If there is one lesson to be learned by the managerial debacle that felled Enron last fall and gravely wounded accounting giant Arthur Anderson, it is that we cannot afford to place blind trust in the fiscal and ethical stewardship of corporate directors.
Not that I'm singling out big business-trust is something that needs to be earned, from individuals and businesses alike-but traditionally, there has been a tendency among many to associate a company's size with its capacity for doing the right thing.
It's not as if there's not a basis for cause. Virtually every large corporation is steered by a select board of credentialed and accomplished professionals, while the ranks of management are filled with the best and brightest graduates of the most prestigious business schools. These elite men and women are not only looked upon as leaders within the private sector, but they also are called upon to shape public policy. After all, who better to help craft our nation's energy policy than the man who took a modest-sized Texas utility and turned it into the nation's largest energy trading concern?
While we learned a painful lesson from the collapse of Enron, we shouldn't be too surprised to be reminded that we can only trust corporate America to do what's right for its shareholders, and even then, we can't be so certain. Given the preponderance of stock options and insanely generous executive compensation packages, a disproportionate share of stock ownership these days rests in the hands of corporate decision-makers. Increasingly, these captains of industry are bent on doing what's best for them personally, not the majority of the company's shareholders, and certainly not the public at large.
If this were not the case, certainly Ken Lay and other officers of Enron would have come clean about the energy company's shady dealings early on, rather than continue to sing Enron's praises while dumping hundreds of millions in soon-to-be deflated stock? Can we really believe CEO Bernie Ebbers was putting the interests of WorldCom shareholders first when he made himself the beneficiary of more than $400 million in company loans? Can't we all help but wonder how Gary Winnick, founder of telecommunication flare-up Global Crossings, walked away with nearly three-quarters of $1 billion, while the majority of the company's shareholders lost virtually all of their holdings after the company's creative accounting practices helped bring it down in flames?
The artful dodgers
As talented as today's industrialists are at feathering their own nests, a great many are also skilled in the ability to stick it to their fellow men. More specifically, given the downright user-friendly nature of today's corporate tax laws, major corporations are able to skirt tax liability on billions in profits, shifting the tax burden to ordinary-and, obviously, less deserving-working stiffs such as you and me.A case in point: For the five years from 1996 to 2000, Enron posted more than $1.8 billion in pre-tax profits. Assuming there was any teeth to the corporate federal income tax laws, roughly 35 percent of that-$630 million-should have been paid to the U.S. Treasury. In actuality, according to the watchdog group Citizens for Tax Justice, Enron netted a $380 tax credit for the five years, amounting to a total tax dividend of more than $1 billion.
In four out of five those years, the energy-trading conglomerate paid less in federal income taxes than virtually each and every reader of this magazine. Which is to say, while we were dutifully filing our 1040s year after year, Enron paid nothing in federal income tax.
Of course, tax breaks like this aren't just handed out for anyone's taking. In order to take advantage of corporate tax loopholes, you first have to be making some serious money. You also need the stomach to undertake whatever seemingly slippery maneuvers are necessary to make those profits disappear, at least on paper anyway.
In Enron's case, a generous portion of the company's earnings were written down through the exercise of stock options paid to company executives and directors. In essence, the federal government rewarded the company's stewards for lavishing themselves with millions in stock options that, when exercised, not only undermined the value of all other of outstanding shares, but also cut into the company's long-term ability to raise capital.
Enron also dodged considerable tax liability by setting up more than 600 offshore subsidiaries in tax-friendly locales such as the Cayman Islands. Enron's executives have argued the operations were 100-percent legitimate, necessary to the development of the company's increasing global operations. That argument would carry more weight had the firm actually bought or sold one energy contract that actually affected the island nation. It didn't.
What the Cayman subsidiaries did allow Enron to do was keep billions in transactions from being recorded-and taxed-in the U.S. And, while the majority of tax-paying Americans may consider such actions treason, surprisingly, a number of other U.S. companies have become enthralled with the idea.
Bermuda bound
Since 1994, more than 20 U.S. companies have pulled up stakes and relocated their headquarters to Bermuda, which, like the Cayman Islands, doesn't bother its corporate citizens with such annoying things as taxes.
In actuality, these companies didn't go anywhere. Rather, by setting up a Bermuda-based holding company that simply acts as a mail drop, and paying a modest annual administrative fee, the companies are able to relocate their corporate offices offshore and out of reach of federal tax liability. And the savings-or cost to taxpayers, depending on which side of the fence you're on-are substantial.
On December 31, industrial heavyweight Ingersol-Rand officially made its move to Bermuda. While the company is still run from headquarters in Woodcliff, N.J., its change of address will yield some $60 million in annual tax savings. New Britain, Conn.-based tool manufacturer Stanley Works has announced its intentions to head to the tropics, where it will reap some $30 million in yearly tax savings. And that's chump change compared to the estimated $400 million that Exeter, N.H.-based Tyco International saved last year by jumping ship.
Other companies that have reincorporated in Bermuda or announced plans to do so include Nabors Industries, Cooper Industries and Foster Wheeler Ltd. All told, these moves will cost the federal government more than $1 billion yearly in lost tax revenues.
While corporate spokesmen defend these moves as nothing more than strategic steps aimed at reducing expenses and maximizing shareholder returns, I see something different. I see short-sighted misguidance pushing the boundaries of corporate irresponsibility by inviting a consumer backlash that will ultimately cost more in lost sales than that saved by tax dodgery. At least I hope that's what happens. And I'm not alone.
Already, congressional leaders from both sides of the aisle are calling for legislation that that will put the brakes on these operational shell games. While it's not known at this stage what shape that legislation will take, I have some ideas on what should be implemented.
If a company chooses to divest itself of its responsibilities as a U.S. corporate citizen, I think it's only fair that the U.S. divest itself of each and every privelege afforded that company. Revoke its patents. Void its trademarks and copyrights. Purge that company and each and every one of its subsidiaries from government contracts and vendor lists.
My ideas may sound extreme, but I think they're no more so than the idea of a company turning its back on its roots, and sticking it to its employees, shareholders and customers, who ultimately end up picking up the tab. W&C
