About This Issue
Taking Stock
After a Bad Year
I HOPE YOU'RE READING THIS in a hammock with a tall glass of lemonade
and enjoying August, the traditional vacation month, for 2002 has been
a year in which we’ve been drenched in a monsoon of headlines about
business scandals. Gloomy weather can make one appreciate sunshine,
but if we slush around in it too long, it plays havoc with our sense
of who we are and our worldview. August is a good time to step back
and ask not only how good people go bad but also how we might make it
easier for them to stay good.
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In a short time, we have gone from a plethora of business news praising
celebrity CEOs and stock analysts to daily tirades about scoundrels.
Given the evidence of corporate greed and mismanagement, it is hard
to call this yellow journalism, but this year’s business headlines portray
a kind of hopelessness that may be just as unjustified as the previous
irrational exuberance (detailed by Ronan McGovern, Sloan ’96). As Professor
James Van Horne makes clear, the current problems have subtle differences,
but they are not really new. In fact, our scholars at the Graduate School
of Business have been telling us for some time that we were overconfident
in the transparency of u.s. market systems. Past issues of this magazine
have described GSB research related to problems with stock analysts,
CEO pay, accounting conflicts of interest, corporate governance—in other
words, nearly all the hot business topics of 2002. Empirical research
by Harrison Hong on stock analysts and by Eric Zitzewitz on stale pricing
in international mutual funds are just the latest entries in a tradition
of research aimed not only at uncovering problems but at making improvements.
Some folks think this research is too dry—we all love a good story
about sex, greed, and avarice in high places. But when the gossip dies
down, somebody has to be there with substantive information to help
us put Humpty Dumpty together again.
Kathleen O'Toole
Editor
Letters
to the Editor
WHEN ENRON declared bankruptcy, the business community suffered its
most severe financial and moral sentinel event since the 1929 Crash.
The impact of this event sent shock waves through the stock market,
financial centers, auditing and consulting firms, Enron shareholders,
employees, and graduate schools of business administration and legal
colleges. This GSB alumnus with 56 years of postgrad experience has
been troubled by the muted response of the GSB to this crisis.
The only GSB response [that I am aware of] has been Dean Joss’s comments
in the May 2002 issue [“A Commitment to Lead”]. His staunch defense
of GSB Dean Emeritus Robert Jaedicke was waffling, considering the compelling
evidence of Jaedicke’s complicit role in approving Enron’s false financial
endeavors. Jaedicke’s expertise was in accounting/auditing, the very
disciplines ignored by the Enron board.
An analysis of the GSB’s courses reveals a paucity of ethics, financial
accountability, and moral discipline subjects.
EUGENE DANAHER, PhD ’46
Tallahassee, Florida
Response from David M. Kreps, Senior Associate Dean for Academic
Affairs:
When Dr. Danaher writes that an analysis of the GSB’s course offerings
reveals a paucity of ethics courses, it is important to know what sort
of analysis he undertook. As part of the required (core) curriculum,
students begin with 10 classroom hours on ethics. And there are a few
electives in our course catalog with names such as Ethics in the
Biotech Industry and Ethics and Global Business.
But having specific courses on ethics is, ultimately, the wrong way
to teach the subject. Students regard one-off courses as just that—something
that doesn’t fit in with the bulk of their lives. Having electives is
good, but only if students elect to take the electives, and often precisely
the students who would benefit the most from such courses are the students
who avoid these electives.
The approach that we take is to weave discussions of ethics and ethical
issues into our entire curriculum. The example I know best, because
I designed the course and am in the process of writing the textbook,
is the required microeconomics course, in which we have direct discussions
of ethical issues (on price discrimination, implicit collusion, labor
relations, and the instrumental role of ethical norms) in at least four
sessions out of nineteen. This approach means that ethical concerns
become part of the big picture rather than being marginalized. That
makes for much more effective teaching of the subject.
If you look at our catalog, you’d see E200, Managerial Economics,
and think, “No ethics there.” But you’d be wrong. So the picture isn’t
as bleak as you might suppose. Neither is it as bright as it should
be; the administration agrees with the spirit of Dr. Danaher’s remarks,
that the GSB can and should do more on this vital topic.
David M. Kreps
I WRITE IN RESPONSE TO Dean Joss’s May column, “A Commitment to Lead.”
Joss notes that it is too soon to judge ex-dean Bob Jaedicke, head of
the audit committee of Enron’s board of directors. I find it ironic
that it should appear in the same issue as John McMillan’s paean to
markets.
Loyalty to Jaedicke is commendable, but he failed to do his job. Jaedicke
may have been of the “highest character and competence,” but he certainly
got rolled by management. Whether he did anything illegal is not the
question.
The connection to the piece on markets? Some have said that Enron’s
collapse proves that the market works. Is it working when billions are
lost, California electricity consumers get shafted, jobs go down the
tubes, pensioners lose their all, and a financial industry can do nothing
but point fingers at others? I like McMillan’s final paragraph, which
begins, “Markets are not miraculous.”
JOHN T. BENNETT, SLOAN ’73
Alexandria, Virginia
ON PAGE 29 [of the May 2002 issue] writer Helen K. Chang quotes Romain
Wacziarg, assistant professor of economics: “Trade economists know that
a country opening up to trade will specialize in certain sectors, putting
resources into producing goods and services that are more efficient,
and abandoning those that are relatively inefficient.”
This businessman and Stanford MBA (from a class exposed to professors
of business economics Theodore Kreps and Jesse Allen, who were also
involved with the real world) has observed that the many countries opening
up to international trade in the last 10 years have mainly specialized
in low wages and unenforced labor and environmental laws. Multinationals
built or leased many more maquiladoras along our Mexican border
to produce a wide range of goods at substantially lower costs than their
U.S. employees did.
Then plants started moving to the Philippines, to Indonesia, and now
to China for governmental subsidies and extraordinarily low wages. (At
present, more than 50 maquiladora facilities have been vacated
in pursuit of lower wage and bribery costs.)
Now there are some 800 tech support centers in India taking advantage
of relatively low wages for English-speaking engineers there.
None of the foregoing are examples of “comparative advantage”—at
least not in any benign meaning of the term.
WILLIAM S. HAY, MBA ’50
Soquel, California
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