LEADER: US capitalism down, not out

Financial Times; Jul 01, 2002

The Enron and WorldCom scandals have delivered a humbling blow to US triumphalism about the superiority of its brand of capitalism and the cult of shareholder value.

A system that was trumpeted during the 1990s as the exemplar for the rest of the world has been brought low by greed, fraud and the gullibility of investors foolish enough to believe the bull market would last forever.

The hunt for prime culprits is now on with a vengeance. As well as top managers of the companies concerned, regulators, auditors, stock option schemes and the remuneration committees that approved them have all been fingered. Given the furore in the US Congress, reforms in all these areas now appear inevitable. But will even thorough house-cleaning be enough? Or is the lesson of recent corporate debacles that the foundations of the US capitalist model are fatally flawed?

Some foreign observers, particularly on the other side of the Atlantic, may be tempted to reach the latter conclusion.

Continental Europe has hesitantly embraced some aspects of Anglo-Saxon transactional capitalism. But complaints remain that it breeds excess, turbulence and short-termism - in contrast with the perceived virtues of "patient" capital of the kind long epitomised by the German model.

At the heart of the issue is which approach most effectively maximises shareholder value by stimulating sustained managerial performance. European traditionalists claim the advantage lies with a system that depends on governance by a core group of committed shareholders, who will stick with a company through thick and thin and not jump ship at the first set of poor quarterly results.

There are undoubtedly benefits to that approach, particularly in capital-intensive industries that require large investment commitments. Yet it is not faultless.

Restricted ownership and control did not stop ill-judged diversification by Germany's Daimler-Benz in the 1980s, gross mismanagement of France's Crýdit Lyonnais bank or reckless overspending by many European former telecommunications monopolies. Nor has it prevented fraud by desperate managers.

Furthermore, when big US companies fail, they go bankrupt. In Europe, governments are much more likely to step in with support. That may produce less turbulence - but often at the cost of prolonging the agony.

It also impedes the formation and market entry of new companies - one of the greatest strengths of the US model.

Ultimately, corporate performance probably depends less on styles of governance than on market competition. The fiercer it is, the greater the incentive for managers to succeed - and the bigger the penalties for failure.