21st Century Corporate Responsibility - "evolution, Revolution, or Back to the Future?" - Alfred P. Carlton, Jr.

• Jurisdiction: United States,Federal
• Publication year: 2003
• Citation: Vol. 54 No. 2

Lessons from Enron: A Symposium on Corporate Governance

October 16, 2002

Dinner Speech

21st Century Corporate Responsibility—"Evolution, Revolution, or Back to the Future?"by Alfred P. Carlton, Jr.^*

It is indeed a privilege to sound the "opening bell" on this timely symposium. Yes, tomorrow we will tackle the new world of corporate responsibility and the role of lawyers, pause to consider their effect on compliance and enforcement, and then delve into specific corporate governance reforms and the role of accountants. We will be challenged both intellectually and philosophically on an issue that, I believe, underlies the number one problem facing this nation's economy—confidence in our capital markets. It is timely. It is not only relevant, but important. So I thank Mercer University for sponsoring this event. I hope that I can provide some perspective and food for thought to assist us in our deliberations.

I think it would be helpful if I begin my remarks by focusing on the average, everyday American citizen and the average, everyday American investor.

This great country is nothing but a collection of 250 million individuals, each of whom operate under an essential economic contract. The contract goes like this: If you work hard, obtain skills, and show some ingenuity and creativity, you will go far in this economy. Success certainly is not guaranteed to anyone, but the American form of capitalism does hold the promise that talent, aggressiveness, and hard work will be the criteria on which individual success is either realized or denied. The promise that our unique brand of capitalism does make is that when you and I put our money on the table and make a bet, we will win or lose that bet based on its true merits, its true worth—a fair understanding of the risk taken and on what specifically is being wagered. This is a fundamental principal of our economy. We believe in a free and fair capitalist economy supported by the rule of law. We believe that when we harness the power of individual economic creativity and motivation, we collectively prosper.

In the last decade ordinary Americans have become directly involved in investing as have no other generation in history. Traditional pensions have given way to 401(K)s—with the added features of substantial 401(K) investment in the employer by the employee and dramatically increased use of stock options. The Internet has made access to the stock markets and other investment institutions as easy as a few clicks of a mouse. We have witnessed the grand democratization of our economy through increased participation in the capital markets.

But in some ways it seems like "de ja vu all over again." History seems at times more cyclical than linear. Similar openings to the marketplace occurred in the 1920s, when we saw more people take an active role in their own investments. Unfortunately, folks at that time started investing euphorically by wildly speculating, many on margin. Marketplace abuse and capital market structures assisted and abetted in a market collapse, resulting in a sudden avalanche that wiped out entire fortunes and changed the entire landscape of this country.

So this country dusted itself off, learned from its mistakes, and implemented a real change to how the marketplace works through Depression-era legislative reforms resulting in dramatic de novo marketplace regulation and real protections from marketplace abuse, reforms which previously had been thought to be un-American and anti-free enterprise.

Today we find ourselves in a similar situation. Dusting ourselves off. Who among us a year or two ago would have predicted that the U.S. capital markets would lose over a third of their value? That abusive, breathtaking corporate fraud would result in an almost unprecedented national loss of confidence in American capital markets? Thus, the parallels of the euphoria of the 1920s and the irrational exuberance of the 1990s, and their results, are telling and instructive.

Once again we must come to terms with the realization that a free and fair market does not occur by its own operation. That without rules and restrictions and without a structure of corporate governance that counteracts marketplace manipulation in an effective manner, a marketplace will trend in a destructive and decidedly undemocratic fashion—out of round—violating the promise of the American capitalist system. Violating it not just in a macro sense, but in a microsector sense—my thought being that marketplace manipulation can occur outside of central market mechanisms—or in one sector of the market that will lead to a chain reaction, destroying the one essential element that makes the market work—investor confidence. A sobering statement? You bet. So, it is today with irrational exuberance being replaced with irrational doom. So to what do we look to shore up the market?

I have heard others say, when speaking to the current corporate governance crisis, that "you can't legislate morality." Well, yes you can! And you can also engage in social engineering! As Exhibit A, I offer up the Securities & Exchange Acts of 1933 and 1934.¹ Whether it is utilizing the rule of law against the ultimate immoral act, murder, and on down the line, including unprecedented public corporate thievery, we do not rely on conscience alone to govern ourselves or to regulate the economic marketplace to assure its openness and fairness.

So in this light, what do we seek from the law? What do our markets need from the law? Our historical answer has been to utilize the rule of law to force a market to act in a transparent manner—to assure that investors, big and small, play on a level field of accurate information and with principals playing by the rules.

And we know that a transparent, abuse-free economy is nothing more than a...