CHAPTER EIGHT

ECONOMY/CORPORATE BEHAVIOR

The corporate world established a global system shortly after World War II. However, it has gone in the same direction of greed and power of the relatively few early super-rich, (known in history as "robber barons") who have kept much of the world in poverty. Statistics show that corporations are a mere 2-5 percent of the population, but they rule the world through commerce.
It is no wonder that in the U.S. the Bush Administration is comprised almost entirely of former corporate executives, compared to past administrations consisting mainly of lawyers. Consider the work experience of President George W. Bush who owned an oil company and a major league baseball team. His administrators starting with Vice President Dick Cheney, former CEO of Haliburton (which happened to receive huge contracts to rebuild Iraq); was also on the Board of Directors of Electronic Data system, Proctor and Gamble and Union Pacific. Chief of staff Andrew Card had been General Motors chief lobbyist in Washington for several years.
Secretary of State formerly National Security Advisor, Condoleeza Rice, was on the boards of Chevron Oil and Transamerica and became Provost for Stanford University,
Former secretary of state, Colin Powell, was a director of Gulfstream Aerospace and America Online.
Defense chief Donald Rumsfeld, was CEO of G.D. Searle Pharmaceutical for seven years, at General Instruments for 3 years, and Director of Kellogg, Sears Roebuck, Chicago Tribune, and Gulfstream Aerospace.
Former Secretary of the Treasury Paul O'Neill was chairman of Alcoa, and director of Lucent Technologies.
Secretary of Commerce Donald Evans is the son of a Shell Oil manager. He was CEO of Tom Brown, a Texas Oil company.
Secretary of Labor, Elaine Chao was, manager at Citicorp and Bank of America and director of Clorox, Dole Foods and Northwest Airlines. Is it difficult to surmise where these folks will land at the end of the Bush administration?
This clearly shows the direction of global business, compared to the more diversified Clinton appointees, Secretary of State Warren Christopher a corporate lawyer and director of Lockheed Martin, Southern California Edison and First Interstate. Bank; Secretary of Defense Les Aspin was part of a family-owned business, Secretary of the Treasury, Lloyd Bentsen inherited his wealth and was head of his own insurance company; Secretary of Treasury Robert Rubin worked for Goldman Sachs. Secretary of Labor Robert Reich was a Harvard professor.
Evidence of a viable planetary/continental system of self-government can be seen in the enormous profitability of multi-nationals which have evolved into this new global corporate class of business and society. A new global plan would revoke their charters granted by state governments and reissue them for their original purpose to provide public service. There would be tight control, and financial accountability of those corporations doing the people's business. Separate charters would be issued to corporations to conduct private business, but with regulations that protect the people from unfair trade practices.
Corporations existed before they were used for business purposes. In the ancient world, they developed towns, guilds, churches, universities and colonies. The legal authority given to the state to create a corporation is old law. If not recorded, corporations were recognized by custom. A corporation is a fictitious legal person who may sue and be sued, may hold or transfer property and exists independent of its individual members. Shareholders are not liable for the debts of the corporation.
Affiliate corporations are rarely identified. They consist of brother- sister corporations that could be controlled by another company; investment companies; parent; charitable; non-profit; foreign; municipal; public; subchapter S; dormant that are inactive but legal, capable of being reactivated; clearing, where all of the capital stock is held by or for national securities exchanges or associations; collapsible, formed for manufacture, construction or purchase of property.
In England, authority from the crown was essential. In 1688 Parliament was given the power to grant monopolies and special privileges. In the 16th and 17th centuries trading companies made commerce possible. Commercial monopolies gave rise to the perpetual wealth of the aristocracy. It was socially incorrect for noblemen to mention "work" which was a lower-class word, or discuss finances outside of custom houses. The main purpose of establishing the colonies in America was to provide materials to be sent to England for manufacture.
After 1776, 250,000 immigrants settled west of the mountains creating the need for public roads, public transportation and bridges. As the nation expanded new towns were built, systems to supply water were essential, docks were needed for seaports and river transportation. To fund projects for public service, in 1791 the Bank of the United States was granted the first federal charter. Four-fifths of the capital stock was provided by private investors, and one-fifth came from the federal government. The bank was the depository for federal funds and provided credit and short-term loans.
State-created corporations contracted to build and maintain public facilities. A uniform banknote currency was supported to facilitate purchasing of land and materials. As no banks existed in the colonies before the revolution, fiscal policy was copied from English banks and from the experience of immigrants from other European countries.
Alexander Hamilton favored private capital as the best means to accomplish long-term public projects. New York issued 165 charters for internal construction of turnpikes. Cheap land and expanding markets for agricultural products would make railroads profitable. Establishing manufacturing was considered to be patriotic when the war of 1812 reduced imports. Capital was scarce so state government granted tax exemptions and other privileges to the half-dozen millionaires. Soon after, general commerce became big business
Then abuse crept into state legislatures through lobbying which infected Congress. Scandals were becoming common, and sadly they continue today. Newspapers report them, cover the court trials and perpetrators go to jail after long-lasting appeals. There are no reports of anyone recovering losses. President Jackson and farmers tried to combat special privileges with strategy to obtain equal terms for all, along with free competition. Industrialization swiftly changed business structures. Most businesses operated without office staffs, but when corporations merged, they evolved to chief executive officers, presidents, chairmen, directors, vice presidents, upper and lower-level management, and white-collar workers. Accounting departments became necessary having their own staffs led by a chief financial officer. Then departments led by vice-presidents were created to manage production, sales, advertising, personnel and various lesser departments. This created jobs and also the opportunity for fraud and mismanagement. Smaller companies either merged or went into bankruptcy.
In 1890 the Anti-Trust Law was enacted in answer to public outcry due to newspaper editorials. It has been known erroneously as the "Sherman" Anti-Trust Law, so named for John Sherman, brother of General William Tecumseh Sherman of Civil War fame. John was a U.S. financier and statesmen, elected to Congress from Ohio from 1854 to 1877. He was appointed by President Hayes as head of the Treasury Department. The Sherman Act also enacted in 1890 year, provided for the purchase of silver and the issuing of treasury notes.
Collusion in trust agreements fanned the flames further, so that clauses were added to make restraint of trade and illegal monopoly, misdemeanors. The biggest companies in America were American Tobacco, International Harvester and DuPont. U.S. Steel was the first billion dollar corporation. Teddy Roosevelt known as the "trust buster," would not let corporations put themselves above the law. He had a vendetta against John D. Rockefeller of Standard Oil who did not support his candidacy, but he did favor those tycoons who supported him.
President Woodrow Wilson strengthened anti-trust laws with the Fair Trade Commission (FTC) and the Clayton Act in the second wave of mergers between World Wars I and II. Because of the depression from 1927 to 1935, there was a let-up in enforcement of anti-trust laws.
Conglomerate mergers after World War II were the third wave, with 1951-55 higher than any 5-year period. The New York Stock Exchange played a vital role in mergers as thousands of new stockholders entered the market. Corporations divide their capital stock into shares which can be purchased by a large number of investors so that each could subscribe a relatively small amount. Classes of shares were redefined and some were stripped of voting rights. Former President Dwight Eisenhower, after World War II warned that the military-industrial complex would become a new form of government.
Today, it seems the government has forgotten about the Anti-Trust Law. The recent surge of mergers of Exxon-Mobil, AT&T-SBC, AT&T & Cingular mobile phone; AT&T & Lucky Dog 10-10 international calls, (Ma Bell's breakup apparently did not have a permanent effect - AT&T apparently held SBC long before its customers were told); Exelon-PSEC; PA-NJ-IL gained 7 million electric and 2 million gas consumers; Buffitt's MidAmerica and Pacific Corp. 3 million electric and gas customers in 10 states and 3.6 million overseas; 3.7 million electric and 1.7 million cable companies in mi-western states and Canada; Constellation & FPL at $9.4 billion; and Cinergy & Duke, $9 billion.
Competition has been diminishing so that consumers are doomed to regress to "robber baron days." The White House boasts about the booming economy. It does not make clear who the beneficiaries are of this happy event. Nicor Gas tripled the cost of natural gas for Illinois consumers. Regulation of electric power companies expired in Illinois at the end of 2006. Com Ed has advised consumers to expect rising prices.The Illinois legislature failed to approve extending the regulation, but are preparing a compromise to cap increases at 22 percent. Com Ed had a record profit of some $2 billion last year. They claim they could not afford to keep up with repairs if they didn’t get the increase. Who and how many legislators did their lobbyists reach?
With fuel oil at record-breaking prices and profits, fear of inflation is expected to cause interest rates to increase. The media is silent and there is no public outcry for federal, state, city and other local governments to lower or put a moratorium on gasoline taxes. Revenue from this source has probably "gone through the roof," yet officials say they need funds for education.
The down-turn in the housing market has already lasted almost a year. Sellers are taking huge losses if they are able to sell, and related industries such as manufacturers of furniture, appliances and building materials also remain silent. Real estate agents are not helping the situation, and appraisers have a standard of ignoring differences in condition of interiors, location and other important factors, instead relying only on the number of bedrooms and bathrooms advertised.
As described in previous chapter, pharmaceuticals already enjoying huge profits, are raising the cost of some medications.
Two-thirds of corporate business is now conducted in the U.S. Global corporations, Intel, IBM, Microsoft, General Electric have expanded into Asia.* Buick has become a major manufacturer of autos in China.
The future of the next economic super-powers is almost here. China and Japan own 40 percent of all U.S. treasury securities. The total, along with other foreign nations who loan money for the Bush Administration to wage war is $2.2 trillion debt. China's share is growing most rapidly, in 2004 to a $480 billion share in U.S. securities*
America's government debt grew by $1.7 billion a day in 2004, reaching $7.5 trillion. In 2004, Americans' shopping-spree debt of $9.5 trillion in mortgages, automobile loans, credit cards and other personal debts, an unbelievable $84,454 per household has never been higher.
The Clinton administration used low interest rates to pay the national debt, kept annual budgets in balance and produced a surplus, while the Bush administration set record budgets, slashed taxes for the wealthy, and caused budget deficits that may never be paid off by our children and their children.
The North American Free Trade Agreement passed in 1994 was supposed to turn Mexico into a magnet for world capital.* Mexico lost 218,000 jobs when 500 of 3,700 export-only maquiladors closed between 2001 and 2003. Workers earn less than they did in 1993. This triggered the illegal immigration furor. They came to Chicago increasing its growth to some 700,000. Then Chicago lost about 100,000 manufacturing jobs in 2003. Employment dropped to 622,000 in 23,000 factories. Americans feared U.S. manufacturing would lose to cheap Mexican labor, but both countries lost to China.
China's entry into the World Trade Organization does not assure their compliance with the WTO's currency provisions, due to European countries efforts to align themselves with China, and the U.S. favoring its own ties with China.
Wiser economic heads have not prevailed in preventing the U.S.'s downward spiral. Uncontrolled indebtedness leads to the kind of crises experienced by Argentina and Brazil, and leaves the U.S. with no way to save itself from economic destruction. Not only will the U.S. suffer, but countries that depend upon its trade, could go under, too, hurling the world into an economic depression.
The U.S. is falling behind in research and development. Corporations blame poor education. Students are opting for sports and exercise majors rather than electrical engineering. India, China and South Korea are promoting their world-class universities. Singapore is becoming a world-class biomedical research and development country. Scientists from around the world are going there to work on stem-cell research, which President Bush vetoed on July 18, 2006 with the blind loyalty of Republican party supporters. The president and congress have ignored the fact that there is no provision in the Constitution to allow them to decide issues based on personal religious beliefs, nor does it mention the duty of the president is to decide what is moral. Americans are too apathetic to do anything about demanding compliance with constitutional law.
The U.S. is behind Hong Kong where 60 percent of their consumers get TV ultra-speed broadband, computers, video on demand. Two dozen cities in China are installing tracking systems for cargo arriving in seaports and air terminals. Credit card memory chips are reducing fraud in Europe and Asia. The U.S. internet provider, Earthlink, partners with South Korea for new business. Cell phones are functioning as credit cards in new technology.
General Motors' financial problems stem from huge buy-outs to reduce its production costs for 30,000 workers, who according to union terms must be paid even if robots are doing their jobs. Toyota has overtaken them. An old American slogan was "what is good for GM is good for the country." Hopefully, this does not mean that GM’s battle to prevent bankruptcy will be America’s future..
High cost scientific technology in semiconductors, telecommunication, nanotechnology and internet services have gone overseas. American companies are looking for talent in the countries whose educational systems produce scientists. Lower pay for scientists in developing countries, is of course, an incentive. This picture will soon be reversed. Instead of nations coming up to the U.S. standard of wages, the U.S. will be lowering wages, seeking out-sourcing from future successful overseas corporations. A frightening new twist as of 2005 is that there has been a 20 percent increase in foreign corporations purchasing factories and buildings in the U.S.
Indiana toll roads have been turned over to a foreign corporation to collect tolls for the next 75 years. The state expects to receive $3.8 billion to repair roads and bridges. Management of U.S. seaports are already in foreign control made possible by the stealth of the Bush administration most recently for an English corporation based in Dubai, one of the richest countries in the world.
Six of the top technology companies are based in the U.S., fourteen are based in Asia. Price Waterhouse Chairman, Dennis Nally reports that the spread of more American companies going into other countries opens new experience for American executives, engineers and scientists. To absolve corporate abandonment of American workers, he explains, "It is a tremendous opportunity to do a lot of things outside of the U.S. in places with growth rates such as in China and Brazil."* Half of IBM's 190,000 engineers and technical experts work and live overseas.
Speculation is that the U.S. economy is not what it seems as information from the White House is not to be trusted. Actually the rich have become richer and the poor poorer* according to charts in U.S. News & World Report. Jobs that are being "created" by this administration can be attributed to minimum wage fast-food chains, and low-pay retail sales positions.
The early trust placed in corporations is no longer justified. Today, corporations exist to serve the greed and power of corporate executives over and above stockholders' dividends, and the public good. Corporations today actually harm the public good by polluting the environment and in fraudulent practices that cause bankruptcies, so that investors, hard working loyal employees suffer loss of pensions, jobs and life savings.
In the U.S. corporate fraud has been in the headlines for almost a decade, with some CEOs under indictment and others brought to justice and serving time in federal prisons.
Enron's CEOs, the late Ken Lay, and Jeff Skilling were found guilty in June 2006 on all counts of criminally causing the largest failed corporation in U.S. history. They brought financial disaster to their employees who lost their investments in Enron stock, as well as their pension funds. Ken Lay did not apologize for gigantic personal benefits in travel, vacations, parties and the luxuries of the rich and famous, all at the expense of stockholders and employees, as well as victims of huge utility bills in California. Enron brought destruction to a prestigious accounting firm for its role in falsifying the true value of Enron. Millions of dollars have been spent on legal fees, which will be greatly increased for the appeals process, before their prison sentences commence. Ken Lay suffered a massive heart attack and passed away on July 5, 2006.
We have heard of the acts of MCI moguls, Milliken, and overpaid CEOs who failed their companies and gone to jail, others departed with extraordinary "golden parachutes". The recent retirement of Exxon-Mobil's CEO with $400 million in cash, and stock options is another example of corporate greed and corruption.
“Major management fraud is all about leveraging positional power and is an interrelated top-down phenomenon-fraud for the organization leads to fraud against the organization, and vice versa,” writes John D. O’Gara.
With tools available for internal audit functions in what seems to laymen to be complicated arithmetic, it is astonishing that CFOs are not always meticulous in avoiding the risk of the appearance of criminal behavior. The U.S. Securities and Exchange Commission is responsible for oversight of corporate management and accountability. When corporate criminal acts went too far, the Sarbanes-Oxley Act was enacted in 2002 that made significant changes to financial reporting. Reports were to be provided both quarterly and annually on internal control over financial reporting and scrutiny of monitoring methods in every aspect of corporate activity. It remains to be seen whether and/or how, manipulators will be able to circumvent these controls.
The end of July, 2006 was the fourth anniversary of the signing of the Sarbanes-Oxley Act. Jim Quigley, CEO of the Big Four accounting firm of Deloitte & Touche answers the complaints of "too complicated, too expensive and too time consuming....and making a killing in skyrocketing accounting fees," with, "the law is not only on the right track but should be expanded." Another crisis is looming, that of corporate backdating of stock options with some 60 companies under investigation.
It would seem that anyone who majored in economics and finance surely must be aware of how to identify specific types of management fraud. Yet, the worst offenders claim they did not know what was going on in their own organization for which they were paid millions to manage.
There are categories of corporate fraud against the organization, starting with management, deliberate corruption, accounting fraud, false billing, price-fixing, set-up bids, bribery, tax evasion even with generous tax breaks from communities urging them to come and create jobs. The motivation behind corporate fraud is greed beyond comprehension. Corporate leadership is the most lucrative and respected position in the business world, but even the most jaded manipulators must be dumb-founded at their outright criminal activity.
Symptoms of management fraud are aberrations in Profit & Loss statements that can hide debit or windfall profits that do not appear in the books, but show adequate profits. Another is when an organization is decentralized with middle management having control over both accounting and operations. If there is fraud at the top, it is understood that there is fraud at other levels.
There is no question that investors should benefit with dividends for a reasonable, even generous return. However, when profits come from gauging and dishonest corporate practices and stockholders fail to control their corporate executives they should be held liable and return ill-gotten gains to those who have been damaged by the criminal activity. Changes need to be made to multi-nationals who have no loyalty or compassion for employees and investors who are at risk of losing all of their assets due to greed and their audacity to think they can fool all of the people all of the time.
Moreover, corporate indifference to the state of a fragile environment is equal to the damage they do to belief in ethics, safety in the work-place, safety in the use of their products, and ignorance as to their global responsibility. Michael Moore, producer and director of investigative documentaries, who is a thorn in the side of corrupt practitioners, produced a film about the inside of corporate behavior that is so shocking as to wonder how they continue to function at all.
Some corporations quietly paid fines for damage to the environment and to the health of the nation. He discloses the huge fines paid by companies such as Exxon in the Valdez oil spill at $125 million. General Electric fined $9.5 millions, IBM $8.5 million, Kodak $20 million, Pfizer $20 million, Sears $6 million and other companies: Unocal, Royal Caribbean Cruise Lines, Roche Pharmacy.
Monsanto Corporation covered up agricultural practices, such as using hormones to feed livestock that affect human health; live hog operations polluting the rivers in North Carolina. Whistle-blowers are discharged when they contact authorities to report unconscionable activity, and are forced to fight costly legal battles to prove their allegations of the damage corporations are doing to the biosphere.
Complaints of inefficiency of corporations in serving customers, identity theft, e-mail scams and outright crime against the elderly have increased dramatically. Yet, little has been done to find solutions. A recent health-endangering experience with the Chase Bank reflects what could be happening to the elderly, who rather than suffer a stroke because of stress, comply with payment requests whether or not they are due or owed. In a separate incident, a scheme was reported on ABC-TV in which a Texas judge was a victim of fraudulent overdue bills.
Following is the anatomy of a loan from the Chase Bank in answer to an enticing sign in the bank for a home equity loan at 4.7 percent interest. For some reason it was not available, but another higher interest loan at 6.65 percent was offered in its place. The explanation was so garbled that it would have put the old medicine man ploy to shame. The borrower discovered a pre-payment penalty of $400, was included in the loan without her agreement. The account manager apparently “forgot” that she intended to sell her condominium within the next few months and could not have agreed to that term. With the help of Senator Obama and the U.S. Currency Department, Chase removed the penalty Almost every month another type of error appeared. A separate payment made towards the principle was “mistakenly” applied to interest. A letter of apology was sent when the error was corrected.
The borrower cancelled automatic monthly payments and made the next payment by mail, at the same time withdrawing all funds to close her Chase accounts, but they “automatically” deducted another payment. They then charged $5 per day for the overdraft even though she no longer had accounts there. They later credited the charges. Apparently what they meant was that they cancelled the charge.
Then a Chase teller called to advise that her interest rate would increase because she cancelled the automatic payment. There was no such rule or understanding. After several aggravating calls, an executive consultant apologized and said the charges would be credited. Then she realized that Chase was charging interest per diem instead of per annum as specified in the loan document. Somewhere in the small print in the loan document was the term "simple interest on a per diem basis." Instead of the principal and interest decreasing with each payment, the amounts differ every month. One month, more of the payment is applied to principal, less to interest, but the next month more is applied to interest and less to principal. Account summaries do not match up with their monthly statements.
As a result of the stress, she had a heart attack and made an emergency visit to the hospital, learning for the first time the high cost of ambulances, hospital bills and medication. It became obvious that the elderly accept the outrage, but cannot risk life to challenge unlawful claims. Other petty issues such as delaying payment of certificates of deposit need investigation. Litigation as suggested by the U.S. Currency Department could be costly and deadly.
The elderly, have experienced the same difficulties pertaining to various financial situations but do not or cannot cope with the stress. A phone clinic was held at the public library in our county seat to explain the myriad charges submitted on AT&T phone bills. One-hundred percent of the attendees were elderly. AT&T was trying to collect a $65 bill which they had already received electronically. MCI charged for long distance service which was not requested and is making harassing phone calls for the $26 which this same victim refuses to pay. They have now engaged a collection agency, who called once and then sent a threatening letter. Many people are targets of e-mail scams, snail-mail offers for credit no interest credit cards, but fail to provide information regarding transfer fees and that if the card is used for additional purchases a 16.99 percent interest is charged. Some e-mail purporting to be from a credit card company request updating information and personal data, which they use to steal identity.
CBS's 60 Minutes broadcast on June 11, 2006 was a warning. An individual wanted to check the safety of applying for a credit card by mail. He deliberately tore the application he received from Chase into very small pieces, pasted it back together so that it was obvious it had been destroyed, and sent it back to Chase with his parents' address. He received the card in the mail at his parents' home and when he called Chase to let them know how they had put him in jeopardy, they responded it was probably scanned by a machine that didn't know its condition. They apologized and promised it would not happen again.
Off-shore banking practices consist of money-laundering schemes for drug trafficking, funding terrorists and for nefarious business and criminal purposes. With all of the bribery and corruption, it is doubtful that powerful corporations will police themselves and stop this enabling system from continuing to poison legitimate commercial endeavors. Stronger and quicker intervention is needed.
Global corporations are a reality. All that is needed is Planetary/Continental oversight. Corporate charters should be granted for specified periods of time and if they fail to perform lawfully their charters should be immediately revoked.
When everyone earns a living wage, a whole new market will be created and benefit corporations. This has been initiated in China as opportunities grow for their poor, rural population to come to industrial cities to become part of the labor force. Asia is in an extraordinary economic boom. as trade agreements between China, India, Russia, North and South Korea, and Africa proliferate.
In the U.S. baby-boomers are coming to retirement age, education is failing to produce the trained people we need to sustain our economic power, while the current president squanders revenue on an unwanted war.