Restoring Trust in American Business.

Author:Ostas, Daniel T.
Position:Book review
 
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Restoring Trust in American Business, edited by Jay W. Lorsch, Leslie Berlowitz, and Andy Zelleke. Cambridge: The MIT Press. 2005. Paper, ISBN 0262740273, $16.00. 185 pages.

This book, sponsored by the American Academy of Arts and Sciences, examines the causes of managerial fraud in American society. Prompted by the Enron, Arthur Andersen, and WorldCom scandals, the authors ask what happened, why it happened, and what can be done about it. Contributors include academics from law, journalism, and business, as well as practicing lawyers and investment bankers. The book proceeds in three parts. Part 1 discusses a manager's responsibilities to shareholders, focusing on the financial temptation for managerial self-dealing and the need for self-restraint in the face of those temptations. Part 2 examines the roles played by auditors, lawyers, and other "gatekeepers" responsible for policing and deterring managerial misconduct. Written in the wake of Enron, the analysis emphasizes the conflicts of interests and other corrupting influences that threaten the independence and effectiveness of each gate-keeping role. Part 3 concludes with recommendations for reform, emphasizing the need for an enhanced commitment to the norms of professionalism both for managers and for the gatekeepers responsible for safeguarding shareholder interests.

The authors largely concur on the causes of managerial fraud. Managerial fraud and excessive self-dealing result, first, from a failure of managerial self-restraint and, second, from a failure of the various gatekeepers to adequately deter managerial opportunism. Given the separation of ownership from control, top level executives have historically found opportunities to enhance their own personal finances at shareholder expense. An early chapter documents examples, including the insider trading scandals of the 1980s, controversies over executive compensation packages of the early 1990s, and the recent stock price manipulations designed to artificially boost the values of stock options held by managers at Enron and elsewhere. Of course, various "gatekeepers"--corporate directors, auditors, corporate lawyers, investment bankers, government regulators, and business journalists--are supposed to protect the shareholders' interests. But if these gatekeepers are understaffed, undertrained, inattentive, or, worse, compromised and co-opted, then it may very well be that managerial fraud pays, and pays quite handsomely. In such...

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