 |
You are
here: the-vu>
Earth> The Decisive
Fork
The Decisive Fork
By Dr. Nagendra Rentala
Published September 2002
First Enron, ImClone, then
WorldCom, Xerox and now Merck - what is going
on in Corporate America? With the WorldCom top
brass invoking the fifth amendment following Enron's
(mis)lead and also filing for bankruptcy, there
arise some serious, fundamental questions in an
investment dominant economy. Are we on the verge
of another explosive crash of the economic structure,
have we reached a decisive fork in a critical
onrush of events, from where the wrong turn this
time means a definite point of no return?
Are these astonishing corporate
disclosures merely a few hiccups in the vast financial
organ of the free world? Is this just a process
of readjustment and evolution of an otherwise
robust economic system from which the corporate
administration, investing public and regulating
Government are learning a few precious lessons?
The atmosphere in which these financial crises
are bursting forth with so many critical events
taking place in rapid succession - the Internet
boom and bust followed by the recession, the September
11th attacks and the continuing war, the disgusting
Church scandals and a magazine like Time running
cover-page article on apocalypse - call for some
serious, fundamental thinking. These are not isolated
events - not in a world so well connected as it
is today and together they can cause a calamitous
domino effect unless they are clearly perceived
and checked. Things unfortunately follow the path
of entropy when left to themselves and do not
evolve for the better without a deliberate, conscious
human intervention and a process of rational,
objective analysis.
Do these cover-ups call
for more, or less governmental controls on corporate
dealings? There is a widespread debate going on
in the country - employees of Enron, WorldCom
and the investors who lost heavily in the wake
of these debacles are clamoring for corporate
reforms, a euphemism for more controls. Even to
utter the word laissez faire is to invite intense
public wrath under these circumstances. Has something
seriously gone wrong with capitalism and free
enterprise? Is there a simplistic explanation
for all this and hence an evolutionary pointer
in the right direction or is it too mind-boggling
to fit into any one single coherent thought capsule?
There are two scenarios
in which one can lose sight of the true perspective
of an event - either by being too far removed
in space or time from the event, in which case
one does not really care much about what is going
on. Alternatively, for those who are caught up
in the thick of the events and completely overwhelmed,
the tendency would be towards wishful thinking
that somehow things will get better sometime,
with the complementary cynicism that if they don't,
we all go down the drain and it does not matter
anyway. Cynicism leads to sheer frustration sweeping
everything under some ill-defined carpet, which
in this case happens to be "Corporate Greed".
America epitomizes enterprise.
Taking risks, investing in potential, not harboring
a mere arm-chair optimism but a firm conviction
that the situation tomorrow can be made better
than what it is today and the resolve, the hard
work to make it happen are the hallmarks of a
great nation built by entrepreneurs who flocked
to this country from all parts of the world. Shake
the roots of the optimism, the spirit of enterprise
and what is left is an empty shell, a catastrophic
failure of a glorious experiment. This laboratory
is not only the free world's but mankind's greatest
achievement. Explaining away the events with a
fatalistic viewpoint like cyclic economic prosperity
of a nation is doubly ridiculous in this context.
This edifice is built on the firm foundation that
economic prosperity is not a randomly driven entity
like waves in an ocean but the realization of
entrepreneurial principle of human intellect and
America is unlike any other nation - it is a microcosm
by itself. Any flaws have to be summarily removed
from the free world - from their most fundamental
level based on objective analysis before they
can cause a ripple effect and topple the economic
and as a consequence the social structure altogether.
There is no way this glorious experiment can be
allowed to fail.
In the aftermath of unprecedented
economic debacles, the clockwork salvage operations
have already begun - congressional hearings, ongoing
debate for more controls, the usual rhetoric and
assurances from the government in the backdrop
of a public outcry for 401K protection and investment
security against malfeasance in a turbulent market.
Most significantly, the corporate world itself
is coming out with a set of revised norms for
their standard accounting practices - executives
are slowly raising their hands with the echo "me
too". This is a timely and welcome self-regulatory
mechanism spurred on by self-preservation that
is infinitely more effective than any external,
Governmental controls. A drastic rethink is required
to benefit from this astonishing joining together
of internal and external controls and to strike
an optimum, objective balance between the two
- more importantly to identify where that balance
should eventually lead so that tiny flaws do not
rear their ugly heads once again as mammoth beasts.
It is never easy to answer
the question as to what is the right direction
to take but in retrospect at least we know what
directions should not be taken and learn precious
lessons by using the principle of negation. Who
can best provide us an insight into what went
wrong with the corporate world? Not surprisingly,
the people who traveled that path of wrong-doing.
A drunk driver in a stolen van with a load of
marijuana in the trunk on a Los Angeles highway,
chased by half a dozen police cars and a hovering
helicopter has a better shot at not being caught
compared to the corporate executives who thought
that somehow 2 and (-3) can be shown to add up
to 4. Not withstanding the fact that the drunk
driver in comparison is totally reckless, why
did these executives resort to the kind of malfeasance
that has landed them in an almost tragicomic,
pitiable situation?
Astonishingly, how could
these intelligent people and doyens of enterprise
ever think that they could get away with it? No
one believes even for one fleeting moment that
when he founded WorldCom, Bernard Ebbers thought
that his vision of enterprise would be that one
day he would run away with a few billions of dollars
of personal loot from the corporate coffers and
then hide under the cover of the fifth amendment.
When Scott Sullivan graduated from an accounting
school, he would hardly have imagined that the
high point of his career would soon turn out to
be a balance sheet, which would have guaranteed
him a flunk in the freshman years. Try this hypothesis
- Kenneth Lay and company wanted to create history
by discovering axioms of equality in elementary
arithmetic that would confound the most brilliant
number theorists.
At what point in their careers
did these people start making a bend here and
a bend there in their accounting practices and
at what point did these bends metamorphose into
grotesquely twisted works of modern art with numbers?
What canvas did they paint on and which tools
did they use? At what point and more importantly,
why did their integrity break down? When did they
recognize once again the truths from their elementary
learning - no matter how much you twist and turn,
you cannot escape the objective fact that 2 and
2 always add up to 4? At what point in the collapse
of their edifices did they think of the "fifth
amendment"? Equally significantly, why did they
do it? What is the inflexion point in the chronological
history of events, at which the norm of acceptable
falsehood turned into downright malfeasance? When
did their cooked books started looking more like
crooked books? When did they first realize that
their petty actions are reaching the alarming
proportions of grand larceny? Why? Why were these
actions triggered by intelligent minds of responsible
individuals? What would these people have done
differently if only they could go back in time?
Was it peer pressure? The pressure to win at all
costs not knowing what victory means in the long
run? Was it shortsightedness or the cynical perversion
that others are doing these things and getting
away with it and why not us?
To get the right answers,
we need to ask the right questions. No one seems
to be asking them though. Just imagine what precious
insights into the flaws in our economic structure
could be gleaned from the revelations of executives
who took the low road - the ones caught on the
radar as well as those now volunteering. The entire
nation could scream and shout for a corporate
lynching but what has been done is done and we
cannot turn the clock back nor alter the cause
and effect relationship coupling the chain of
events. No serious analyst would doubt even for
one moment that these executives are sincerely
regretting today for their actions that landed
them personally and the economy collectively in
a terrible mess. Untangling their reasons through
routine hearings would take so much time, energy
and public expense that at the end of the inquisition
the findings would be utterly irrelevant. Alienating
them in such a process would push the precious
recipe for real remedy for this malady so deep
into the inner recesses of these people that the
initial diagnostic symptoms of the disease would
be lost forever.
Don't give them the cage
in a congressional hearing room, don't even think
of a place for them behind the bars - give them
the pedestal in a conference hall instead and
listen to them with ears pricked and capture every
nuance of their testimony with eyes agog. Don't
ask them to explain their books - implore them
or even beg them if necessary to articulate in
their own words the principle behind their actions
and what corrupted that along the time line. Provide
them with every conceivable kind of unconditional
legal, social and economic immunity and request
in return for one single favor - at least a glimmer
of an insight into this principle. Offer them
the highest-ranking positions in the SEC and give
them this one chance to redeem themselves and
the society at large because that is our only
hope.
Of course none of this is
ever going to happen. Not because it is too revolutionary,
but because we are afraid of what they are going
to say - an indictment of no one in particular
and everyone in general. An indictment of how,
in this specific context, non-objective accounting
norms and by implication their non-objective cousins
of legal enforcement have found their way into
our administrative structures despite the best,
bona fide intentions of all concerned. Man discovered
language to articulate and exchange his ideas
with others as precisely as possible. A grotesque
mutation of this idea that has evolved in a diametrically
opposite direction of obfuscation instead of clarification
is legalese. The structures around which such
a mutation has thrived are the non-objective laws.
Mathematics was invented to facilitate quantification,
i.e., language stretched to the very asymptotic
limit of precision. Accounting practitioners found
a way to confound even this by hanging their numbers
in myriad niches (provided by non-objective government
regulations), which are neither positive nor negative
and assume no sign in-between.
Ever tried to dust a cupboard
with a host of bends, corners, twists and turns,
nooks and crannies and numerous tiny appendages?
There lies a fertile ground, a maze of opportunities
for a wily spider to spin its web, an accounting
wizard to park his numbers with suspended signs
and a legal genius to obscure his client's true
intentions even unto himself. Walk into any legal
and / or accounting practitioner's lair and you
will find rows of neatly stacked bookcases with
thick bound volumes of their trade. The bigger
the collection, the greater the firm's reputation:
reflects erudition - read smacks of obfuscation.
In any organization, the legal and accounting
departments do not add any value per se to the
company's products. And yet, astonishingly these
are the highest paid individuals / consulting
firms. Ever wondered why? If a company's books
are clean, why does it need accountants with millions
of dollars of pay packets for consultation and
if a firm is righteous, why does it need lawyers
with equally huge retainers?
Surprisingly, these questions
are not even being debated seriously in a corporate
environment where the focus in recent times has
shifted from mere value addition to great and
innovative efficiency improvement concepts such
as Kaizen, Six Sigma, Re-engineering towards adaptive
business models and others. The fundamental issues
related to the role of accounting and legal practices
in the business world do not seem to have been
addressed at all despite significant advances
in other spheres of business activity. Is this
a reflection of the implicit acceptance of one
serious structural flaw - an element of the form
appeasing itself rather than adding value to the
substance it carries?
Companies need to hire (dis)reputable
firms like Anderson to unearth the superficially
exceptional in a maze of controls and regulations.
A firm that specializes in taxation laws airs
a commercial that proclaims with unabashed cynicism
(I mean this as a compliment) - "Only God can
understand taxation laws better than we do". This
is not an indictment of lawyers and accountants
- far from it, the cynicism in that ad is pointed
at you and me and everyone else. This is the kind
of canvas, the brush tools, colors, shades and
myriad hues provided to a thinking mind. Any point
in blaming the artist? What usually starts as
an earnest attempt to create a masterpiece occasionally
mutates into a grotesque and abrupt failure like
Enron or WorldCom, shaped synchronously by the
non-objective norms or (f)laws in the ambient
structures.
A clean, straight, airy
and objective structure in which every element
has a specific and non-redundant purpose, which
in turn is subsumed by the single polarizing principle
of the structure, does not permit ghastly, self-contradictory
mutations like Enron or WorldCom. That unique
principle is deterministic, convergent evolution
within the dictums of which every aspect of social,
economical, legal, administrative and other structures
has to be understood, monitored and guided. Deterministic
because the foundation of such evolution or change
is rational human thought process and not chance
occurrences in nature, and convergent because
it is a principle that integrates seemingly disparate
components into a harmonious whole. Applying this
principle is the only way to untangle the puzzling
contradictions within the trinity formed by the
Public, the Government and the Corporations and
identify the course of action open to each party.
As an entity with the lowest
pain threshold, the investing public should initiate
measures of reform. Currently, the knee-jerk reaction
on the part of the public is to call for transparency
in accounting practices. Ever heard of the art
of impenetrable candor or that too many facts
can be mind boggling and are as useful as too
few of them? With the kind of divergent structures
to which the current accounting and legal practices
are attached (recall the taxation law firm's ad
campaign), is it physically possible for any single
individual to fully grasp the economic health
of a corporation at any given moment? The few
wizards who might be able are hired for not disclosing
the verdicts publicly, particularly the unfavorable
ones.
Clamoring for more controls,
monitors and reprisals can only appease the immediate
need for palliating the symptoms but will not
eradicate the deep-rooted malady. These measures
will only exacerbate the disease in the long run.
The only kind of corporate reform the investing
public can bring about and the only type of discipline
they can impose on executive boards is by demanding
a value-add justification for the accounting and
legal departments. Like the impressionist painters,
the multi-million dollar paycheck accountants
who give the impression of health to the corporation
and do very little to fortify the same will not
find their current niche in an optimal economic
structure based on objective norms.
President Bush recently
made the axiomatic observation that the element
of risk cannot be eliminated altogether from investment.
This remark emphasizes one fundamental aspect
of governance - observatory and mediatory roles
take precedence over regulatory ones. The government
should do what the wise Chinese sage Confucius
said long ago - to rule as unobtrusively as possible.
Shift the focus towards laissez faire in all aspects
of governance, asymptotically evolving towards
self-redundancy. Any other course of action is
beset with contradictions. A case in point is
the recent idea of trying to arm the SEC with
greater powers denying any more funds at the same
time. We all have to accept at some point that
one cannot have the cake and eat it too. Another
idea is that of demanding corporate executives
vouch for the sanctity of their accounting statements.
With the physical impossibility of any one individual
being able to comprehend all the subtleties and
nuances of every entry in the account books, tangled
within divergent laws and regulations, there will
definitely be the escape clause "to the best of
my knowledge and belief", that makes the entire
exercise futile. In a highly advanced democracy
like the US, political parties and their erudite
leaders can afford to take objective decisions
and make an indelible, positive personal mark
on history rather than be driven by petty, short-term
political pain / gain equations.
While the investing public
has a reactive or secondary role to play and the
government has a regulatory or tertiary role,
the onus of assuming the proactive or Prime Mover's
mantle rests with the entrepreneurs and the visionaries
in a tripartite economic structure. For the corporate
executives whose vision of enterprise is based
on a firm foundation of integrity for its own
sake (not because it is the best policy), the
current market turbulence is a precious opportunity
to take control and steer its evolution in the
correct direction. There is no escaping the ruthless
consequences of axiomatic facts - "A is A", "2
and 2 make a 4", "one can make money only by adding
value" and "bad money throws out good money".
When the principle of deterministic,
convergent evolution is projected into the realm
of economic activity, all the current clamor for
transparency and accountability is reduced to
one fundamental, primary assertion, viz., "compensation
commensurate with value addition". By emphatically
propagating this common sense dictum at every
available opportunity - through actions, advertising,
discussion forums and the like, executive boards
can ensure that economic structures evolve asymptotically
towards perfect market equilibrium - public trust,
laissez faire and self-regulation.
Man, the thinking organism
has taken over the reins of evolutionary direction
from Nature and gave it an entirely new impetus
- from the stochastic or chance mutations to deterministic
or goal oriented improvement. Man still continues
to imbibe one more aspect of natural evolution
though and that is divergence. The evolutionary
structures or forms such as social, economic and
administrative, constructed by Man around himself
as the substance have reached a critical mass.
A decisive fork has been reached in the evolutionary
history of mankind - one path diverging towards
runaway explosion eventually ending up in complete
chaos and the other converging towards absolute
harmony. All the critical and rapidly happening
events of the present day (cited at the beginning
of this article), of which the economic indicators
are the most significant, are pointing to this
cusp. A process of thought, i.e., logical, objective
analysis is the only tool available to Man to
identify it as such and prepare for a course of
action. Man has by and large striven to remove
the stochastic element from evolution. Now is
the time to control the divergence.
Nagendra
Rentala (b. 09/23/1953) holds a Doctorate degree
in Geophysics. A member of the New York Academy
of Sciences and recipient of the Young Scientist
Award of the Indian National Science Academy
(1982), he worked for over 20 years teaching and
researching in the field of Computational Geophysics
in Osmania University, Hyderabad, India. He was
a Visiting Scientist at the following institutions
- Dept. of Geological Sciences, University of
Birmingham, Birmingham, UK - 1986/87; Dept. of
Earth Sciences, Christian Albrechts University,
Kiel, Germany - 1992/93; Dept. of Disaster Research,
GeoForschungsZentrum, Potsdam, Germany - 1996/97.
A keen Chess enthusiast, he visited Switzerland
(playing in the Chess Olympiad in Lucerne - 1982
as a member of the Indian team), Russia, Spain,
Germany, Slovakia and Hong Kong in various capacities
like player, coach and organizer. Fascinated in
1990 by reading the works of Ayn Rand, he started
practicing Objectivism. He has to his credit numerous
radio and TV presentations on popular science
topics, articles of topical interest and articles
in Computer Science / Geophysics journals. An
Indian by nationality, for the past 3+ years he
is working in the US as a Senior Programmer /
Analyst specializing in the development of Lotus
Notes / Domino based Internet business applications.
He currently lives alone in Bellflower, CA, USA.
He may be contacted directly at nrentala@hotmail.com
but the-vu encourages feedback through the feedback
page so that readers can share in the debate.
You
are here: the-vu>
Earth> The Decisive
Fork
|
|
