The drumbeat of legal actions and investigations against the corporate icons of the late ’90s intensified today, with the news that the New York district attorney was investigating Hewlett-Packard over its activities during the Compaq merger — or non-merger, as time and the lawyers will tell. This raises the questions: were dress down Fridays symptomatic of the ethics of the late ’90s, and should we, if we are looking for a reformed capitalism, seek a capitalism not only purified, but dressed in a wing-collar and driving a Packard?
As I have remarked previously, the key psychological difference between the baby boom generation and previous U.S. generations was its contempt for established norms of behavior and ethics. Dress down Friday was just a symptom of this. Once baby boomers reached the top first as investment bankers and consultants, and later in the Fortune 500 companies, they found it attractive to bring their overage blue jeans style into the office, and to demonstrate their rejection of outmoded norms of suit-and-tie dress. Of course, as in other areas this was simply a surface change; those baby boomers that wished to alter the underlying reality that executives should dress smartly for business had been weeded out well before they made it to the boardroom. The result was an epidemic of expensive fashionable “casual” clothing, to be worn on Fridays, and yet further uncertainty added to the lives of junior and trainee staff, who now had to waste money on not one but two expensive “office” wardrobes — polyester pants from Sears, however casual, did NOT cut it with the trendy style-setters at the top of ’90s business organizations!
The old style of business attire, particularly in its extreme form, both personified and encouraged a certain rigidity of thought patterns. J.P. Morgan, resplendent in wing collar, three-piece suit and watch-chain, told the Pujo Committee in 1912 he gave loans not on the basis of balance sheet, but of character. This was an important difference with the mores of the late ’90s; Arthur Anderson could work wonders with Enron’s balance sheet, but could do nothing with the character of its principal officers. Banks like J.P. Morgan Chase, lending billions to the company, would have done well to pay as much attention to the ethical sloppiness inherent in the off-balance sheet partnerships, with their insider transactions with Enron Chief Financial Officer Andrew Fastow, as to the mountain of Enron’s formal financial data.
Similarly in the dot-com world, the lifestyles of the major players should have been a dramatic signal to investors that they were not in it for the long haul. In a previous tech stock boom, in 1983, baby boomer Dennis Barnhart, founder of Eagle Computer, caused the cancellation of his Initial Public Offering by fatally crashing his Ferrari the afternoon of the share sale. The money was refunded to investors, which mighty not have happened fifteen years later.
Barnhart’s hedonistic lifestyle was symptomatic of his successors in the dot-com boom — the only difference was that they sought, mostly, to remain alive long enough to cash in their stock options. Had Barnhart adopted the lifestyle of the previous generation of entrepreneurs, being chauffeur-driven at stately speed in a Packard rather than driving his own Ferrari, both he and his company would have survived — with all that sheet metal around them and a relatively low top speed, occupants of a Packard were unlikely to suffer worse than a fender-bender!
The New York attorney general’s investigation into the investment banking analyst community was a long overdue recognition of the conflicts of interest inherent in modern conglomerate investment banking. However, the dot-com stock phenomenon, in which celebrated analysts produced buy recommendations on wildly overvalued and in some cases worthless stocks, thereby raising their valuations still further into the stratosphere, was simply a manifestation of Charles Mackay’s 1851 classic “Extraordinary Popular Delusions and the Madness of Crowds.”
In the 1990s, the ethical constraints against such dealing were weaker, the communications technologies enabling gullible investors to have access to spurious research were better and, perhaps most important, the barriers between investment analysis and stock peddling were lower, because of the growth of conglomerate banking behemoths, doing both issue and investment business.
In the wing-collar and Packard era, after all, even before the securities legislation of the 1930s, issuing houses — whether London merchant banks or wholesale banks like J.P. Morgan — were not involved in brokerage directly, and relied far more than do modern houses on their market reputation. Hence the temptations to hype stocks were less, and the inhibitions greater. Stock hype occurred, of course, but it was confined mostly to second-tier houses that were not regarded as among the market leaders.
The plague of creative accounting that occurred in the late 1990s was also a product of the era’s fascination with results over process. General Electric, as reported in the New York Times Sunday, and here as early as last June, in the 1990s took to inflating its earnings numbers year after year in order to provide a steady growth trend, and to adopting such gimmicks as negative pension fund contributions in order to goose the numbers further. Even as late as the 1960s, such creative accounting was largely restricted to the era’s “go-go” stocks, and in the era of wing collars and Packards, where there was disclosure, it was expected to be accurate and generally was so. The 1920s investor expected the limited information with which he was provided to give him a clear picture of his company’s operations. That picture may have been limited and indeed distorted, but for a company of General Electric’s stature it was not misleading. In any case, corporate earnings were of very limited investor importance; stocks were bought for the size and security of the dividends they paid.
The plague of excessive insider stock option grants, unreported except as a footnote in the issuing company’s income statements, was a further area in which ’90s management sought to push new frontiers in appropriating the wealth of shareholders, without significant scruples about doing so. By supplying “compensation consultants” to validate the stock option grants and complaisant accountants to hide their effect from the stockholders whose wealth was being diverted, ’90s capitalism showed itself adept at creating mechanisms to hide truth and create “spin.” Ripping off stockholders is no new phenomenon, of course, but in wing-collar and Packard capitalism it was the mark of a fly-by-night company, not a top-table operation like Cisco, in which widows and orphans might invest.
In retrospect, as was partly clear at the time, the late-1990s was a period, both in stock markets worldwide and in U.S. politics, of unique ethical sloppiness, that has besmirched the free market system and is likely to do so further. It is clear that the future, whether or not it brings a deep bear market and “second dip” to the recession, will bring a renewed emphasis on ethical behavior in the business community — such a renewal is after all entirely typical of the reaction after a stock market bubble.
If the improved ethical climate is to have any effect, however, it will require either business or, worse, the government on business’s behalf to draw much clearer lines between acceptable and unacceptable conduct. Business must also focus more closely on activities that are likely to generate long-term shareholder wealth, and put in place far more stringent controls against management expropriation of shareholder property. This return to “wing collar and Packard” capitalism does not imply greater inequality. The GINI coefficient measure of inequality for the United States was almost certainly no higher in 1929 than the 0.43 it reached in 2000, after a long up trend from the egalitarian 0.35 of the 1960’s.
An era of more rigid rules and “get rich slow” is likely to produce a revolution in standards of business dress and lifestyle. The market for corporate capital will demand, not dress down Friday, but dress up Friday. To demonstrate its new commitment to higher ethical standards, business could begin by smartening its dress code, on Fridays at least. First, the vest, or waistcoat, should be brought back, to hold in the middle-aged spreads that even baby boomers develop eventually. Next, wing collars, to hide the double chins and, by their unique and excruciating pressure against the chin, remind executives at all times that higher standards of probity are now essential. Finally, top hats should return, promoting in executives the stately progression that is the mark of the sound business rather than the swift trot of the hurried or the mad dash of the fly-by night.
Packards, too, could usefully make a comeback. While no more fuel-guzzling and impractical, they just LOOKED more attractive than sports utility vehicles.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
This article originally appeared on United Press International.