U.S. Businesses Dim as Models for Foreigners
June 27, 2002
By EDMUND L. ANDREWS
FRANKFURT, June 26 - It was not just WorldCom that took a
beating today. It was also the United States itself, and
the American gospel of how business should be done.
After years of pumping billions of dollars into the United
States because it seemed the land of opportunity, foreign
investors are pulling back. And people around the world who
for decades have looked to the United States as the model
for openness and accountability in business have been
sorely disillusioned by the mounting waves of scandal.
"This is the most pessimistic sentiment against the United
States that I have ever experienced in my career," said
Wolfram Gerdes, chief investment officer for global
equities at Dresdner Investment Trust in Frankfurt. "There
is unanimous agreement that the U.S. is not the best place
to invest anymore."
The immediate impact is discernible in the value of the
dollar, which has been sliding since March. It fell today
to its lowest level against the euro in 28 months. The
dollar has also fallen against the Japanese yen, and even
gold has been rising steadily in dollar terms.
The loss of foreign confidence in the United States is
important in itself, because of the huge deficit the United
States runs in its trade with the world. To cover that
deficit, America must attract a net inflow of $1.3 billion
in foreign money every day. Even a modest decline in the
flow can weaken the dollar and drive up the prices of
But the fall from grace is broader than just a turn in the
monetary tide. The more enduring impact of the accounting
and boardroom scandals may be the tarnish they spread on
the "American model," a philosophy that emphasizes
bare-knuckle competition, aggressive deal making, a high
level of public disclosure and fantastic rewards for
executives who deliver the goods.
Europe has had its own run of financial scandals, generally
involving young technology and media companies, that match
the worst cases to surface during the dot-com bubble. But
Guido Rossi, a former chairman of Telecom Italia and now
one of Italy's most outspoken advocates for modernizing the
way companies are run in Europe, said: "What is lacking in
the U.S. is a culture of shame. No C.E.O. in the U.S. is
considered a thief if he does something wrong. It is a kind
of moral cancer."
There is a groundswell among executives in Europe against
the American system of corporate accounting - the so-called
generally accepted accounting principles - that was
supposed to be the gold standard in disclosure.
Before Enron, Global Crossing and WorldCom, America had
been winning the argument on accounting standards. But now,
a growing number of Europeans are convinced that the
American system is both too complex and too easy to
manipulate. "We always thought it was too good to be true
in America, and this has proved it," said Angela Knight,
the chief executive of the Association of Private Client
Investment Managers and Stock Brokers in Britain.
To be sure, American corporate practices in general remain
at least as open and accountable as those in any other
country, and they have raised the expectations that
shareholders elsewhere have of their own companies. And
most experts agree that the main problem is not with the
principles themselves but with people who are determined to
distort their companies' financial results.
European corporations like Vivendi Universal are reeling
from shareholder wrath over their inscrutable finances and
unsupportable debt. Deutsche Telekom, Germany's biggest
telephone company, is for the second time in two years
fighting off charges that it grossly overvalued billions of
dollars worth of real estate before it went public six
In Germany, Italy and elsewhere, many of the biggest
companies remain shielded from takeovers by byzantine
cross-holdings and capital structures and by laws that arm
entrenched management with a variety of defenses against
their own shareholders.
Nor are Enron-like problems unknown elsewhere, as
shareholders in HIH, a major Australian insurer, and Asia
Pulp and Paper discovered last year when the companies
plunged into default.
Indeed, advocates of improved corporate governance in
countries like Japan say they only wish their companies
were as accountable as those in the United States. The
problem now, they say, is that the scandals in America will
be used by opponents of openness and accountability to
justify their intransigence.
"This has disappointed many people who tried to work to
modernize themselves along the lines of the American
model," said Haruo Shimada, a professor of economics at
Keio University in Tokyo, who has pushed for freer markets
in Japan and has been an adviser to Prime Minister
In Russia, where corporate governance has all too
frequently meant blatant theft and Machiavellian intrigue,
corporate executives say the scandals prove that Russia is
not so different from the United States after all.
"At a certain point, Americans began thinking that they
were the ideal," said Anatoly M. Karachinsky, president of
Information Business Systems, one of Russia's largest
information-technology companies. "But there are no ideal
The American model has put down roots around the world that
are too deep to be uprooted entirely by the recent wave of
scandals, especially in developing countries like India
that have pushed hard to modernize in recent years.
Executives there said that a decade ago, an Enron or
WorldCom collapse might have tipped the policy argument
against Westernization of the economy, but there is no
turning back now.
What has happened instead, in India, Russia and elsewhere,
is a painful loss of face for the consultants and
accountants representing American companies. "The scandal
has been unhelpful, especially since we, as a profession,
operate on a reputation and the implicit trust that
follows," said Gautam Dalal, chief executive of the Indian
arm of KPMG.
In Western Europe, corporations have been gravitating
toward American management principles for much of the last
decade. They raise money on Wall Street, and a growing
number now list their shares on the New York Stock Exchange
or Nasdaq, obliging them to report their results according
to American rules.
But those rules have also met growing resistance. The New
York Stock Exchange recently invited Porsche to list its
shares. Porsche will not make a decision until December,
but its executives have openly balked at some of the
requirements that would go with such a listing. Porsche
refuses to publish its financial results quarterly, as
American companies must, because executives worry about
being held hostage to short-term pressures.
The American practice of executive enrichment is also
coming under attack. Appalled at the tens of millions of
dollars that executives at Enron and many other companies
received through stock options, the chairman of Germany's
biggest steel manufacturer cautioned his peers this week
against following suit. "I warn people not to simply take
over rules from the United States without first reflecting
on them critically," said Gerhard Cromme of ThyssenKrupp.
German companies, led by Volkswagen, are adamantly fighting
proposals by the European Commission that would make
hostile takeovers easier. Advocates of the new rules say
they would force companies to become more accountable to
their shareholders, but German leaders say they would
create an "unfair playing field."
European leaders are also pushing for greater acceptance of
their auditing rules, known as the international accounting
standards, as an alternative to American rules. The great
virtue of the international accounting standards, which all
European Union companies will have to adopt by 2005, is
that it is a simple and fairly compact list of basic
principles. The American system, by contrast, is made up of
volumes and volumes of decisions reached over the years on
the finest nuances and shadings of every issue.
European critics (and a growing number of Americans) say
the American system permits companies to follow the letter
of the law while violating its spirit - to "tick boxes
rather than use sound judgment," said Peter Wyman,
president of the Institute of Chartered Accountants in
England and Wales.
Whether the international standard wins out over the
American standard or not, global investors are clearly
anxious to see some kind of meaningful accounting reform
before they plunge back into the United States. A survey
this month by UBS Warburg and the Gallup Organization found
that only 32 percent of European investors now rank the
United States as the most attractive market in the world.
But investors do not have many other places to go. European
economic growth is expected to remain slower than American
growth for the foreseeable future, Japan remains moribund
and other markets are seen as fraught with risks.
"The one major currency area that has been able to play the
role of safe harbor is the American area," said Jürgen
Müller, a senior economist at DaimlerChrysler. "Everybody
in the world is staring at the U.S. economy. Everybody is
waiting for the U.S. economy to boom again."