O'Neill Has the White House Running Scared

The big fear: His tough talk on accountability will box Bush in

As the famously hands-on CEO of Alcoa Inc. (AA ), Treasury Secretary Paul H. O'Neill was loath to miss a stray carpet tack, let alone an anomaly in his company's financial data. That's why, as the official charged with giving President George W. Bush a report in the coming weeks on Enron Corp.'s implications for corporate governance, O'Neill is talking tough. His big idea: requiring CEOs to sign a financial-health affirmation statement that would make them more liable for Enron-style misrepresentations, whether intentional or not.

O'Neill's desire to increase corporate accountability--outlined in a Feb. 12 interview with BusinessWeek and touched on in a speech to the Economic Club of Chicago on Feb. 25--is music to shareholder advocates' ears. But it has ignited a furious debate inside the White House, pitting the President's more ideological economic advisers against the pragmatic Treasury chief.

On one side of the spat is the plain-talking O'Neill, who is outraged by the insistence of Enron's top brass that they had no knowledge of--and no responsibility for--the financial shenanigans going on at the energy-trading giant. On the other is White House economic czar Lawrence B. Lindsey and Council of Economic Advisers Chairman R. Glenn Hubbard, who fear that O'Neill's efforts will cause untold numbers of frivolous investor lawsuits against "negligent" CEOs. Indeed, several members of Team Bush sport an ill-concealed hatred of trial lawyers, a group well-known for bankrolling Democrats.

Another big concern is that O'Neill's outspokenness could risk boxing Bush in. Down the road, that could make it harder for him to spurn the Treasury chief's plan without being accused of caving in to CEO big shots.

O'Neill's forum is the Administration's Working Group on Financial Markets, a crisis-management unit formed after the 1987 stock market crash. Besides O'Neill, the current group comprises Federal Reserve Chairman Alan Greenspan, who believes the Treasury chief is heading in the right direction; Securities & Exchange Commission Chief Harvey L. Pitt; and James E. Newsome, head of the Commodity Futures Trading Commission.

In a sign of how high the stakes are, both Lindsey and Hubbard are sitting in on the panel's deliberations. According to Administration sources, Vice-President Dick Cheney, the official widely credited with getting O'Neill his job at the Treasury, is also keeping close tabs on the group's doings.

Much of what the working group will propose in coming weeks will be relatively noncontroversial. It will focus on the need for better and more timely release of a company's financial vital signs.

But when it comes to addressing a key question stemming from the Enron collapse and a string of similar, accounting-driven crises--how come top company officials never take the rap for this stuff?--O'Neill is running into a political roadblock. In his interview with BusinessWeek, he suggested that corporate CEOs and their boards be required to certify that they have told investors everything they need to know about a company's financial prospects. Asked if that wouldn't mean that corporate execs could suddenly find themselves hit by legal action, O'Neill replied: "Not if [they] do the right thing." In his Chicago speech, O'Neill said CEOs should be held accountable not only when they intentionally mislead investors--the legal standard for taking criminal action against them--but also if they fail to stop corporate wrongdoing out of negligence.

Lindsey and Hubbard fear that lowering the standard to negligence would be a legal nightmare. CEOs and CFOs would be vulnerable to lawsuits whenever disgruntled investors think share prices are too low or earnings prospects change. O'Neill insists that's not his intention and believes that problem can be avoided.

The upshot: Some of O'Neill's most controversial recommendations may be watered down by the time the forum's report hits Bush's desk. In the meantime, O'Neill is continuing to speak out--even as his more ideological counterparts try to dilute his ideas.

By Rich Miller in Washington

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