Academic journal article
By Leeds, Roger
Harvard International Review , Vol. 25, No. 3
If leadership is about setting an example that others seek to emulate, who could argue with the proven track record of sustained economic success in the United States? During the boom years of the 1990s, it was hard find fault with the country's economic performance. With the stock markets breaking records on a daily basis and the economy reveling in the longest period of uninterrupted growth in the post-war era, the United States could rightfully claim the mantle of undisputed global leader in creating and practicing a brand of capitalism that was the envy of much of the world. Although far from perfect, at the core of the US economic model was an elaborate network of institutions and individuals who presumably practiced the virtues of fairness and transparency while maintaining a so-called level playing field--precisely the qualifies that serve as the foundation for competitive markets and sustainable economic growth. Largely because of these characteristics, corporate access to investment capital--the fuel that drives private sector performance in any economy--was broader and deeper by far in the United States than any other country.
Regardless of the country or culture, a prerequisite for market efficiency is public trust--trust in a system where investor decisions are based on reasonably accurate and complete corporate disclosure, where all participants have equal access to information, and where the laws and regulations governing market behavior are effective and enforced. These are the underpinnings that allow investors and regulators to make comparative assessments about risk, price, and performance of those seeking to raise capital in the marketplace. In a market economy, trust is embodied most prominently in an interconnected network of public and private institutions that conveniently fall into three categories: the main government agencies that set the rules of the game for corporate and financial market behavior and monitor their performance, such as the regulators of securities markets and banks; the private sector self-regulating bodies that set standards for acceptable conduct within specific professions, such as accounting, law and banking; and perhaps most importantly, the companies themselves, along with their independent directors, outside legal counsel and financial advisors. The model works at its best when the investing public, the suppliers of capital, has confidence in the competence and integrity of these institutions, as well as in the individuals in key leadership positions who set the standards defining how these institutions operate on a day-to-day basis. The overpowering strength of the US economy, especially during the 1990s, seemed to provide the ultimate validation that the model worked like a finely tuned machine and enjoyed a high level of public confidence.
The credibility of this premise, however, has been seriously damaged by the flood of revelations describing corporate misconduct that began when Enron declared bankruptcy in December 2001. Although the alarm was first sounded in the United States, where the scandals rapidly seemed to take on epidemic proportions, similar headlines exposing corporate chicanery soon began to appear regularly in country after country. The cumulative evidence began to suggest convincingly that this was not simply a story of one or two rogue corporations and their advisors circumventing the rules of the game, or a one-off breakdown by public institutions responsible for oversight and supervision of financial markets. Instead, there appeared to be a systemic erosion of governance standards and practices on all three levels of institutional responsibility: government agencies demonstrably failed to effectively monitor corporate and financial market behavior, the self regulators were far more intent on protecting than monitoring the performance of their professional members, and corporate executives were enriching themselves at the expense of their shareholders, apparently with the acquiescence of their boards and outside financial and legal advisors. …