The Incredible Shrinking Businessman

By Michael Elliott

When a rock-ribbed conservative columnist at the Wall Street Journal and the man who was Bill Clinton's chairman of the Securities and Exchange Commission use the same sweeping adjective to describe a situation, you know they're talking about something serious. Testifying before the Senate Governmental Affairs Committee last week, Arthur Levitt, former head of the SEC, identified the Enron affair with "an emerging crisis of systemic confidence in our markets." Three days earlier, Robert L. Bartley had written in the Journal of the "systemic failure" at the root of the matter, one that touched "Directors suspending their ethical guidelines... Accountants and lawyers studiously looking the other way... Wall Street analysts failing in their principal duty."

It's the sense that Enron represents the failure of a system, not just of a Texas oil-and-gas-and-cybertrading company, that gives the case its weight. In capitalism's 700-year history, financial scandals are two a penny. As detailed in Charles Mackay's Extraordinary Popular Delusions and the Madness of Crowds, some of them had far more devastating impacts than Enron's collapse ever will. John Law's Mississippi Co., for example, bankrupted 18th century France, until Law was chased out of Paris and songs were sung in the streets advocating "the application of all his notes to the most ignoble use to which paper can be applied." From Credit Mobilier to Cendant, from Jay Gould to Ivan Boesky, under Republican Presidents and Democratic ones, wherever and whenever there is a chance to make a dishonest buck, someone will take it.

Enron stands out from this sorry list not by virtue of the company's size but because the scandal is of such a fundamental nature. At the heart of capitalism is the act of investment, which is nothing more than a decision by one party to lend money to another in the hope of a return. The system can't function without trust--trust that the money so lent will not be stolen or applied to illegal purposes, and trust that an enterprise's accounts will accurately reflect the state of its business. Company directors, lawyers and accountants are said to have "fiduciary" duties--the word derives from Latin for trust--that place upon them obligations to do more than collect fees and salaries.

Time was when investors were drawn mainly from those rich enough to look after themselves. But those days are long past. From 1989 to 1998, the number of Americans who invested in shares--either directly or through mutual funds, savings accounts and retirement plans--grew from 52 million to 84 million. Enron matters because those charged with the trust of such investors--many of them new to the markets--let them down. A system that has brought unimagined prosperity cannot survive if such betrayals become commonplace.

The scandal may prove to be systemic in a broader sense. For reasons that are well understood--the years of turmoil between John Kennedy's assassination and Richard Nixon's resignation, the end of the cold war, the absence of a sustained national emergency that required a strong Federal Government--the authority of the American political process has been in a long decline. At the same time, the reputation of U.S. business leaders has grown extraordinarily. In the 1980s and '90s, Lee Iaccoca, Sam Walton, Bill Gates, Andy Grove, Jack Welch and their ilk became our new heroes. Businessmen seemed to combine a buccaneer's spirit with a slide-rule mind. "Washington" (the word had to be said with a sneer) was, by comparison with the worlds of our titans, disorganized and inefficient, quite hopeless.

Not long ago, many would have placed Enron's Ken Lay--innovative, daring--in the pantheon of American business. That such a judgment could be made by those not otherwise known for idiocy places our value system into question. The task of companies is to provide returns for investors and so create jobs and spread wealth. But by the '90s, top businessmen had become celebrities, writing books (or having them ghostwritten), gracing covers of magazines and preaching the wonders of American management and transparent accounting practices to companies in other countries. After Enron, the audiences overseas for heroes of glamour capitalism may diminish; meanwhile Americans have become appreciative of safety and security--for themselves and their money. At such a time, it's natural to look to government, not institutions driven by the imperatives of the market.

The Enron affair matured into a scandal just as it began to seem that the culture of celebrity was defunct; suddenly, we remembered that Barbra Streisand was not a political philosopher. Neither is Jack Welch or Bill Gates or, certainly, Ken Lay. In the '90s, we treated businessmen as if they were film stars (and we treated film stars like gods). But we lend stars our affections only; we lend businessmen our chance of future prosperity. A lesson from Enron: we would be wise to entrust that responsibility to those with their feet on the ground, not on a pedestal. Even if we built it for them.