High earnings, low ethics: pressure to generate steady profits has been intense and destructive. But if history repeats, our current cataclysm presages a moral rebirth. (Essay).

By today's standards, David Rockefeller, America's corporate icon during the l960s and early '70s, was a poor businessman. The 87-year-old former chairman and CEO of Chase Manhattan Bank (now J.P. Morgan Chase & Co.) had been producing mediocre returns, at best. But Rockefeller and most leading businessmen of his day saw their responsibilities in terms broader than "maximizing shareholder value." Their perspective was to work for the well-being not only of their shareholders, but of their employees, their communities and the world.

Since then values have taken a sharp about-face. Corporations and individuals have signed on to the undiluted Adam Smith theory that the pursuit of self-interest is the best way to help society as a whole. In practice, that philosophy has evolved into an ethic in which corporations and individuals are judged by very simple yardsticks--growth in quarter-to-quarter profitability for corporations and personal financial wealth for individuals.

"The problem, perhaps, is that success today is measured in personal wealth, opulence and the ability to play a social role, not in the broader sense of helping society, but in the sense of wanting to be well thought of at the country club," Rockefeller said in a recent interview.

Another aspect of the new ethic, he adds, is the keen focus on day-to-day stock prices. To keep the stock price from plummeting, corporate executives must assure the public that profit and revenues will grow by extraordinary amounts on a regular basis no matter what the external environment.

"A premium is put on consistency--that earnings will grow like clockwork," says John Maloney, CEO and chief investment officer of M&R Capital Management, a New York-based investment firm. He points out that at General Electric, former CEO Jack Welch was expected to produce annual earnings growth of 14 percent. "That's very hard to do," notes Maloney. Until recently, it seemed clear that Welch had succeeded in that endeavor; it's only since he's retired that some bond analysts are questioning whether part of his steady success was due to accounting trickery.

What is certain is that the pressure to keep earnings and revenues growing continuously at breakneck speed has led CEOs to do things they might not have done otherwise. AT&T, for example, might not have broken itself into several pieces had it not been for its inability to show the same growth rates as WorldCom, which we later learned had been greatly exaggerating its success.

PNC Financial CEO Jim Rohr might not have gotten himself into trouble last year, either, had he not been under intense pressure to sustain solid stock performance. In 2001 Rohr transferred some $762 million of volatile, troubled or underperforming loans and venture capital investments to three special-purpose entities, which kept them off the company's balance sheet, thereby inflating earnings. When regulators discovered the tactic, they forced PNC to restate 2001 earnings downward by some $115 million.

Under pressure to keep the good times rolling, Rohr bent the rules. And apparently the questionable practices were approved by PNC's auditor, Ernst & Young, and the company's lawyers. In January, E&Y was replaced by Deloitte Touche as PNC's external auditor, but E&Y still performs some internal auditing for the banking company.

Driven to desperation

"CEOs and CFOs will do anything within their power to deliver what investors want; that is, earnings that are at or above the consensus," says Maloney, who maintains that, for the most part, CEOs played such games to keep the stock price from falling, not primarily "to fatten their own pay envelopes."

In many cases, fear of a slowing growth rate can drive a CEO to act desperately. In the mid-1990s, for example, John B. McCoy, whose Bank One had been doing splendidly, feared the company's annual growth rate would slow from the teens to about 8 percent. So he paid about $7 billion to buy First USA, a credit card company that was growing by about 22 percent a year. But when First USA's earnings growth slowed, the credit card unit, under pressure to sustain, started milking its customers, driving them to competitors. It was disastrous for Bank One's stock price, and McCoy was shown the door.

Despite such disasters, there are many who continue to believe that revving growth and focusing on stock price is the way to corporate nirvana. Among them is Chuck Lucier, senior vice president and management consultant at Booz Allen Hamilton, who thinks the emphasis on earnings growth has created a more productive society. "The average company is performing better over the most recent decade, and that's a good thing for shareholders. And because it requires growing revenues, it's good for employees too," he says.

Lucier has conducted studies showing no correlation between revenue growth and earnings. During the personal computer boom, he says, revenue growth for PC makers was very high, but profitability wasn't. "The people who do well tend to be those who change the rules of the game, people like Southwest Airlines and Wal-Mart, and they are not in high-growth industries," he says.

Ethics evolve in cycles

Clearly, Lucier's perspective continues to dominate the nation's, and certainly, investors' thinking, despite the recent market troubles. And it's the kind of short-term focus that has caused CEOs to run afoul of the law. "You can't just blame corporate executives," for the greed among some of them, says Rockefeller, adding that trying to keep the stock price up on a day-to-day basis "puts great pressure" on CEOs. "I'm very sympathetic, but I do think, unfortunately, it has made CEOs in general pay less attention to corporate responsibility."

Rockefeller's view, that CEOs must look past short-term profits, may have fallen out of fashion in recent times. But societal ethics tend to evolve in cycles. The current era is reminiscent of the end of the "Roaring Twenties," when companies grew rapidly with little or no regulation. Indeed, many of the practices that led to passage of the "Depression-era" Glass-Steagall Act are being repeated today. Glass-Steagall prohibited commercial banks from engaging in investment banking. That came about because the biggest banks had lent heavily to Cuba, expecting the price of sugar to continue to soar. Instead, the price collapsed and the banks were left holding loads of bad loans. To avoid heavy losses, the banks had their captive securities firms package the loans and sell them as securities to the proverbial widows and orphans.

Today, with Glass-Steagall repealed, banks are doing much the same with their problem loans, such as those made to the telecommunications industry. Today, they're selling the loans, or using derivatives to sell the risks of those loans, to pension funds and mutual funds. Similarly, they are packaging and selling off credit card loans that are being made to consumers, who are more deeply in debt than ever.

An indication of the change in society's values is that people who had been considered villains for many decades are being resurrected as heroes. The most notable example is J.P. Morgan. Following the publication in 2000 of Morgan: American Financier, by Jean Strouse, the robber baron is being viewed as a good guy, and Strouse has become a popular booster of his on television talk shows.

Rockefeller's perspective is shaped by his era. He survived the scandals of the Twenties, the Depression and World War II, and came to power after the war, when hopes were high for building a new and better world. It was the same spirit that inspired American soldiers to battle for principles and motivated leading executives to encourage free trade and the creation of organizations such as the World Bank and International Monetary Fund to help rebuild the war-torn nations of Europe and Asia. They were interested in profits, but making money was not the only goal.

As memories of the Depression and the war began to dim, and as competition heated up among corporations, the nation's mentality began to change.

About 30 years ago, many Americans felt unions were too strong, that many of America's biggest companies, particularly in the auto industry, couldn't compete against leaner players overseas, and that government regulation had become overbearing. The pendulum was swinging away from regulation and toward laissez-faire philosophies.

The process accelerated with the stock market boom in the mid-1990s, and the high-tech bubble that lasted until 2000. Many investors--and just about everyone had become an investor, as in the 1920s--expected stock prices to continue climbing by 20-30 percent a year. Greed took a rock-solid hold on the American mentality.

There are indications that the ethics cycle is beginning to shift, however. The nation has been appropriately stunned by the failures of large, once high-flying companies and by the greed of many senior executives, some of whom now face jail time. Meanwhile, Congress is working on laws to reform the system, just as it did in the l930s. And, of course, the stock market has been tumbling.

Perhaps the most tangible indication that change may be coming has been the efficiency with which workers cleaned up the mess of the terrorist attack on the World Trade Center. To the surprise of all, the job was completed before schedule and under budget. That feat indicates that the workers and their managers were making a full-fledged effort, reflecting the motivation of working for the common good.

If that is an omen of a change in ethics, we may now start seeing the same kind of performance from America's corporate executives.

Robert A. Bennett has covered banking and finance trends for more than four decades. Most recently, he was editor-in-chief of monthly publication U.S. Banker.