Management needs to ride same train as shareholders

July 10, 2002|By JAY HANCOCK

A MONTH AGO, Texas Sen. Phil Gramm said "the feeding frenzy is pretty much over" in the debate over what to do about corporate wrongdoing.

A recovering stock market, the steady ministrations of big-business lobbyists and elapsed time since the Enron bombshells seemed to take the tread off the corporate-reform tractor.

But yesterday, President Bush offered his second major corporate reform proposal in four months.

Republican Sen. John McCain now thinks Harvey L. Pitt, head of the Securities and Exchange Commission, should resign. And Senate Majority Leader Tom Daschle, a Democrat, is pushing for a vote on an accounting-reform bill immediately, instead of in September as had been planned.

Hello, feeding frenzy. The stunning disclosure that WorldCom improperly removed almost $4 billion in expenses from its income statements has put corporate accountability back in the race with health care to be the top issue in the fall elections.

Proposed remedies are all over the map, thanks to the complexity of scandals that featured shell companies in the Cayman Islands, energy-market manipulation in California and a dozen kinds of bookkeeping chicanery.

A bill written by Maryland Democrat Paul S. Sarbanes, chairman of the Senate Banking Committee, would essentially set up a government agency to regulate accountants.

Pitt and others want to end the Sergeant Schultz "I know nothing" defense by making top executives personally vouch for the cleanliness of their books.

Many of these ideas are excessive or irrelevant.

Substantial reform is needed, but it will be more effective and less onerous if Congress focuses on a simple principle: making corporate executives bear the long-term consequences of their management - good or bad.

The idea is not to have Washington run the corporations or the accounting firms. It doesn't work. We don't need new bureaucracies.

We already have a Securities and Exchange Commission. We already have a Financial Accounting Standards Board. We already have a Justice Department.

If the organizations need new resources, help them out. But don't clone them. Instead, zero in on the sticks and carrots affecting the people who do run the corporations.

If executives' fortunes were welded to the long-term health of their companies, not just to the next quarter so they can unload their stock options before the price dives, the whole economy might run a lot more smoothly.

The system of incentives at Enron and many other U.S. companies over the past decade was nothing less than a cruel and well-designed behavioral psychology experiment.

Should Enron executives follow the company's lauded code of ethics? Or should they cheat to enhance results and then cash out huge sums before the malfeasance visibly hurt the operation?

We know which choice many Enron bosses made. The guys in monocles and Vandyke beards taking notes behind the two-way mirrors must have been highly interested.

Now Congress and corporate boards should shift both the negative and positive reinforcements in the CEO rat maze toward promoting corporate stability and long-term performance. They should:

Prohibit corporate bosses from selling most of their stock until 90 days after leaving the company, as McCain proposes. This would encourage executives to manage for the long term.

Freeze the assets of executives charged with corporate fraud and throw more malefactors in jail, for longer terms, as Bush proposes.

Book executive stock options as a cost on the corporate income statement. This would make executive-pay practices more transparent.

Consider outlawing stock options as a form of executive compensation and instead provide for stock grants, which would put bosses in precisely the same boat as other shareholders and simplify the executive-pay accounting issue.

Allow a corporate tax deduction for dividends similar to the one for interest expenses. This would encourage companies to rely on patient, flexible equity capital instead of loading up on debt.

As stock options and CEO compensation soared over the past 10 years, executive-pay "consultants" promoted the trend by talking about "aligning the interests of shareholders and management."

It is now clear that those interests were far from parallel. Making them run in the same direction again would go a long way toward keeping Bush from having to give another major Wall Street speech a couple of years from now.

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