Over the past decade, the "fat cat" story has become a newspaper staple. Knowing that envy is a weakness not confined to socialists, even the right-wing press joined the sport of exposing the inflated earnings of top management, pursuing them to the manicured lawns and polished doors of their luxurious homes. But the main complaint has been from the left, on grounds of social justice and social solidarity. We know now, however, that greed is also bad for business.

This is the true story behind the current stock market plunge. Investors have lost confidence in the management of big companies. People have already lost trust in their politicians; now they are losing trust in business leaders. They are realising, as one corporate scandal follows another, that they were lied to throughout the 1990s. They were told endless stories of business success; many have turned out to be bogus. Nearly 1,000 US companies have restated their post-1997 earnings; Enron is merely the biggest example, and WorldCom the most recent - more will follow. One research firm estimates that total US profits were overstated by nearly 20 per cent in 2000 and, in the case of technology companies, by 70 per cent. To describe it as a conspiracy would be an exaggeration; but there is little doubt that the top echelons of Anglo-Saxon capitalism - accountants, managers, analysts, bankers and some politicians - colluded to create a culture that allowed them to cook the books. These are more or less the same people who lecture the rest of the world on corruption.

Two related ideas lay at the centre of this culture. The first was "shareholder value" - the belief that management's overriding duty was to maximise returns to shareholders, usually through getting share prices as high as possible, rather than through paying out dividends. The second was that managers' interests should be aligned with those of shareholders by giving them a stake in the companies they worked for - mainly through options to buy shares at a discounted rate. The result was that managers would go to any lengths to boost the value of their companies' shares. One way to do this was to merge with or acquire another company, preferably across international boundaries, thus adding assets while cutting costs and jobs. (The managers might lose their own jobs, but they would still have their share options, to say nothing of their severance payments; the average tenure of a US chief executive is in any case only four years.) Subsequent studies suggested that those mergers achieved little of value, and something like a third of them are now being unwound. Another way was for companies to buy back their own shares, thus increasing the value of the remaining shares, including those held as options by management. Consequently, many top companies either increased their debt or reduced investment, leaving the US with outdated plant and equipment across its old economy sector. (This is one reason why America now needs tariffs to protect its steel industry.) Worst of all were the arcane financial devices used to exaggerate profits and understate costs.

Nobody had any reason to blow the whistle, or even raise a whisper of doubt. The climate of the times favoured minimal regulation: let the market do its business, and everything would come right on the night. Economists were in thrall to a "new paradigm" whereby the IT revolution would cause profits to rise till the crack of doom. Politicians and civil servants, incurious creatures by nature, were happy as long as the economy prospered. Investment bank analysts feared losing corporate finance business if they got a reputation for raising awkward questions. And if ever the balloon looked like going up, executives could always exercise their options and sell the shares before anybody else, as the bosses at Enron did (while forbidding employees to sell the shares they held in their private pension funds).

The accountants were the dogs that didn't bark in the night. Andersen, implicated in both the Enron and WorldCom scandals, is one of five big firms that dominate accounting worldwide - all the companies in the FTSE-100 are audited by one or the other. But none of them now makes anything like the majority of its money from statutory auditing work. They tout for much more profitable business in corporate consultancy. The conflict of interest is fairly obvious, as is the conflict when staff hold shares in the firms they audit - as, astonishingly, they often do, according to a report from the US Securities and Exchange Commission. In a recent report, the New Economics Foundation argues that the need to separate commerce from auditing is now as urgent as it once was to separate the powers of church and state.

As our business columnist Patrick Hosking reports on page 34, some managers have found yet another trick to protect their share options from the current stock market collapse. The victims, once more, are shareholders, for whom the new business culture of the past 15 years was supposed to be so beneficial. And these shareholders are not cigar-smoking or grouse-shooting dwellers in country houses, but ordinary people who own the big companies through pension and life insurance funds. They have been led to believe the capitalist system is infallible, that it will assuredly protect them against old age or infirmity. But it has been undermined, as was the communist system, by those who run it.

In an illuminating recent article in Prospect, Edward Chancellor quotes a consultant who argues that the successful running of companies has little to do with executive compensation schemes; rather, it depends on "great managers motivated by the pride they take in their work". Well, gosh! Isn't that what they used to say in the stuffy old public sector?

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