How Bush Would Hold CEOs' Feet to the Fire
It was billed as a routine ceremony for the President to hand out the Malcolm Baldrige National Quality Awards, an annual pat on the back for select CEOs. But at an appearance scheduled for Mar. 7, Bush had more than applause in mind for Big Business chieftains. What he intended to offer was a dose of post-Enron medicine aimed at addressing the crisis of confidence in corporate accounting.
Shaped by a task force headed by Treasury Secretary Paul H. O'Neill, Bush's plan for overhauling corporate governance puts the bulk of the responsibility for future Enron debacles squarely on the shoulders of America's CEOs. That means disclosure requirements to keep employees and shareholders in the loop, tougher oversight of auditors, new penalties for serial miscreants--and a requirement that the men and women of Corporate America's top tier sign a personal affirmation statement attesting to honest bookkeeping.
Mindful of the explosive growth of the Investor Class, Bush is extolling the virtues of what he calls "the responsibility culture." But in the wake of Enron, the President thinks CEOs have to do much more to rebuild public faith. "Leaders of corporations have a special obligation to shareholders and the public," says a senior Administration official.
The point man for Bush's plan will be Securities & Exchange Commission Chairman Harvey L. Pitt. He'll make sure that CEOs sign off on full and honest disclosures of their companies' finances (table). The SEC will write guidelines to help audit committees determine whether their accountants have conflicts that interfere with an accurate reading of the books. And the SEC will get new clout: Bush is directing the securities cops to take away corporate bonuses or stock gains when companies inflate their profits. He'll ask Congress for legislation to let the SEC bar corporate offenders from ever serving again as officers or directors of public companies.
The Bush reforms are a solid start toward preventing another Enron. But they're not likely to satisfy Capitol Hill, where even pro-business Republicans are prepared to crack down harder. And the White House still isn't promising more than a bare-bones budget increase for the SEC, while lawmakers of both parties are talking about boosting the agency's budget by 40% or more.
Restrictions on auditors will be a major flashpoint. Bush wants the SEC to bar accounting firms from doing both the external audit certifying a company's books and internal audits of the same client's corporate controls. But the SEC wouldn't ban the far more lucrative practice of accounting firms helping clients design and install huge computer systems--a major win for the Big Five. Democrats, including Senator Jon Corzine (N.J.), would ban almost all consulting by auditors.
For its part, business may find Bush's responsibility agenda too hard to swallow. Richard J. Carbone, chief financial officer at Prudential Financial Inc., told Pitt at a Mar. 6 SEC forum that managers need "more safe harbor" from lawsuits brought by disappointed shareholders. Without added protection, CEOs are likely to fight Bush's proposed responsibility statements--or turn them into loophole-ridden boilerplate.
Administration officials are trying to avoid giving trial lawyers new ammunition. The White House rejected O'Neill's suggestion that CEOs could be held accountable for mere negligence--as opposed to today's standard of reckless or intentional deceit--in failing to disclose important events. "We don't want to get into excessive litigation," a top Administration official says, "but we want to hold corporations to a higher standard."
Much of Bush's plan depends on Pitt's belief--strongly held even before Enron's collapse--that current financial-disclosure requirements fall far short of giving investors what they need to know. "We want to move away from check-the-box accounting to statements that give investors a true and fair picture of how a company operates," the Bush aide asserts. Business leaders and accountants say they'd welcome such changes. They'd better. Bush's message to CEOs is clear: It's up to you to deliver--or face some unpleasant consequences. And the current plan could be just a starting point for reforms to come.
By Mike McNamee and Rich Miller in Washington