New Issues Faced By Corporations
Corporations in the United States have suffered a series of major fiascos in recent years that have cost investors and employees billions of dollars and have eroded public confidence in the governance of major corporations. During the mid to late 1990s, the U.S. economy grew in record numbers, much to the delight of investors and the public in general. Adding to this elation
was the success of Internet-based companies, known generally as "dot-coms." Business commentators and the general press referred to this collective success as the "dot-com bubble."
The "bubble" burst during the early part of 2000. Marketing analysts in 1999 predicted that the enormous flow of capital, coupled with a limited range of business models that tended to copy from one another, would lead to a severe downturn or shakedown. Early in 2000, stock in several of these companies sank rapidly, leading to hundreds of BANKRUPTCY filings and thousands of employees losing their jobs. Although not all of the companies shut down, entrepreneurs and investors have been weary to follow this model since the collapse.
Confidence in American corporations decreased further with a series of corporate failure based largely upon mismanagement by directors and officers. In 2001, Enron Corporation, a large energy, commodities, and service company, suffered an enormous collapse that led to the largest bankruptcy in U.S. history. Many of the company's employees lost their 401(k) retirements plans that held company stock. The controversy also extended to the company's auditor, Arthur Andersen, L.L.P., which was accused of destroying thousands of Enron documents.
Enron reported annual revenues of $101 billion in 2000, but stock prices began to fall throughout 2001. In the third quarter of 2001 alone, Enron reported losses of $638 million, leading to an announcement that the company was reducing shareholder EQUITY by $1.2 billion. The SEC began an inquiry into possible conflicts of interest within the company regarding outside partnerships. The SEC investigation became formal in October 2001, and initial reports focused on problems with Enron's dealings with partnerships run by the company's chief financial offer.
Many additional allegations continued to surface throughout November 2001, including rumors suggesting that company officials sought the assistance of top-level White House officials, including Treasury Secretary Paul O'Neill. In December 2001, Enron's stock prices fell below $1 per share in the largest single-day trading volume on either the New York Stock Exchange or the NASDAQ. Because the company's employees' 401(k) plans were tied into company stock, these employees lost their retirement plans.
Concerns over corporate governance continued to dominate business news in 2002, as WorldCom, Inc., the second-largest long-distance provider in the United States, filed for bankruptcy. Like Enron employees, WorldCom's employee 401(k) plans held company stock, and by 2003, the value of these plans had decreased by 98 percent from their value in 1999. Moreover, similar to the Enron fiasco, many allegations focused upon the accounting methods that WorldCom's accountants employed. The company's board of directors and chief executive officer expressed "shock" that the company had misstated $38 billion in capital expenses and that the company may have lost money in 2001 and 2002 when, instead, it had claimed a profit.
The SEC has responded to these problems by requiring greater oversight of the accounting profession in the United States. New regulations have also modified the accounting methods that by these companies employed. Nevertheless, public confidence in U.S. corporations and the capital markets remains shaken, and much of the criticism has focused upon the lack of oversight regarding corporate directors and officers. Many have called for reforms that will hold these directors and officers responsible in instances of malfeasance.
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