NEW YORK — Is there anything more to say about the collapse of Enron?
For Catholics (and anyone else interested in the common good) the answer is definitely Yes. With the scandal spreading wider every day, the Church's social doctrine — its teaching about society and the economy — offers by far the most profound explanation, and the only authentic solution, to the crisis.
What the Church has to say about Enron has nothing to do with partisan politics. The Democrats’ campaign to tie the Enron collapse to the Bush administration is just political opportunism — officials from both parties have been entangled with Enron for years.
The Church's diagnosis goes much deeper, beyond sound bites and finger-pointing, to expose the root cause of Enron's downfall — the end-of-the-millennium obsession with quick and easy profits through stock market speculation.
Looking back, the Internet stock “bubble” — and its collapse — seems almost inexplicable. But the warnings were there all along, prophetically, in Catholic teaching.
It's what can happen when “economic freedom loses its necessary relationship to the human person and ends up alienating and oppressing him,” foretold John Paul II in his 1991 encyclical Centesimus Annus (On the Hundredth Anniversary of Rerum Novarum), his landmark document on the Church's social teaching.
The Rise and Fall
Look up “speculation” in the dictionary and you read: “engagement in risky business transactions on the chance of quick or considerable profits.” That definition might as well be illustrated with an Enron logo or mention the recent Internet-stock craze.
Remember that Enron, while an energy company, was as much a “dot-com” as Yahoo or Amazon. It publicly threatened to render Mobil, Exxon and other “old economy” businesses obsolete through its innovative online, Web-based trading exchange.
Sometime in the late 1990s, Enron and hundreds of other high-technology companies were anointed forerunners of the “new economy,” the vanguard of a new virtual world based on the Internet, which had acquired a quasi-religious status. Thought to have unlimited potential, not bound by normal measures of profit-and-loss, the allure of these companies caused the stock markets to explode. Big and small investors alike abandoned sound investing principles. They poured money into companies with only a few million dollars in revenue, but with stock valuations ascending into the hundreds of millions of dollars.
Is it any wonder that public company executives, and entrepreneurs primed to take their companies public — their compensation heavily based on stock options — fell to temptation and distorted the truth about their companies’ financial and business prospects? Wall Street venture capitalists and investment banking firms — otherwise known as “The Street” — cheered them on, funding absurd business ideas and encouraging the worst business practices. It was only a matter of time before this “irrational exuberance,” a term used by Federal Reserve chairman Alan Greenspan, collapsed in March 2000.
This is an old story — history is filled with examples of such speculative “manias” — and the Catholic Church is the guardian of the lessons they teach us.
In Centesimus Annus, the Pope warns about the ill-effects of speculation. In No. 43, he says that business ownership “becomes illegitimate” when it results from “speculation,” as opposed to the “overall expansion of work and the wealth of society.” In No. 48, he cites “improper sources of growing rich and of easy profits deriving from illegal or purely speculative activities” as threats to the economic order.
Enron, at one-time the nation's seventh-largest company by revenue, is bankrupt today because of speculation. Not criminal speculation. Just speculation. Enron executives used entirely legal but unsound accounting tricks and financing schemes to push up its stock price and cash in on the biggest bull market in history. Illegal methods came relatively late in the process, failed attempts to sustain the company's phony revenue growth. A recent New York Times article summed it up: Enron “was not much of a company, but its executives made sure it was one hell of a stock.”
From a Catholic perspective (insert “fully human” for Catholic here if you prefer), speculating — making money without producing real value — is immoral. No one has a right to “speculate” with a business, especially one the size of Enron. Not when the lives of 21,000 employees, thousands of shareholders and numerous communities are affected.
The Holy Father makes clear in Centesimus Annus, consistent with what the Church has always taught about justice in the economic sector, that business enterprises have obligations that go beyond “maximizing shareholder value,” the guiding principle of free market absolutists. (In the case of the “dot-com's,”only those shareholders privileged — or lucky — enough to sell out before the collapse saw their values “maximized.”)
How is this for prophecy? “The Church acknowledges the legitimate role of profit as an indication that a business is functioning well,” says Centesimus Annus (No. 35). “But profitability is not the only indicator of a firm's condition. It is possible for the financial accounts to be in order, and yet for the people —- who make up the firm's most valuable asset — to be humiliated and their dignity offended. Besides being morally inadmissible, this will eventually have negative repercussions on the firm's economic efficiency. In fact, the purpose of a business firm is not simply to make a profit, but is to be found in its very existence as a community of persons.”
Economic “libertarians” in the press, while agreeing that lawbreakers should be prosecuted, have minimized the Enron fiasco, claiming that the system “worked.” Enron investors were punished by the stock market for their poor judgment. The energy markets adjusted to Enron's collapse with few problems. As for the stock market crash, well, booms and busts are a natural part of a healthy capitalist economy.
But the Pope refuses to take such a narrow view of business behavior. In Centesimus Annus, he insists that “the decision to invest in one place rather than another, in one productive sector rather than another, is always a moral and cultural choice.”
Is the Church too idealistic? Not at all. The Church's emphasis on the productive and moral aspect of a business, as opposed to a one-dimensional focus on financial performance, is echoed by most real-world business management thinkers.
The Real World
In an interview with the religious Web site Beliefnet, Peter Drucker, the most influential management consultant and theorist of modern times, had this to say about the recent stock mania:
“No financial man will ever understand business because financial people think a company makes money. A company makes shoes, and no financial man understands that. They think money is real. Shoes are real. Money is an end result.”
Another leading management consultant, the late W. Edwards Deming, the father of the “quality” movement in American business, and a major influence on Japan's economic rebirth after World War II, was highly critical of companies who cut corners to achieve short-term financial results, putting long-term business performance at risk.
In his 1982 book, Out of the Crisis, Deming said, “Dividends and paper profits, the yardstick by which managers of money and heads of companies are judged, make no contribution to material living for people anywhere, nor do they improve the competitive position of a company or of American industry.”
Deming was ahead of his time on people management, too. He proposed that workers be allowed to monitor their own quality levels, to “work for themselves” (to use a phrase used by the Pope) even though they work within large organizations.
A company bent on boosting its stock price at all costs isn't likely to treat its employees with dignity. Enron didn't. Destroying the value of employee retirement plans was its most serious offense against employees. But according to Bethany McLean, the Fortune magazine reporter who rang alarm bells about Enron back in April, the company also promoted a “cutthroat” culture that left little room for people to do what was right.
The negative effects of the Enron fiasco are spreading because the energy giant was not alone. Lots of companies “speculated” during the Internet-stock mania, putting “paper” profit ahead of real wealth creation. The fear now is that Enron's example may lead to a painful but necessary correction of inflated balance sheets across corporate America, stalling the long-awaited stock market rebound and economic recovery.
Yoking the Bull
Back in 1991, at the start of the bull market, the Pope, in Centesimus Annus, asked himself whether, with the collapse of communism, capitalism was now the model for the world. He based his answer on two different versions of capitalism.
The first capitalism is well illustrated by Enron and the Internet stock craze. It is the economic dimension of “the culture of death,” where freedom is not in the service of truth. A good name for it might be “economic hedonism.” The Pope is against it.
The second version of capitalism is one where economic activity is “in the service of human freedom in its totality, and sees it as a particular aspect of that freedom, the core of which is ethical and religious.” In short, freedom in service to truth. To this version, the Pope says Yes.
The first steps in addressing the Enron fiasco will require only a return to traditional business values on the part of corporate (publicly traded) America.
But to fulfill the Catholic vision of a just economy will require a lot more.
It will mean bringing the message of the Gospel not just into the streets — but into The Street.
Angelo Matera is chief executive officer of Circle Media, parent company of the Register.