Lerbinger O. Corporate Public Affairs. Interacting with Interest Groups, Media, and Government

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political marketplace needs prohibitions against the use of “unfair”

techniques.

The economic and political marketplaces are basically communica

tion networks that bring together selected information from groups of

people. Consumers are said to have “purchasing power” and citizens

“voting power.” Businesses sell products and services in the economic

marketplace to buyers, the consumers. In the political marketplace, leg

islative regulatory bodies are the sellers of preferred public policies and a

variety of favors, such as subsidies, tax benefits, and tariff protection, to

a variety of buyers. This demand side of the market comprises citizens,

businesses, associations, and the many interest groups in our society.

They react to the political products proposed by lawmakers and regula

tors. They have the right to express their demands through the right to

petition government, sometimes backing up their demands with cam

paign contributions, which to some is tantamount to “buying” legisla

tive votes. This analogy between the economic and political

marketplaces has one notable difference: Government can impose its

products on corporate and other citizens. However, if buyers are dissat-

isfied, they may engage in political campaigning to change the composi-

tion of the sellers; that is, the lawmakers and the president.

In economics, full and accurate information from both sellers and

buyers is an essential condition for a market to function efficiently. In

the simple world of the general store, a customer possesses what econo-

mists call “full knowledge”—of what products are available, what their

essential characteristics are, and what their prices are. Similarly, the lo-

cal merchant is aware of his or her customers’ needs and the prices sup-

pliers charge for their products. Price is the core information required in

the market.

It is an incredibly efficient way to reflect the strength of de-

mand for a product and the willingness of sellers to provide the product.

Nothing comparable to price exists in the political marketplace.

The

closest type of information is public opinion, which reports on the num-

ber of people and the intensity with which they support a particular

public policy—the equivalent of “quantity demanded” in the economic

arena.

Constant reference by lawmakers, public officials, and politi

cians to “market research” findings to determine what citizens want

and, therefore, what “products” they should provide, shows the impor

tance politicians place on public opinion. Candidates running for office

play the game of “product differentiation”; that is, identifying them

selves with selecting issues that resonate with voters.

In applying the economics model to the political marketplace, there

fore, two features are essential: maintaining competition and ensuring

truthful and timely disclosure of information.

MAINTAIN COMPETITION IN THE POLITICAL MARKETPLACE

Just as the public interest in the economic marketplace is preserved by

competition among large numbers of sellers and among buyers, so is

382 I CHAPTER 14

the public interest in the political marketplace safeguarded by compe

tition among citizens and a variety of interest groups. The model of a

pluralistic society represents this state of affairs where “citizens are all

well informed, all share and treasure core public values, all care about

what their government does, and all participate in their collective gov

ernance through advocacy, voting, and the other avenues of the demo

cratic process.”

However, population growth and the formation of a myriad of inter

est groups have required that this “town hall” model be replaced by a

more complex one: the pluralist democratic elite theory in which a di

verse and competing group of elite leaders replace ordinary citizens.

Democratic ideals are thereby sacrificed because this system of elites

functions more like a “protected market with high entry barriers than a

system of free and open competition.”

Furthermore, it is likely that

“some groups—larger, richer, with better access—will have dispropor

tionate power.” Andrew Hacker’s metaphor is often cited: “When Gen-

eral Electric, American Telephone and Telegraph, and Standard Oil of

New Jersey enter the pluralist arena we have elephants dancing among

the chickens.”

To avoid gross inequality of power and maintain a com-

petitive political marketplace, attempts should be undertaken to provide

equivalent opportunities for all political participants.

Encourage Diversity of Interest Groups

To build and maintain competition in the political marketplace, the exis-

tence of a large number and wide assortment of interest groups to repre-

sent various businesses and social institutions is desirable. This feature

provides a large source and reservoir of political and social ideas. Some

of these ideas gradually work their way through the issues manage

ment process and result in changes in the political agendas of Demo

crats, Republicans, and, possibly, politicians of other parties. Corporate

policymakers also have the option of acting on some issues independ

ently or resolving them with others in the private sector instead of wait

ing for ideas to percolate through government.

To maintain competition in the political marketplace it is important

that the voices of interest groups not be eliminated or muted, tempting

as this strategy is in short-term campaigns. Some controversial exam

ples are as follows:

1. SLAPP suits, which intimidate individuals and small groups

from speaking out against some business interests. Speaking for con

sumer groups, Ralph Nader attacked these suits as “blatant attempts

by corporations to bully citizens into silence.”

2. Questionable and sometimes outright illegal antiunion tactics

by employers. The Taft-Hartley Act corrected the prolabor bias of the

1935 Wagner Act by giving employers the right to tell their employ

CONSTRUCTING A COMPETITIVE POLITICAL MARKETPLACE I 383

ees why they should not join a union. However, when employers

threaten to close facilities if a union wins, that is a violation. Firing

union supporters during elections is also illegal, which, however, a

third of companies in an NLRB study admitted doing (up from 8% in

the 1960s). Requiring workers to meet one-on-one with supervisors

on a union issue is, at best, questionable.

George Schultz, the former

secretary of state who was also once an industrial relations expert,

believes a system of collective bargaining should survive. He fears we

are now looking at megacorporations and microlabor as we enter the

21st century.

3. Seeking restrictions on political spending by unions. On this

highly partisan issue, business supported California Proposition 226,

which would require unions to obtain permission from individual

members to use dues in political campaigns. (As some legal experts

believe, such a prohibition might also require employers who take de

ductions on employees’ behalf to get annual permission from each

worker.)

Serious consideration has to be given to the argument that

unions should be treated the same as other voluntary associations.

Members have the right to participate in the governance of that asso-

ciation, but the majority rules.

4. Depriving legitimate groups of financial support when they

speak out against corporations. A distinction should be made be-

tween the so-called Packard Doctrine, which advises companies not

to give financial support to their critics, and efforts to disqualify

501(c) nonprofit groups from exercising their advocacy role.

5. Asking the courts to treat corporate free speech as commercial

speech is equally repressive to the expression of viewpoints, as argued

in the Nike v. Kasky case.

It may appear unrealistic and self-defeating from a short-term view

point to ask corporations to mitigate or abandon these strategies, be

cause doing so conflicts with the public affairs spirit of “fighting to

win.” However, in the long run the preservation of viable opposing in

terest groups is part of the system of checks and balances needed to pre

serve the democratic foundations of marketplace economics.

Recognize the Legitimate Function of Government

Ideological faith in free enterprise does not rule out a legitimate role of

government in making sure that at least the “rules of the game” in the

marketplace are observed. This requirement was the minimum pre

scription of Adam Smith, the ideological godfather of the free enterprise

system. The basic economic function of government is to create and op

erate a system of institutions that allows for the conduct of business ac

tivity. These include the right to private property, freedom of contract,

money and credit, weights and measures, and a system of civil law for

adjudicating the private disputes of individuals.

384 I CHAPTER 14

Other functions of government have been added that, to various de

grees, are controversial: (a) to promote the maximum production of

goods and services in the conduct of business activity—which would be

assured where freedom of competition exists—and (b) to provide for a

determination of prices and incomes that are in harmony with the pub

lic welfare. Few would disagree that government must regulate prices

where monopoly exists, as has been done with public utilities. Greater

disagreement exists over government interference with income, such as

the setting of minimum wages or limiting executive salaries.

The underlying political issue in the United States is whether people

want more or less government. President Reagan believed that govern

ment is the root of social and economic evil, so that once government is

“off the people’s backs,” problems can more easily be solved through the

automatic functioning of the marketplace. Some measures, however,

like deregulation, have gone too far. If the Enron and other corporate

scandals have taught any lesson, it is that the unbridled pursuit of profit

results in periodical excesses that trigger public outrage and greater

government regulation.

Few would argue against the idea that government has a basic regu-

latory function to perform. This lesson was reinforced by the wide-

spread U.S. power outage in the summer of 2003. Secretary of Energy

Spencer Abraham said that voluntary compliance with standards that

ensure reliability are inadequate and that enforceable standards are re-

quired to lessen the risk of further power failures.

A U.S.–Canadian

task force report warned that there was little reason to believe the elec-

tric system was hardier at the beginning of 2004 than it was in 2003.

A few conservatives have warned against demonizing government.

William J. Bennett and John J. Dilulio, Jr. note that some of their fellow

conservatives believe so strongly in antigovernment ideology, they

come perilously close to delegitimating the idea of government itself.

Furthermore, says Bennett, “Unbridled capitalism … is a problem for

that whole dimension of things we call the realm of values and human

relationships.”

If there are limits to capitalism, government must play

a role. Whether social justice and democratic ideals are thereby achieved

is a question that the competitive system can only partly answer.

Political parties provide voters with some choices about social ideals

in that they differ among themselves on the principles that guide their

interpretation of the national interest. As defined by Joseph A.

Schumpeter, members of political parties “propose to act in concert in

the competitive struggle for political power.”

When considering the

wide range of political ideologies that have existed—ranging from com

munism and socialism to conservatism—the Democratic and Republi

can political parties are distinctly procorporate, believing in free

markets, free trade, deregulation, and welfare reform. Nevertheless,

they differ on some major issues of concern to environmental and labor

groups; for example, the extent to which oil and gas development

should be allowed in western wildlands, and whether to allow the card

CONSTRUCTING A COMPETITIVE POLITICAL MARKETPLACE I 385

check system for recognizing a union. Other differences, however, re

volve around such narrow issues as the size of tax cuts, the degree of

privatization of Social Security, whether patient rights should include

the right to sue, and new prescription drug benefits.

Avoid Gross Disparities in Political “Purchasing Power”

Laws governing the political marketplace barely exist. The Constitution

of the United States says nothing about political parties. Laws prohibit

only a few “unfair practices” by political parties. The most specific but

limited law is the Hatch Act (referring to two federal statutes, the 1939

act and the 1940 act), which restricts the permissible political activity of

most federal employees. More general and of broader impact are laws

about campaign fund raising that specify the size and type of contribu

tions interest groups and citizens may make and how this money may

be used. Campaign financing thus essentially determines the existence

and manner of competition in the political marketplace.

As in the economic marketplace, money largely determines how

much “purchasing power” each group on the demand side of the politi-

cal marketplace has. Obviously, corporations, trade organizations, la-

bor unions, and wealthy individuals have much more influence in the

political marketplace than do most other groups. To preserve demo-

cratic values, however, the gap between those with large political funds

and those with few or no funds must not become analogous to the

well-publicized inequality between the top 10% and bottom 10% of

people’s income and wealth.

Campaign Finance Laws. The purpose of the Federal Election

Campaign Act amendments of 1974, as discussed in chapter 11, was to

curb the influence of big money by setting limits to allowable cam-

paign contributions by individuals, labor unions, and corporations.

The overall objective of the act is congruent with the goal of increasing

political competitiveness, namely, to increase the competitiveness of

congressional elections so a greater number and variety of candidates

can run for office.

However, by taking advantage of unlimited soft

money contributions, campaign contributors thwarted the act’s in

tention, with the result that money continued to play a much too sig

nificant role in elections.

Passage of the McCain-Feingold bill severely restricted soft money

contributions to national political parties, but it has not stemmed the

flow of money from the usual sources. A BusinessWeek article, “The New

Fat Cats,” reports “record fund-raising and record-shattering influence

by the same special interests that the reforms sought to stifle.”

It par

ticularly refers to “super fat cats” like Peter B. Lewis and George Soros,

who write megamillion-dollar checks to liberal 527 groups like America

Coming Together and the Media Fund. Equally important are the “bun

dlers,” who are high-powered executives and lobbyists who open up the

386 I CHAPTER 14

taps at Wall Street firms, health care companies, manufacturers, and oil

and gas companies. President Bush, for example, has 188 “Rangers”

who have brought in upwards of $200,000 each, followed by 270 “Pio

neers” who have raised at least $100,000.

Thus the impact of the law

is limited because some of the new special interest groups, especially 527

groups, are new vehicles for political contributions and have simply

become surrogates for political parties.

As campaigning in the 2004 elections confirms, controversy over po

litical money will continue and new campaign finance proposals will be

made, especially the controversial proposal to provide candidates with

broadcast opportunities. For example, Paul S. Herrnson proposed that

broadcasters be required to make free or discounted television time

available, using the argument that airwaves are a public resource.

Even the conservative magazine The Economist recommended reducing

“the cost of television time—the most burdensome component of cam

paigns—by requiring broadcasters to offer free time as a condition of

getting a license.”

Agreeing with these views, Senator John McCain,

speaking before the National Press Club in November 2002, said he

“would require radio and television broadcasters to provide candi-

date-centered programs before elections, provide vouchers for free po-

litical advertising for political candidates, and ensure that air time is

available to candidates at a reasonable rate.”

The powerful National

Association of Broadcasters, however, would never stand for it and,

even if passed, it is believed candidates would go on spending the same

amount of time raising the same amount of money they did before.

A more radical proposal is public financing of congressional candi-

dates.

In addition to broadcasting time, Herrnson proposes that gov-

ernment provide vouchers and free postage for candidates, or at least for

political parties. These measures would lessen the advantage incum-

bents now enjoy of using franking privileges. Incumbents already have

the other advantages of inertia, seniority, name recognition, pork,

perks, and patronage.

Unless there are further major scandals or political upheavals, these

more radical campaign finance proposals are unlikely to gain accep

tance. Differences in financial resources among political participants

will continue to give some voices advantage over others. However, com

petition can still flourish when interest groups mobilize people power

and use the power of the Internet to communicate with others and

mobilize for action.

TRANSPARENCY: REPAIR THE FINANCIAL INFORMATION

INFRASTRUCTURE

A competitive marketplace—whether economic or political—depends

on the availability and accuracy of relevant information, known as

“material facts” in the world of finance. The availability and disclosure

CONSTRUCTING A COMPETITIVE POLITICAL MARKETPLACE I 387

of “full and timely” information establishes the trust needed in our eco

nomic transactions. That trust was undermined by the corporate scan

dals and continuing news reports of manipulation of accounting

records to hide losses and inflate earnings.

Scandals Expose Fractures in the Financial Information

Infrastructure

Cries for transparency have been loud and clear. Support has grown for

the SEC’s requirements for full and timely disclosure. On one level this

involves improved communications between a corporation and its in

vestors. However, in today’s complex financial marketplace, many pro

fessional groups and institutions process, interpret, and judge

information. Their role is reflected in what can be called the financial in

formation infrastructure. It comprises seven components: (a) corporate

accountants, (b) auditors, (c) lawyers, (d) boards of directors, (e) secu-

rity analysts and investment bankers, (f) stock exchanges, and (g) the

SEC. An examination of recent corporate scandals reveals how the fail-

ures of each component of the financial information infrastructure con-

tributed to the corruption of information.

Corporate Accountants. They record business transactions in cor-

porate journals and ledgers and prepare periodic and annual financial

statements showing the health of the business. These accountants gen-

erally report to the chief financial officer (CFO). Together they start the

supply chain of financial information. Unfortunately, the CFOs in the

scandalized companies were more interested in strategic maneuvers to

give the impression of profitable operations and growth than in the ac-

curacy of information. In fact, most CFOs have backgrounds in strategic

management rather than accountancy.

When accountants discover questionable entries, they are supposed

to bring them to the attention of higher management. However, out of

concern for keeping their jobs and being loyal to their employer, most

accountants often fail to follow up on discrepancies. Some have been co

opted, as Enron demonstrated. Although Sherron Watkins, an Enron ac

countant, was chosen by Time Magazine as the “Person of The Year,” as

one of a trio of whistle-blowers—along with Coleen Rowley, an FBI staff

attorney, and Cynthia Cooper, an accountant at WorldCom—her actual

behavior was less heroic.

Long before she wrote her now-famous letter

to Enron Chairman Kenneth Lay in 2001 warning him of the impending

scandal, she had observed questionable accounting and business ethics

but remained silent.

Auditors. Businesses are required by law to hire certified public ac

countants to certify that the information provided by company ac

countants is correct. The “big five” accounting firms—now four with

388 I CHAPTER 14

the demise of Arthur Andersen—represent most large corporations.

The practice of auditing was started by U.S. Steel in 1903 when it hired

Price, Waterhouse and has since become standard. However, over the

past two decades, the truthfulness of the audited reports has deterio

rated. During the 1990s bubble, the incentives for corporate managers

to distort the information they provided investors grew. One incentive

is the benefit that accrues from the close tie of compensation to stock

prices; another is that the rewards through initial public offerings,

stock options, and takeovers are huge. As a result, “Too many compa

nies treat accounting rules the way they treat tax laws: If it isn’t ex

pressly forbidden, it’s OK.”

Arthur Andersen, which employed 85,000 people in 84 countries,

was Enron’s auditing firm until its collapse. However, this auditor safe

guard failed because, like many other auditing firms, Andersen became

more interested in making money by offering consulting services than

in performing its primary duty of checking and certifying the books. In

2001 it earned $27 million from Enron in consulting fees and other

work, more than the $25 million in audit fees. Arthur Andersen, among

others, allowed itself to be coopted by the companies it audited.

Andersen even proposed using its own employees to serve as regular

Enron accountants, seemingly oblivious to the basic idea of outside au-

dits. The 340,000 member American Institute of Certified Public Ac-

countants (AICPA), the purpose of which is to provide oversight and

discipline auditors, failed to defend the integrity of audits and financial

statements, the very underpinning of the profession, and has stead-

fastly opposed reform.

Certified public accountants, and its professional association, the

340-member American Institute of Certified Public Accountants who

had steadfastly opposed reform, lost heavily with passage of the

Sarbanes-Oxley Act. By favoring consulting and other profitable ser-

vices, the AICPA failed to defend the integrity of audits and financial

statements, the very underpinning of the profession. Stubbornly, ac

countants seem not to have caught the spirit of reforms of their pro

fession. For example, they still wanted to use off-balance-sheet

entities to hide some assets and liabilities by exploiting a loophole in

the rules laid down by the FASB, a practice that would obviously hin

der transparency.

Some auditing firms have taken the high road and engaged in adver

tising campaigns to announce corrective moves. The outstanding exam

ple is PriceWaterhouseCoopers, which inaugurated a “stand and be

counted” advertising campaign on “how to rebuild investor confidence

in America’s public companies. Some of its themes are the use of audits

to better detect fraud and misrepresentation, ways to improve internal

controls, and the Board of Directors’ role. Integrity was addressed in one

ad carrying the headline, “Integrity 101, Education for the Public

Trust,” which then discussed the “importance of attracting new talent

to the accounting and tax professions.”

Another auditing firm, KPMG,

CONSTRUCTING A COMPETITIVE POLITICAL MARKETPLACE I 389

which was accused by the SEC of accounting fraud in connection with

Xerox, started an “KPMG Discussion Series. In its Issue Five, it educates

companies about Section 404 of the Sarbanes-Oxley Act which adds the

responsibility to corporate managements to assess and report “on the ef

fectiveness of their internal control processes and their procedures for fi

nancial reporting.”

Lawyers. At Enron, the CFO obtained advice from outside attor

neys to approve of a particular accounting practice, such as “spe

cial-purpose entities,” which keep liabilities off the balance sheet. An

Andersen memo noted that two high-ranking partners from Vinson &

Elkins LLP concluded that “the client’s position” on the Raptor (a spe

cial-purpose entity used to dress up the company’s earnings) restruc

turing was acceptable.

The order to the Houston office to shred

thousand of records and delete tens of thousands of e-mail messages

originated from Arthur Andersen’s professional standards group at the

firm’s Chicago headquarters, but was supported by Nancy Temple, a

lawyer with the firm’s legal department.

Law firms implicated in the Enron and other financial manipulations

have generally denied wrongdoing. In contrast, after passage of the

Sarbanes-Oxley Act, corporate lawyers have seized the opportunity to

dwell on compliance. It was the buzz at the American Corporate Counsel

Association’s October 2002 annual meeting, attended by a record 2,000

in-house lawyers. It released a survey of its 12,000 members (1,200 re-

sponded) showing that 57% believed in-house counsel should play just

as important a role as a company’s top officers in preventing fraud and

other illegal or unethical behavior. Yet, 49% complained that they were

kept out of the loop on some important financial and accounting devel-

opments. In contrast, 85% said their companies’ general counsel had a

great deal of access to the CEO and slightly more thought they had ac

cess to the board of directors as well.

Board of Directors. The function and responsibilities of boards of

directors is to hold management accountable. As Charles Elson, director

of the Weinberg Center for Corporate Governance at the University of

Delaware, observed: “Go back to all those corporate scandals, and it all

comes down to a board that missed warning signals.”

There is no

quick fix. The relationship among a corporation, its stakeholders, and

society requires rethinking.

Boards of directors neglected their fiduciary responsibility through

negligence, or knowing connivance, as Arthur Andersen’s former CEO

Joe Berardino observed. He blamed board members for not serving as

watchdogs. He said they were too disengaged and failed to ask the right

questions. After making nearly 300 presentations to audit committees,

he got this impression: “Nobody fell asleep, but many of them didn’t

understand the business. They just sat there and received reports.…

390 I CHAPTER 14

Some directors just don’t want to know. They might have to do some

thing about it.”

Corporate governance has become a major subject in

the post-Enron era. It is discussed in chapter 15.

Security Analysts and Investment Bankers. Working for broker

age firms and other buyers and sellers of stocks and bonds, security an

alysts are supposed to provide investors with impartial, objective advice

about a company. Instead, they misled small investors by hyping re

search on companies that were also investment banking clients. By be

coming allies of investment banks and promoters of securities, they

subverted their role in the financial infrastructure.

Jack Grubman, telecom expert at Salomon Smith Barney’s, a unit of

Citibank, became Exhibit A. He gave the seal of approval to WorldCom

and, later, AT&T, whose stocks and bonds were being sold by the invest

ment bank unit of Citibank. The fiction of firewalls—that analysts

would not talk to the investment bankers whose stock they were evalu-

ating—was exposed when Grubman became part of the team that

touted stocks. His “boosterism” statements were sometimes inconsis-

tent with his true views, as exposed by his e-mails.

He became an ad-

junct to marketing and by so doing allowed the investment bank to

make a mint while sacrificing the interests of ordinary investors. In re-

sponse to this conflict of interest, Citibank proposed splitting research

and investment banking.

Some investment banks share the blame for the corporate scandals.

For example, Citibank helped Enron disguise financing as trades to avoid

booking it as debt. This unusual financing technique enabled the com-

pany to appear rich in cash rather than saddled with debt.

Another

abuse associated with the investment companies, where many security

analysts work, has been the improper doling out of coveted shares in

initial public offerings to corporate executives to win their banking

business, a practice of Citigroup’s Salomon Smith Barney and Credit

Suisse Group’s Credit Suisse First Boston. William Donaldson, chairman

of the SEC, commented, “I am profoundly saddened—and angry—

about the conduct that’s alleged in our complaints. There is absolutely

no place for it in our marketplace and it cannot be tolerated.”

He also

said, “These cases reflect a sad chapter in the history of American busi

ness—a chapter in which those who reaped enormous benefits from the

trust of investors profoundly betrayed that trust.” Reflecting this senti

ment, Paul Sarbanes (D-Md.) wondered, “How is it possible that the reg

ulators could have missed for so long the supervisory problems at all ten

of the nation’s top investment firms?”

Accordingly, it was not the SEC but New York Attorney General Eliot

Spitzer who has been the prime mover in exposing deception and other

abuses of investors by Wall Street firms. In May 2002, he obtained a

$100 million settlement from Merrill Lynch over conflicts of interest

that affected its research analysts. Without acknowledging guilt,

Merrill settled to place its operations above suspicion.

The following

CONSTRUCTING A COMPETITIVE POLITICAL MARKETPLACE I 391