consultant and writer, and co-author of two other books. Here, Kennedy argues that “the end of the era of shareholder value is drawing near.” Step by step he shows that focusing on shareholder value leads to near term thinking and decision making, which in turn leads to bad long run decisions for the company. “Shareholder value driven managers were mortgaging companies futures to achieve higher stock price now. Future generations of investors, customers, and employees will pay the price,” he argues. The book was written in 2000, before the reporting of most of the recent major ethical scandals or the burst of the economic bubble. From this perspective, some of his statements are almost prophetic: “Like all bubbles throughout history, the shareholder value bubble will burst, too. Forecasting such events is neither productive nor within the scope of this book. Nevertheless, I am tempted to predict that the rupture will come soon.”

Kennedy doesn’t simply critique the situation, however. He dives deep into data to prove his points, and then surfaces with alternative recommendations for managing a company. It requires realigning goals to include a broader set of stakeholders — employees, customers, suppliers, shareholders. To accomplish this Kennedy proposes a revamping of regulations, goals for management, and of boards.

I have two small quibbles with his conclusions. First, I don’t think his proposals are sufficiently radical to address the concerns he has raised. Second, in setting up his argument in purely commercial terms, he says: “There is nothing wrong with the idea that people, even theoretical ‘people’ like corporations, should do ‘right.’ It just belongs in the province of religion, not commerce.” I’d contend that even businesses need to go beyond simple utilitarian objectives, and consider the “rightness” and “wrongness” of their actions. Overall, this book comes highly recommended and should be read carefully.

Reviewed by Al Erisman

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Final Accounting: Ambition, Greed and the Fall of Arthur Andersen by Barbara Ley Toffler with Jennifer Reingold; New York, Broadway Books, 2003; 273 pp.

Barbara Toffler teaches at the Columbia School of Business. She was Partner-in-Charge of the Ethics and Responsible Business Practice consulting service at Arthur Andersen from 1995 until 1999. She has also run her own consulting business in business ethics, and has been on the faculty of the Harvard Business School. Jennifer Rheingold has served as management editor at Business Week, and writes for numerous publications.

This book paints an ugly, insider view of the fall of Arthur Andersen, one of the big five accounting firms that closed its doors in 2002 after being rocked by ethical scandals. Those who believe the often quoted comment that Andersen fell because of a few “bad apples” associated with the Enron case should read this book. According to Toffler, it wasn’t just Enron, but WorldCom, Qwest, Waste Management, the Baptist Foundation, and many others. Andersen wasn’t framed, or murdered, but committed suicide, she argues.

How did this happen to a proud company with a great reputation that had been in business since 1913? According to Toffler, there were two major factors. The first was in the early 1990s, when new graduates were tough to get and the business was growing rapidly. For the first time in a substantial way, Arthur Andersen went outside to bring in partners rather than raising them through the ranks. This led to a breakdown in the carefully trained culture that had characterized Arthur Andersen until this time. A second factor was the greed of the 1990s. As the culture of the company was stirred by the new leaders, the time was ripe for the seeds of greed to be planted, and they took hold. An auditing business that was independent and above board became consumed with growth through consulting. It completely lost objectivity.

This is a very sad story that needs to be understood — by the “Final Four,” and almost anyone in business — the message isn’t confined to the auditing industry. The book itself is riveting, generally fast-paced and well written, but not without its difficulties. Toffler admits being caught up in the Andersen system herself, alternately concerned and critical, then participating in the greed like anyone else. Her tone at times is a bit “whiney.” Getting hired to do a job and then having the boss leave before you get there has happened to many, as have other struggles in a large organization. She takes a full chapter and far too many examples to explain the challenges of organizational “cross charging” — for which she provocatively uses an “R-rated” term. Yet she never proposes a reasonable business alternative to a difficult, pervasive practice.

In spite of these limitations, the book is worth reading. It is a sobering account of a drastic result for a company and its people. She provides the reader with an accurate sense of the pressures to “make the numbers” in a large company, and shows convincingly how such pressures can undermine the best intentions. I liked her broad views on business ethics, going far beyond “compliance” to dealing with the root of company culture.

Reviewed by Al Erisman

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Conflict of Interest Conference
Co-sponsored by the National Science Foundation and the Carnegie Bosch Institute

A conflict of interest occurs when a party’s personal and professional interests are at odds, providing the potential for an unfair financial advantage at another party’s expense (e.g., shareholders, customers, medical patients). Last September, leading academics from Harvard, Stanford, Northwestern, Columbia, Carnegie Mellon, and others gathered for a conference at Carnegie Mellon University to discuss the latest research on conflicts of interest, in disciplines spanning psychology, economics, medicine, and law. Modified versions of the papers presented at the conference will be published next year by Cambridge University Press. I had the benefit of attending the conference. Here’s an abridged version of some of the good news and bad news pertaining to the latest thinking on conflicts of interest, based on my experience at the conference.

First, the bad news. There was an overall sense by the end of the conference that ethical violations in general and conflict of interest problems in particular have become more pervasive in American culture over the last decade than at any other time in recent memory. Examples ranged from the broader contextual issues behind Enron/Andersen, to the increasingly uncomfortable linkages between big pharmaceutical interests and our healthcare delivery system. It seems as though we’re surrounded by a swarm of unsolved ethical dilemmas, and the swarm is only getting denser. This may not be new to anyone who reads the Wall Street Journal at least once a week, but that doesn’t make it any easier to swallow.

Now, the good news. Social scientists can provide us some genuine insights into the psychological dynamics behind our own moral failings. That is, a growing body of research is investigating our fallibility as moral agents in executing the moral values to which we claim to ascribe. As examples, evidence suggests racial biases and stereotyping may be wired into our unconscious cognitive processes; the practice of full disclosure (e.g., in a sales transaction), though intended for good, in some cases could end up harming the party it’s intending to benefit; and “consequentialism” (belief that a “good” end logically justifies the “means” to that end)–from the perspective of an ardent consequentialist–may be impossible to implement since our processes for defining “good” ends are inherently flawed.

The notion that our moral agency as human beings is fundamentally off kilter might not sound like good news. Until we’re reminded: the first step in any solution is learning to understand the problem that needs solving. If we can better understand the limitations of our moral agency, we can begin to understand what adjustments we need to account for in issues of technology, law, policy, and personal and professional conduct. The easiest (and costliest) solution to which our society is accustomed, is to pass more laws, build more jails, arrest more white collar criminals. But the problem goes deeper than this. It’s a problem that won’t be solved by more regulation and enforcement. It’s a problem with human nature. And the more we can understand that, the better our solutions will be.

At the time of this review, information on the CBI/NSF Conflict of Interest conference was still available at, including links to the papers presented. Check it out.

Reviewed by Gerard Beenen