The Cult of Numerology
June 5, 2006 Mary Lou Roberts
“. . . both ‘cult’ and ‘culture’ come from the same root. At [Arthur] Andersen, people didn’t seem as if they belonged to a cult in the sense of worshiping an out-of-the-mainstream charismatic leader. . . . But their behavior–their overarching commitment to the Firm and what it stood for–and the Firm’s efforts to shape that behavior were. . . cultlike. Slowly, a mighty culture was disintegrating into a soulless cult behind those doors. . .” –Barbara Ley Toffler, Final Accounting
When the verdict was announced on May 25 of Enron demons Ken Lay and Jeffrey Skilling–Lay guilty on all six counts of conspiracy to commit securities and wire fraud against him, and Skilling guilty on 19 counts of similar charges–much of the world cheered. I didn’t. I hadn’t expected my own reaction which was simply to feel saddened for us and for them.
Before you start composing the hate mail, let me explain. I’ve read a great deal about the Enron debacle, most notably Conspiracy of Fools by Kurt Eichenwald (the most fascinating account of the scandal, in my opinion), and Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron by Bethany McLean and Peter Elkind, and I’ve seen the movie that was made of the latter text. I’ve also recently read Final Accounting: Ambition, Greed, and the Fall of Arthur Andersen, by Barbara Ley Toffler–another fascinating if depressing account of wrongdoing in corporate circles. All of these texts should be on your reading list if you have a serious interest in understanding not just the specifics of the Enron and Andersen horror stories, but the breadth of the business and social cultures that we have all participated in that fostered these crimes and others.
The Enron case has certainly gotten the most publicity, and the conviction of the top management players who, at best, allowed the fraud to occur by turning a blind eye to the machinations of Andy Fastow. But let’s not forget WorldCom and Waste Management, or Drexel, or Adelphia Communications, or ImClone Systems, or Tyco or Global Crossing or any of the other examples of greed and corruption in American business that came built up in the 1990s and busted our economic investor bubble so abruptly.
Has it always been thus? To some extent, of course it has. The gluttony of greed is nothing new and has been recorded since ancient times. What may be new is the extent to which our culture actually promotes this type of behavior.
Promotes? Yes. Despite what we say constitutes our moral code, and despite the teachings of just about every major, recognized religion in the world, we have over time constructed a society that rewards and praises the greedy and the short-cut takers–as long as they don’t get caught. And when they do get caught, we hang them for the crime of bringing the unsavory acts into the public spotlight, not for the acts themselves. We all praise and reward and even envy the Ken Lays and the Jeff Skillings and love to go along for the ride if we can latch onto the coattails of their “success.”
This syndrome is all part of our desperate need for instant gratification–our societal inability to be patient and reap deep-seated and meaningful rewards. We seem simply unable to view the big picture and look at things long-term.
Most (admittedly, not all) of the crimes committed in corporate America in recent decades can be directly tied to the need for corporations to meet or exceed Wall Street expectations for a given quarter. The rules are simple: companies must make predictions that show they are going to be profitable and grow, and they darn well better make those numbers. If you miss the mark, your stock will plummet, even if your company has done well. A company that projects a 5 percent increase in earnings but realizes only a 4.5 percent increase can expect to be punished by investors and analysts alike. And a company that fails to project a sizable increase will be punished as well. Is it any wonder that the name of the game has become manipulating of the numbers to show the investing public what it wants to see? Make those numbers (forget about how you reach them) and you’re a success. Fail to make them and we’ll show you the door. And while we’re at it, let’s complicate the issue by compensating executives with huge blocks of stock options so that they and their families now have a personal incentive as well to increase the value of the stock.
Were Lay and Skilling alone in their guilt? Certainly not. There’s a lot of guilt to go around. Frankly, I’m just as angry if not more so with Andersen, the external auditor. That organization was, after all, supposed to be looking out for the welfare of the investing public. Instead, Andersen was more concerned with whether or not it could keep this plum account. Rather than risk irritating the client, Andersen removed from the account anyone who asked too many questions or who balked at approving the “non-traditional” accounting methods that were used to cook the books. When such a big chunk of partnership profits are at stake, “client satisfaction” becomes the name of the game–and the client paying the bills was Enron, not investors. But the role of certified public accountants is to protect the investing public. If I pay a security guard to guard my house, and that security guard is bought off by the thief, I’m madder at the security guard than I am at the thug who ripped off my new DVD player. I expect the thief to try to steal something (or managers to try to make their corporate numbers to look as good as possible); it’s the security guard who has betrayed me more.
And where was the press? A reading of the accounts of the Enron case shows that the Fourth Estate, supposedly a deliverer of unbiased news, fell down on the job as well. Enron put heavy pressure (read that “threats of loss of advertising dollars”) on publications that gave bad press to the Enron bunch. In fact, in early 2001, just months before the first cracks in the Enron wall became public, Fortune gave Enron the number one spot for innovativeness (the accounting certainly was), and the number two spot for quality of management. Even the reporters for the journals that exclusively cover markets and corporate financials failed to ask the right–and some would argue, obvious–questions about the balance sheets and financial statements. Were they simply not digging deep enough? Or were they too concerned about the impact that any revelations they might report would have on their own careers and company earnings?
Pressure to make the numbers is pervasive in other aspects of our society as well. Take, for example, higher education where grade inflation is rampant. Students used to be proud of a B average. (That was a cut above C, which was, of course, supposed to mean “average.”) But any who still are should not be. It’s been reported that Harvard students have a 50-50 chance of getting an A or A- in any given course. Anyone with a B average is near the bottom of the class. Why do colleges do this? My observation as a college professor of 15 years is student retention. Forty years ago, at the start of the Baby Boom, students had to work to get into college. There were more students wanting to be admitted than there were seats. Today, the economics has reversed itself. Anyone can go to college, provided that they can scrape up the tuition dollars–and that’s relatively easy through student loans. The increase in the number of colleges (especially community colleges) has put pressure on the system to keep enrollments up. In short, colleges don’t want students to drop out or to go somewhere else. Professors who don’t inflate grades aren’t popular; their classes don’t fill. And student popularity does have influence on tenure (but the abuses of that system constitute a whole separate discussion). Non-tenured professors who are not popular with students are expendable. But these professors need to earn a living too, so they go with the flow, much like their counterparts in corporate America.
The students, too, play the numbers game. Out of curiosity, I recently asked one of my classes at the beginning of the semester, “What would you say if I made a deal with you all? We won’t tell the college, but we’ll agree that since you don’t really want to be here, and since I have other things to do too, so would you agree that we won’t come here every Monday night for three hours. Instead, I’ll just give each of you a B+ for the semester.” Eighteen of the twenty students said they’d take me up on that. For an A-, the other two would agree. Of course, we didn’t do it. But not one of them said they would be concerned about missing out on the educational experience. The learning–and what it would buy them for their futures–didn’t matter. The number did.
Where did they learn to put this emphasis on the numbers–on the appearance rather than the substance? We have taught it to them. We fight to get them into the most advanced pre-schools so that we can be sure they’ll be at the top of the class when first grade rolls around. If, heaven forbid, they don’t excel, we medicate them with Ritalin and anti-depressants to explain why they aren’t living up to their potentials. We push our kids to score the most soccer goals so they’ll be the best on their teams, and we get angry and blame the coaches when our kids don’t perform at top levels.
We tell them to get that piece of paper with the high GPA because it will get them the best jobs with the highest salaries. Once you’ve got the job, make your numbers. Show the highest profits. Generate the most revenue. You, too, can make it to the top, just like Lay and Skilling.
What we have forgotten is to teach them that most things don’t come easily or quickly. That we aren’t all good at everything. That sometimes slow and steady is better. That happiness doesn’t come wrapped in stock options or even big houses.
Before we celebrate the convictions of Lay and Skilling, and before we sleep better at night knowing that Martha Stewart had to wear an electronic ankle bracelet while at home awaiting her trial, and before we console ourselves with the notion that the bad guys and gals are being punished, we had better look around at the cults that we each of us are a part of and the cultures and values that we ourselves teach and praise and reward. Until we do, not much is going to change.