Integrity Itself On Trial

It‚s been more than two decades since the integrity of the nation‚s business and financial institutions have been subjected to the type of widespread challenge and opprobrium that they are encountering today. And this time it‚s different.

Back in the 1970s, when Wall Street and corporate America occupied center stage in the national doghouse, they were victims of an irreverent, cynical counterculture that derided the values of capitalism and often democracy itself. Today, not many people question democracy or capitalism. Instead, financial and business institutions are victims of their own actions.

Treasury Secretary Paul O‚Neill raised hackles a few months ago when he cited the Enron affair as an example of the beauty of capitalism. His choice of words may have been inappropriate, but his meaning wasn‚t. In the old Soviet Union or even in a nation of state-managed capitalism like Japan, an enterprise like Enron could have perpetrated its fraud a lot longer than it did in America.

That said, it is clear some of the checks and balances of the free enterprise system are out of alignment. Auditors, we thought, worked for shareholders, not management. Although no one believed the barriers between the research and investment banking units at Wall Street firms were the Chinese walls they were made out to be, it‚s still surprising to learn that analysts privately referred to companies they touted as pieces "of junk." I always assumed that when they handed out the $5 million bonuses, they also gave the analysts a glass of Kool-Aid that induced them to "really" believe that Extreme Networks‚ shares were actually going to $900 a share.

The other day, I heard former General Electric CEO Jack Welch complain that for years business leaders could do nothing wrong and now they can do nothing right. He has a point. Perceptions and images can gyrate as wildly as stock prices. Since journalists rank just above politicians and used car salesmen in terms of professional respectability, I have little sympathy for Welch.

Image itself can be a problem. I wasn‚t surprised that after Coca-Cola‚s legendary CEO, Roberto Goizueta, died, the company missed its numbers for two years. Nor is it shocking that GE is now struggling to make its numbers, something that was a slam dunk when Welch was in the house. Neither company was cooking the books, but they sure were creative. When people start to question the integrity of basic financial reports, our whole system is undermined.

More than Wall Street, accountants at what contributing writer Eric Reiner now calls the Big Few were perceived to possess a degree of integrity that was unrivaled in financial services. Twelve years ago, when I started covering the advisory business, I was told by a wise reader to try to quote as many then-Big Six accountants as possible, because their comments carried more credibility and authority than those of financial planners, brokers and insurance agents. How far the mighty tumble.

Which brings us to the final point. Independent financial advisors are one of the few segments of the financial services industry to go through this period of creative self-destruction with their images and integrity intact. In one news broadcast recently, an Enron employee benefits executive said that many employees who used financial advisors reduced their positions in the company.

It took the financial planning profession the better part of a decade to restore its own credibility following the limited partnership disaster of the 1980s. It takes years to build an image of integrity and only minutes to destroy it. That lesson should not be forgotten as advisors find themselves in a position of lonely respectability.