Rebuilding Trust in Corporate America: The Challenge of Ethical Performance

Address by THOS. E. CAPPS, Chairman, President & CEO, Dominion
Delivered to the City Club of Cleveland, Cleveland, Ohio, January 31, 2003

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Where Did The Seven Trillion Dollars Go?(English) (Greek)

Thank you, Clare...and thank you, ladies and gentlemen. It's a pleasure to be in Cleveland – and a real honor to address the City Club Forum.

Few cities in America have a public speaking series as prestigious as this one...and I'm privileged to add my name to the list of distinguished speakers who have gone before me.

Three years ago, my company became part of East Ohio Gas Company's long and proud history when we purchased its parent company, Consolidated Natural Gas.

As you may know, The East Ohio Gas Company has roots in this area going back to 1898 – pre-dating even the City Club.

The company was formed by John D. Rockefeller's Standard Oil of New Jersey to bring natural gas across the Ohio River from West Virginia to the citizens of northeastern Ohio.

Dominion is a proud old company also. We date back to 1787 when George Washington was one of the incorporators. Back then, we were called the Upper Appomattox Company. We barged rum upstream and tobacco downstream. You could say we started out in the 'Sin Trade.'

When we merged with Consolidated Natural Gas, East Ohio's parent, we were pleased with what we found at East Ohio Gas. We didn't even fiddle much with the name.

Today, Dominion East Ohio is our largest retail gas distribution franchise. We serve more than 1 million homes and businesses here in the Buckeye State.

Cleveland is our home base, and we enjoy being part of the business community in one of America's great cities.

In short, it's been a great transition – a win/win story with many lessons learned and practical experiences worthy of a speech at this distinguished forum.

Yet, I've taken the opportunity at other recent public events to talk about trust – more specifically, the public's loss of trust in Corporate America, and what the business community needs to do to regain it.

Today, I'm sticking with that timely, pressing subject.

With the possible exception of the students in the audience, I'm guessing most folks here are old enough to remember a hit TV series by the name of 'Dallas.'

If you ever tuned in, you recall that the main character, J.R. Ewing, was the greediest, most conniving, meanest oil tycoon ever to grace the television screen.

In 2002, we didn't need Hollywood to bring us shady characters... CNN, CNBC and Fox News did the job quite nicely. It' s sad. Not since the days of J.R. have America's business leaders been held in such low esteem.

He clearly hit a chord. The show spanned three decades. It seemed like great fantasy at the time.

In 2002, we didn't need Hollywood to bring us shady characters like J.R. Ewing. CNN, CNBC and Fox News did the job quite nicely.

It's sad. Not since the days of J.R. have America's business leaders been held in such low esteem.

A recent Conference Board public opinion survey ranked CEOs only one notch above car dealers, which I assume are above bank robbers and child molesters.

Enron – another villain from the state of Texas – gets considerable credit for that, but certainly not all.

After the Enron collapse, Arthur Andersen crumbled. WorldCom came crashing down. A wave of corporate accounting scandals – not to mention the ongoing power crisis in California and the debacle in the Catholic Church – cast a dark shadow over America's institutions. Public confidence took a dramatic nosedive.

These events have been a painful wake up call for business leaders.

A skeptical, cynical America creates serious problems for the business community.

Let me begin by saying that I'm an unapologetic capitalist.

In my opinion, the system is not broken; however, it could use a little mid-course correction. It needs more transparency and accountability by corporate management.

A lot of people have lost a lot of money recently in the market. Part of it was the fault of corporate management, but part of the blame also lies with the investors.

The dot-coms never made economic sense. They never had earnings – only projected revenues.

Security analysts were making absurd calculations. They would project revenues 5 to 10 years out for a company, then compute earnings on those estimated revenues, then discount the earnings back to get a net present value for the projected earnings, and then apply a multiple to the earnings to derive a share price.

This is a preposterous practice!

Some of the people running corporations did the same thing, but when their pie-in-the-sky assumptions didn't pan out, they played accounting games and tried to hide their mistakes.

Many investors were defrauded. The corporate bad actors that did this need 15 or 20 years of free room and board – in a federal rest home. I am told that the food there does not get even a half-star and the wine list is lousy.

Free markets need trust in order to work properly. Investors need to have confidence in the information on which they base their

Free markets need trust in order to work properly. Investors need to have confidence in the information on which they base their decisions. Consumers want to trust the quality of the goods and services they buy. Corporations need strong bonds with the communities they serve.

decisions. Consumers want to trust the quality of the goods and services they buy. Corporations need strong bonds with the communities they serve. Corporate wrongdoing threatens those bonds.

Generally speaking, the damage is widespread. It has transcended specific companies or industries.

Restoring credibility is going to take time, patience and hard work on many fronts by business leaders and the rank and file as well.

The way I look at it, companies fail for one of three reasons. Either their business plan is flawed, the execution is flawed, or their leadership is flawed.

Most of the dot-com failures of the past few years and the problems in the energy industry can be blamed on flawed business models or flawed execution. Unfortunately, the current crisis is more about flawed leadership.

Leaders at the top have to set the tone for the whole organization. Values and expectations have to be explicit.

Most corporations are run by women and men who are honest, hardworking and have integrity. But as in any group, there are a few bad apples.

Back in 1988, we had a joint venture with Enron that lasted a few years. We terminated our relationship because we felt that our corporate cultures were too different.

They thought we were too staid and conservative – they used the term 'gummy.' We thought they wore their six-guns strapped around their knees.

Their corporate philosophy was different from ours. They rewarded people for signing contracts or conceiving projects.

It didn't make any difference if it was a terrible contract or a dumb project. Their people got big bonuses up front before it could be determined if the contract or the project was profitable. This was an adverse incentive – an incentive to enter into contracts or develop projects so they could collect large bonuses.

I believe the secret to running a successful corporation is not that complicated: Just don't do anything big and dumb.

Enron did many big and dumb things. They thought they had cornered the market on intelligence. The ancient Greeks called it hubris. Because they were smarter than we mere mortals, they didn't have to play by the rules. They got into things they knew nothing about in places they did not understand.

A big, dumb electric project in India, purchasing a major water company in the U.K. when they had no expertise in running water companies, projects in China, Indonesia and Latin America, trying to game the electric market in California.

As each of these projects started losing money, corporate management got creative in hiding the losses. They created off-balance sheet entities to hide their losses and the debt they incurred.

They booked fictional revenues and earnings and moved assets and debt among their various subsidiaries in an attempt to cover up their big, dumb decisions.

Were they immoral? Yes. Were they unethical? Yes. Were they illegal? Yes!

In my opinion, Messrs. Lay, Skilling, Fastow and others should also be given free room and board for a substantial period.

Looking at Enron reminds one of what William Makepeace Thackeray said he wanted to do when writing Vanity Fair: "What I want to make is a set of people living without God in the world, greedy, pompous, men, perfectly self-satisfied for the most part, and at ease with their superior value."

A few bad characters ruin it for all of corporate America.

Any corporate chieftain who wants to avoid the fate of Enron's Ken Lay or WorldCom's Bernie Ebbers has to be able to answer a variety of important questions:

* Are we disclosing all the information shareholders need to know?

* Is our outside auditor helping us do it right?

* Do our board members have all the information they need to ask the right questions? Do we encourage them to question our actions?

* What's our typical response to a crisis? Do we deal with it openly and pay the price? Or do we cover it up and try to hide it?

* Am I, as CEO, setting a proper, ethical and moral example for the people who work in the corporation?

* Do I encourage people to be open with me about any concerns they may have about the way the corporation conducts business?

* Do I take action immediately to correct or alleviate their concerns?

There are more than 11,000 publicly traded companies in the United States. The vast majority of their CEOs understand and act on the premise that corporate responsibility pays. Unfortunately, there are also some who prefer to believe that corporate irresponsibility pays.

As President Bush said in a speech to Wall Street this summer, “ …the American system of enterprise has not failed us. Some dishonest individuals have failed our system.”

The perks of leadership – including money, power and influence – have to be balanced with a clear sense of accountability to shareholders, employees, customers and the public. Otherwise, greed and ego can wreak incredible havoc, as we've seen.

Some legislative and regulatory solutions make sense.

One example is the improvements to the financial disclosure system contained in the accounting reform bill passed by Congress last summer. Clearly, investors need to be protected from fraud, error and undue risk.

But the pendulum can swing too far. Over-zealous regulation is counterproductive. It stifles economic growth, threatens innovation and hinders flexible decision-making.

I'm a true believer in free market capitalism.

Over the long haul, capital markets do a much better job of disciplining corporations than the legal or regulatory system ever could.

As “Exhibit A,” I point to the way the global marketplace has responded to this year’s accounting scandals.

Whenever a company has released suspect numbers – names like Tyco, Bristol-Myers Squibb, Enron and Dynegy come to mind – their stocks and bonds have been crushed.

And many more CEOs have been axed by boards of directors concerned about collapsing share prices than through new laws or governmental investigations.

The point is, markets punish wrongdoing by hammering stocks and throwing managements out the door. And management today lives and dies with stock prices.

No economic model is perfect. But I'll carry the torch for America's free enterprise system any day.

When business is at its best, we fuel economic growth, improve the standard of living and meet consumer needs and expectations. We invent, innovate, problem solve and pioneer. We also give back to the community through the arts, education, and health and human services.

These and other positive virtues of American business cannot be overlooked.

Have no doubts, the stock market will come back. While the economy grew only modestly last quarter, earnings were up almost 10 percent for the S&P 500 companies that have so far reported their earnings for that quarter. For the same quarter a year ago, S&P 500 earnings were down over 20 percent.

The latest figures I've seen show there's between $5 trillion and $6 trillion sitting on the sidelines in money market funds. When these funds decide to come into the market, where are they going to go? Into French growth stocks or Japanese government bonds?

I don't think so. The market will return and, as we all know, a rising tide lifts all boats.

We can – and will – weather the current crisis of confidence and restore the public trust.

But it won't happen by imposing controls and passing more laws and regulations. Those are short-term fixes that bandage the wound without curing the disease.

In the end, there's no substitute for personal integrity. Corporations and their leaders must be good, and they must do good. Organizations must earn the trust of their stakeholders, day in and day out.

America's business leaders must be consistent in their words and in their deeds. They must recommit – and communicate – their organization's dedication to ethical performance.

In the near term, homeland security and the war on terrorism may get top billing over economic growth and wealth creation. But capitalism faces a clear and present danger. It'
s nursing a black eye. Its credibility is on the line. It's going to take repeated demonstrations of corporate character and institutional integrity to get back on track.

In the words of Thomas Jefferson, we must “lay down true principles and adhere to them inflexibly.”

Ethical leadership in the modern business enterprise is a subject that could fill volumes.

At a minimum, I hope I have provided you with some food for thought about an important issue – one we've sure to hear a lot more about.

Again, my thanks to The City Club for inviting me to join you today. I look forward to your comments and questions.