Unfinished business

January 10, 2003

REMEMBER ENRON? The reluctant national economic recovery, the growing federal budget deficit, the march toward war on Iraq, North Korea, Trent Lott - all have moved corporate malfeasance off center stage.

Sure, criminal investigations continue with some of the more flagrant cases. Wall Street, Congress and the Securities and Exchange Commission have taken aim at some malpractices. But there's considerable unfinished business - steps that would do a lot more than President Bush's latest tax-reduction plan to put investor confidence on firmer footing.

Yesterday, many of those needed steps were spelled out by a commission of the Conference Board, a respected voice of blue-chip America. Part of the board's agenda is self-serving - avoiding over-regulation of corporate America - but it's nonetheless offering a blueprint of best practices to prevent more scandals from afflicting the economy. Among the board's recommendations:

Corporate governance: Companies should strive to separate the roles of their too often dominant CEOs and their board chairmen, so there's more independent oversight of management. Corporate boards ought to comprise a majority of independent directors, those with no other connections to their firms. Board members ought to be regularly evaluated.

Ethics: Companies should more actively foster ethical practices. Ethics codes aren't enough; Enron had one. Among the needed steps: more employee education, avenues for anonymous reporting of misconduct and for independent investigations of alleged wrongdoing, and making ethics a factor in senior management compensation.

The long term: Companies and investors should focus on long-term - not quarterly - success, basing management and portfolio managers' compensation on that. More companies should take steps to encourage long-term investing, much as Coke recently did in ending its participation in the widespread practice of issuing quarterly "earnings guidance."

Shareholders: Companies should provide for more shareholder participation in their governance. In turn, shareholders must act like owners, not stockholders, becoming more active in governance issues. This includes the managers of the 100 largest mutual funds, which own half of America's stock.

Auditing: Corporate auditors should restrict their activities to auditing, rather than, say, advocating tax strategies. The auditing committees of corporate boards ought to be made up of sufficiently experienced members, whose oversight of management's financial reporting in turn should be subject to independent evaluation.

Keep in mind that the panel that came up with these reforms - including Intel Chairman Andrew Grove, former Federal Reserve chief Paul Volcker, and John W. Snow, the current Treasury nominee - are hardly radicals. Let's hope they carry sufficient weight with their peers to save corporate America from its worst instincts.

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