Get this man a new pair of glasses! Former Fed chairman Alan Greenspan says he didn’t see a need for most of the 2002 Sarbanes-Oxley legislation and “argued that the business scandals that prompted the law didn’t suggest a massive breakdown in corporate governance,” according to the Wall Street Journal.
The remarks were made at a Treasury-sponsored conference on capital markets regulation in Washington this week, the translation of which is a collection of CEOs and Bush administration officials who are trying to figure out how to roll back laws that are forcing CEOs and directors to do their jobs properly or face serious consequences. We dealt with the first volley in that campaign here.
As chairman of the Fed, Dr. Greenspan made a career of talking in guarded terms and convoluted sentences few really understood. That made him brilliant in the eyes of many. Now, as a much in demand $100,000 a pop speaker to prominent companies and business groups, he has finally found a virtue in plain speaking, and is calling in remarkably unequivocal terms for less regulation. Regulation for which he claims he saw no need.
If we are to take Dr. Greenspan at his word, during the time he headed the Fed he didn’t see the need for changes in governance when huge corporate icons were crashing down about him and taking the stock market with them. He didn’t see the need for codes of ethics that would have protected whistleblowers who tried to prevent Enrons from occurring. He didn’t see anything wrong with the hundreds of millions in loans boards were doling out to CEOs that were never repaid. He didn’t see anything wrong with audit committees that were meeting less frequently than compensation committees while permitting huge liabilities in “off book” arrangements. He wasn’t bothered by auditors who were making all kinds of fees from non-accounting jobs and were more interested in pleasing management than reporting on the true health of the books. He didn’t see a problem with paying CEOs hundreds of millions in stock options without expensing them on the company’s balance sheets.
What else can’t this man see? How about the 200 or so companies who have admitted to backdating stock options so that top management could line its pockets even more. Is that a good testimonial to strong internal controls and vigilant boards at those companies, which include Apple, Research In Motion and Home Depot? How about all the boards today that are demanding more pay because they say the boardroom is not the cozy club it used to be? What were they really doing when Dr. Greenspan could not see any need for change. The consensus of many, including influential committees of the House of Representatives and Senate, is not nearly enough.
Seldom have the capital markets been more shaken than they were by the collapsing corporate dominos that prompted the Sarbanes-Oxley Act –legislation Dr. Greenspan doesn’t see as being necessary. Common to all of these disasters, and to so many that preceded them, was the Typhoid Mary of corporate governance that left company after company with an affliction manifested by palpitating CEO pay, apparent unconsciousness on the part of directors as to what was happening about them, a pronounced inability on the part of auditors to count accurately and a detachment from reality among CEOs often characterized by an abundance of personal jets and decadent parties.
Never in the history of modern American business have so many at the top engaged in such egregious displays of criminal wrongdoing and fraud, and others in outright acts of negligence, leading to such a magnitude of losses in stock value, regulatory penalties and shareholder lawsuits as in the period leading up to and immediately following the passage of the Sarbanes-Oxley Act of 2002. Billions were paid out by Citigroup, CIBC, AIG Insurance and Marsh & McLennan alone to settle litigation brought by outraged regulators and aggrieved investors. And the cost of that era grows almost daily. Just this week, the SEC announced that Bank of America will pay $26 million to settle charges that it issued fraudulent research on a number of companies, including Intel. If the great tsunami of fines, payments, trials and prison arrivals by ex CEOs witnessed day after day by Americans and investors around the world during this period was not indicative of a “massive breakdown in corporate governance” –which Dr. Greenspan never saw– I’d like to hear nominations for that category.
Want to make American capital markets more competitive? A race to the bottom of weaker regulation or looser boardroom rules is not the answer. Scandals do not attract investor confidence; laws that set and enforce standards of integrity and openness in the markets and in corporate conduct, when voluntary efforts have failed, do. This was recognized in another era by American lawmakers who passed their equivalent of Sarbanes-Oxley legislation —it was actually much more revolutionary— which was aimed squarely at directors and CEOs. As the report of the House committee on Interstate and Foreign Commerce that accompanied passage of the Federal Securities Act of 1934 stated: “If it be said that the imposition of such responsibilities upon these persons will be to alter corporate organization and corporate practice in this country, such a result is only what your committee expects.” Some CEOs, directors and their spiritual advisors from Wall Street now complain that Sarbanes-Oxley is actually disturbing the status quo in the boardroom. Do you think? Maybe that’s the idea.
No, the answer to Dr. Greenspan & company’s concerns about American competiveness lie in a different direction. A global market that is becoming increasingly volatile and upon which so many depend for their livelihoods, their prosperity and very often their dreams, requires new rules for the road —not a free-for-all. In this complex environment that has too often in recent years experienced the consequences of those who play only by their own rules and tend to forget the trust from others they hold, a premium will flow to where the regulatory structure and corporate governance regime demand and produce transparency, integrity and ethics. Companies and markets that become synonymous with those values will enjoy a competitive edge. Those that do not will suffer. That’s the reality behind Sarbanes-Oxley legislation and other efforts to empower investors and bring common sense to the boardroom.
What’s not to see?
Some high profile CEOs are taking action to support legislation to curb emissions that contribute to global warming. Like President Bush’s recent speech on excessive CEO pay, the subject of recent comment on these pages, it comes as a surprise to many.
In his Wall Street Journal column this week, where he praised the CEOs for taking the lead, Alan Murray asked “Why has the business community suddenly turned green?”. There are several reasons, of course, not the least of which is the hope of getting in on the ground floor to help draft the legislation they know an alarmed public and a Democratic Congress will demand. Some companies, like GE, where CEO Jeffrey Immelt is spearheading the move for new laws, stand to make huge profits from nuclear sales and other measures to stem emissions. But there is a larger issue to consider here before we go around handing out awards to CEOs for doing the obvious (which will probably be taken by some as another excuse for bigger bonuses). My comment responding to Mr. Murray’s piece is available at the Forum section of the Journal or below for those without a subscription.
Would we be wondering why Captain Smith slowed down when he had reports of icebergs nearby? Unfortunately, he did not. The rest is history. It was called the Titanic.
When disaster’s portents surround us, it is wise to act and not stand back and allow the unthinkable to happen. We hire leaders for their vision and ability to avoid calamity, not for their propensity to sound the alarm after catastrophe occurs. In that regard, it is a sad commentary on the quality of business leadership that we have to ask, “Why are they doing it?” when many less illustrious figures saw the dangers some time ago and have attempted to adjust their own conduct, and those of their policy-makers, accordingly.
It is not leadership these CEOs are engaged in by responding to the dire fears of climate change at this point. It is manning the lifeboats.
Last week, the U.S. Senate’s failure to pass a bill to increase the federal minimum wage promoted a considerable reaction on these pages. Late today, it voted overwhelmingly to increase the minimum wage for the first time in more than a decade. Finlay ON Governance takes no credit for the change of heart, but it is difficult for us to hide our delight. Senator Ted Kennedy called the bill “a victory for the American people.” We couldn’t agree more.
Several years ago, at the height of the scandals involving Tyco and Enron (WorldCom was still to come), President Bush gave a landmark speech extolling the importance of corporate responsibility and sound governance. Having been one of the relatively few voices in the business world for those concerns going back some three decades, I was astonished and frankly delighted at the time to see a president of the United States tackle these issues. Much more needed to be done than he proposed, and the final Sarbanes-Oxley Act was more hard-hitting than the administration first wanted. But at least George W. Bush voiced concerns on a subject that had not been heard from a president since FDR, when a previous crisis rocked confidence in American capitalism.
Yesterday, Mr. Bush sounded a reminder of corporate responsibilities on another contentious issue: CEO pay. Most of you will know this is a long-standing concern of mine. It is ten years since I gave a speech in which I called excessive CEO pay “the mad cow disease of the North American boardroom.” The President did not refer to the pay issue in exactly these terms, but at least his speech is another sign that this is a growing flashpoint among investors, employees and customers. It needs to be among boards of directors, too. Here is an excerpt of what Mr. Bush said in New York:
America’s businesses have responsibilities here in America. I know you know that. A free and vibrant economy depends on public trust. Shareholders should know what executive compensation packages look like. I appreciate the fact that the SEC has issued new rules to ensure that there is transparency when it comes to executive pay packages. The print ought to be big and understandable. When people analyze their investment, they ought to see loud and clear — they ought to be able to see with certainty the nature of the compensation packages for the people entrusted to run the companies in which they’ve got an investment.
Government should not decide the compensation for America’s corporate executives, but the salaries and bonuses of CEOs should be based on their success at improving their companies and bringing value to their shareholders. America’s corporate boardrooms must step up to their responsibilities. You need to pay attention to the executive compensation packages that you approve. You need to show the world that American businesses are a model of transparency and good corporate governance.
Like his initial foray into corporate governance a few years ago, Mr. Bush’s moral exhortations are unlikely to be sufficient as a force for change. But it was the beginning of a new debate at the highest level of American policy-making, and once again, a most welcome surprise.
Most recent scandal shows that a disconnected board and a culture of over-deference to management continue to plague Canada’s largest electrical utility.
It’s like that Amityville house. Perfectly normal CEOs and directors go in and come out totally dysfunctional and disconnected with the world around them. That seems to be what happens with Hydro One, Canada’s largest electrical utility, on a regular basis. The most recent episode involves highly critical findings by Ontario’s Auditor General, who documented irregularities in financial controls at the organization. It eventually led to a government which was outraged, a board which appeared clueless and a CEO who suddenly resigned. It’s all been played out before. (more…)
Terrorist threat ratings for law abiding travelers that can’t be challenged are reminiscent of totalitarian tactics which the United States so long fought.
Neville Hobson, a respected blogger and innovator in the changing field of social media raises some important points on the terrorist rating system to which travelers to the US are being subjected. “Can’t be rescinded, not even questioned,” as the line goes from the movie Casablanca, seems an apt description. There is no provision for amending an inaccurate terrorist rating. You can’t even see it. In a world war against fascism and a very long cold war against communism, America fought the encroachment of a big brother who kept track of everyone and accorded civil rights to no one. What has happened to this once gleaming pillar of civil rights so long an inspiration to freedom loving people? What has become of the spirit of Jefferson, Lincoln, Kennedy and Dr. Martin Luther King?
I have been following Mr. Hobson’s reports faithfully for several years. They are a model of British restraint and proportionality. They also have a significant following around the globe. He is clearly not alone in questioning the principles and management behind such a program. The troubling fact is that the misdirected thinking and policy miscues that brought America to its current calamitous course in Iraq also seem to be manifesting themselves at home in the government’s dealings with its own citizens and those of its allies.
I have written at Finlay On Governance recently here and here about the direction of the United States, a country where I have lived, more than occasionally work and have many family members. I believe America is only now awakening to how misguided its course in the world has become. It is apparent that the assault launched by the U.S. government on the privacy and civil liberties of its own citizens, as well as those of its supporters and allies like Mr. Hobson, is far greater than any outside enemy could ever inflict.
No right thinking member of the civilized world wishes to see America, or any other country for that matter, vulnerable to attack at the hands of terrorists. But the war on terror must not be permitted to become a war on the privacy of law abiding people, otherwise the terrorists have won a victory of a kind they never could have dreamed.
Perhaps the current soul-searching in America about its ever more costly missteps involving the Middle East, and the change of political landscape that occurred in November, will begin to prompt a larger rethinking about the need to preserve those values of liberty and civil rights for which America has been a beacon to the world, but the light of which has sadly grown more dim in recent years.
