Free Markets and Retirement Security. (Humanistic Economics)

By Buell, John | The Humanist, September-October 2002 | Go to article overview

Free Markets and Retirement Security. (Humanistic Economics)


Buell, John, The Humanist


With the bankruptcy of WorldCom, workers have even more reasons to worry about retirement. Enron had already highlighted risks in some pension plans, but World-Com's demise has led many to distrust all the information they receive from corporations and financial analysts. The very volatility of these markets now threatens broader economic recovery. Yet, unfortunately, much of the sensational coverage of financial markets and corporate crime glosses over the deeper problems in corporate governance. Jailing a few outrageous liers and cheaters is likely to amount to little more than the quest for sacrificial victims. Without greater democratization of the U.S. corporation and more just structures of compensation, most workers will have little to look forward to in retirement.

Enron's employees lost money in part because they were deceived and handcuffed. The company's auditors, who also had consulting contracts with the firm, had a financial incentive to sugarcoat information. Workers couldn't sell their Enron stock before age fifty.

Not to worry, says Republican stalwart Phil Gramm, just a few days before the WorldCom crash. The market is now aware of this problem. The New York Stock Exchange is demanding that corporations on its list hire independent directors. Corporations are bending over backward to provide comprehensive and honest annual reports. The market will punish firms that play games. And George W. Bush promises increased criminal penalties for overt fraud. Further reforms aren't necessary.

Enron- and WorldCom-style fraud was probably rare even in the heady days of the high-tech bonanza. The larger problem lies in the charades that go on between corporate managements and Wall Street brokerage houses and more broadly in the structure of corporate governance itself. The Washington Post points out that, even after admonitions to provide candid information, most corporate reports ignore bad news or blame it on "uncontrollable factors such as the weather, the economy, the stock market, or government regulation. There is precious little data and analysis on the key operating measures that executives themselves look at to assess the company's performance--things such as inventory turns or the cost for each new subscriber."

Conservatives argue that the job of investment houses is to sort through this fluff so that clients can make sound investments. Brokerage firms that buy corporate image will fail in the marketplace. They are probably right in the long run, but all of us don't retire in the long run. Right now many brokerage houses still have an incentive to join corporate CEOs in sugarcoating information. The most influential firms enjoy many investment-banking relations with large corporations. Even if analysts' incomes are structured to depend on the wealth achieved by individual investors, the income of the firm itself is still partially sustained by investment banking fees. Individual analysts, with their income now tied to the paper wealth of their clients, themselves may often still have an interest in getting aboard or helping to foster new market bubbles.

Even utterly scrupulous industry analysts and auditors will have difficulty in many situations. Those managements that can skillfully massage the news will continue to induce interest in their stock. The stock price will rise and analysts who don't get on the bandwagon will look foolish. They may not last long enough to mutter, "I told you so," as the bubble bursts.

If pension funds are to become equitable retirement instruments, our corporate order must start by providing more equal information to all. …

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