Reform Lite

In scandal's wake, the government may make only modest changes

President Bush takes to the bully pulpit to deliver a stern lecture to America's business elite. The Justice Dept. stuns the accounting profession by filing a criminal indictment of Arthur Andersen LLP for shredding documents related to its audits of Enron Corp. On Capitol Hill, a gaggle of congressional panels pushes on with splashy hearings on Enron's collapse and, now, another busted New Economy star, telecom's Global Crossing. Lawmakers sign on to new bills aimed at tightening oversight of everything from pensions and accounting to executive pay.

To a spectator taking in this Sturm und Drang, it would be easy to conclude that the winds of change are sweeping Corporate America, led by George W. Bush, who ran as "a reformer with results." But far from deconstructing the corporate world brick by brick into something cleaner, sparer, and stronger, Bush aides and many legislators are preparing modest legislative and administrative reforms. Instead of an overhaul, Bush's team is counting on its enforcers, Justice and a newly empowered Securities & Exchange Commission, to make examples of the most egregious offenders. The idea is that business will quickly get the message and clean up its own act.

Why won't the outraged rhetoric result in more changes? For starters, the Bush Administration warns that any rush to legislate corporate behavior could produce a raft of flawed bills that raise costs without halting abuses. Business has scrambled to drive the point home with an intense lobbying blitz that has convinced many lawmakers that overregulation could spook the stock market and perhaps imperil the nascent economic recovery. And lawmakers have found that drafting new financial regulations on everything from 401(k) retirement plans to stock options can be maddeningly complex.

All this sets the stage for Washington to get busy with predictably modest results. A surge of caution is sweeping would-be reformers on the Hill. "They know they don't want to make a big mistake," says Jerry J. Jasinowski, president of the National Association of Manufacturers. That go-slow approach suits the White House. Aides say the President, while personally disgusted by Enron's sellout of its pensioners, is reluctant to embrace new sanctions that zap even law-abiding corporations and create a litigation bonanza for trial lawyers. Instead, the White House will push for narrowly targeted action, most of it carried out by the SEC, the Treasury Dept., and the Labor Dept. The right outcome, Treasury Secretary Paul H. O'Neill told BusinessWeek on Mar. 15, "depends on the Congress not legislating things that are over the top."

To O'Neill and Bush, that means enforcing current laws before passing too many new ones. Nowhere is that stance clearer than in the Andersen indictment. Critics fear that Justice's criminal charges could sink the company, costing thousands of honest Andersen auditors their jobs, further consolidating the Big Five accounting firms into a Final Four, and ending any chance at turning a reformed Andersen into a model for the rest of the industry (page 32). But that's not a big worry, says O'Neill. He figures Andersen spin-offs, international competitors, and second-tier audit firms will rise to the challenge. "In time, we'll have some number larger than four accounting firms out there," he says. So the Bush Administration left the decision to Justice Dept. prosecutors rather than White House political operatives or their reformist brethren at the SEC.

The minimalist Bush strategy doesn't satisfy many on Capitol Hill. Senate Democrats, in particular, have positioned themselves as champions of reform. That puts Hill Republicans in a bind. While no more eager than Bush to pass sweeping changes, many believe there is a political imperative to vote for something--indeed, anything. "It's an opportunity to say we did something," confesses a House GOP strategist.

That's a formula for thinking small. With the White House and House in GOP hands, few big Democratic ideas will likely make it into law. Any major reform, says one lobbyist, "has a 1-in-10 chance of getting to the President."

The bills that do make it are likely to be limited. That includes even reform of 401(k) pension plans. Democrats seized on the plight of Enron's workers and retirees, who lost more than $1 billion on Enron stock held in their 401(k)s, and called for a flat cap on the amount of company stock workers could hold in such pensions. But that idea was quickly dismissed as unworkable. Now the main Democratic 401(k) proposal, a bill by Senator Edward M. Kennedy (D-Mass.), proposes a more flexible limit.

The GOP, for its part, recognizes that some 401(k) action is a political must. Bush has proposed shortening the time employees must hold company stock to three years and making employers responsible for workers' losses during "blackout periods" when they can't trade in their 401(k) accounts. The President's plan "fills gaps in the system without going too far," says Representative Roy Blunt (R-Mo.), a key White House ally.

But even that's too much for the business lobby. Bush's blackout provision, for example, could unleash a flood of lawsuits, warns Liz Varley, director of retirement policy at the Securities Industry Assn. More than 500 companies and business groups have banded together to fight 401(k) legislation. Tactically, the K Street Gang hopes that Congress will be unable to bridge the broad gap between Kennedy's plan and Bush's. "Employers hope to just run out the clock," says David Certner, director of federal affairs at the American Association of Retired Persons.

Similar delay could also help business defend a perk near and dear to executives: stock options. Revelations that Enron's top execs made tens of millions by cashing out their options before the company's demise fueled populist outrage. Senators Carl Levin (D-Mich.) and John McCain (R-Ariz.) want to force companies that offer options to charge them as an expense against earnings, a change that could lower corporate profits by 9% (page 35).

Tech companies, which popularized the use of stock options to attract and retain top talent, are leading the counterattack. If companies are forced to take a charge against earnings for the options, lobbyists warn, they may stop issuing them altogether because of the unpredictable hit to profits. Top executives of Cisco Systems (CSCO ), Microsoft (MSFT ), and other tech powerhouses weighed in when they traveled to Washington in early March to meet with Cabinet officials and lawmakers. They got a receptive hearing, and the still-potent industry is unlikely to lose on a core concern.

The same can't be said for the accounting industry, normally a lobbying juggernaut. Lawmakers who've steadfastly backed the profession are too angry--or embarrassed--to leave the bean-counters untouched. That has created an opening for Democrats such as Senator Christopher J. Dodd (D-Conn.), who has proposed a tough new board to discipline auditors and a ban on CPAs doing consulting work for audit clients.

The accountants' best hope is an alliance with Bush, who wants SEC Chairman Harvey L. Pitt--not the Hill--to write the new rules. But while the accountants have always been able to enlist other interests to help them, this time they're on their own. As a result, says House Energy & Commerce Committee Chairman W.J. "Billy" Tauzin (R-La.), Congress is "more than likely" to create an auditing board more powerful than the one Pitt or the Big Five favor and set some new consulting rules.

Throwing the accountants to the wolves would follow an old pattern. In nearly every scandal of the past 100 years, from Teapot Dome to insider trading, the capital engages in a ritual of outrage but produces little legislated reform. Still, the purifying act of carting miscreants off to the pokey and allowing a few high-profile companies to fail is usually enough to spur Corporate America to clean up its act--at least until the next scandal. For Bush, there could not be a better outcome.

By Richard S. Dunham, Amy Borrus, and Mike McNamee, with Lorraine Woellert, in Washington

— With assistance by Lorraine Woellert

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