The System Needs Fixing, Mr. President
Dear President Bush: This Fourth of July finds the nation at a tipping point. Americans are starting to bail out of the equity culture that made this nation so prosperous and powerful over the past two decades. Many no longer trust Corporate America. They're putting their new cash into banks, bonds, and building bigger houses. And some are beginning to dump all their previous investments in stocks and mutual funds.
This is a crucial moment, Mr. President. America's real power in the world is based not merely on military might but also on its successful model of market-driven economic growth and prosperity. However, many foreigners are now saying the '90s were a sham and the model is a fake. They are about to join jittery U.S. investors in dumping USA Inc. That is what the sinking dollar is really all about.
Up to now, Mr. President, you've focused on the rotten apples. To your credit, you have publicly condemned CEOs who have broken the legal and ethical codes of our society. There are now criminal charges against the ex-CEO of Tyco International Ltd., L. Dennis Kozlowski and the CEO of Imclone Systems Inc., Sam Waksal. The bunch at Enron Corp. and WorldCom Inc. will probably be indicted as well. But the problem goes much deeper, Mr. President. Corrupt practices have seeped into rock-solid companies. The model of a high-risk, high-growth economy based on honest financial numbers and arm's-length transactions has broken down and needs repair. It may be hard for you as a believer in deregulated markets to admit, but there are major defects in accounting, corporate governance, and Wall Street behavior. It goes way beyond rotten apples, Mr. President. The barrel has a few busted planks, too.
OPPORTUNITY KNOCKS. Mr. President, you've got a speech on corporate crime coming up on July 9. Your political advisers are saying you have to show anxious voters you care about them as the November congressional elections approach. Mr. President, you've got to do a lot more. You've got to convince Americans at home and people abroad that this nation is cleaning its corporate house. You've got to help restore the trust that millions of small investors will need before they risk putting their money into equities again. If you don't, Americans will retreat to safety, and flows of overseas capital will dry up. Stocks will stagnate, economic growth will slow, the budget deficit will soar, the dollar will tank, and America's prestige and power on the world scene will erode. Mr. President, your speech should be not about comforting voters but about preserving our dynamic economic system.
There are some radical steps being proposed to restore public confidence that deserve your attention. One is to have all publicly listed corporations contribute to a fund that pays for accounting firms to audit their books. That would effectively end the fundamental conflict of interest accountants now face when they must police the very companies that pay their fees. Another radical proposal is to separate the roles of chief executive and chairman of the board. The chairman would represent shareholder interests while the chief executive manages the company.
A TOOL KIT FOR THE ECONOMY. Both ideas have merit. But Mr. President, if they go too far for you, there are other proposals you could back:
-- Support tough accounting reform. Your Administration tried to send a powerful signal by punishing Arthur Andersen to death, but the accounting profession isn't getting the message. The Final Four are fighting meaningful reform in Congress. Mr. President, when self-regulation doesn't work and the financial system is threatened, you have to change the rules of the game. Tell Americans you are throwing your weight behind the tough accounting reform bill being proposed by Senator Paul S. Sarbanes (D-Md.). This legislation would create a new oversight board that is run by a full-time staff which would set higher standards and punish those who don't meet them. Announce that the board will insist companies rotate their auditors every five years. Finally, tell the country that you are going to support the Volcker plan and split auditing from consulting to avoid conflicts of interest. Explain how smart CEOs are already doing this.
-- Make CEOs responsible. We need a clean slate in financial reporting, a new benchmark for the bottom line that investors can believe in. Tell the audience you are supporting the SEC's proposal to get the CEOs of the 1,000 biggest U.S. corporations to sign off on their companies' financial statements personally. And say you are accepting Treasury Secretary Paul O'Neill's idea of making CEOs legally liable for those statements. Tell the people you are asking government enforcers to take back CEOs ill-gotten gains from selling options based on phony numbers.
-- Back Wall Street reform. Throw the weight of your office behind the New York Stock Exchange's proposals to clean up corporate governance by replacing insiders on boards of directors with independent members, especially on key audit and compensation committees. Publicly support Merrill Lynch & Co.'s agreement with New York State Attorney General Eliot Spitzer that stops analysts from owning or trading stocks they cover or paid for bringing in investment banking business. Say it should be a model for all of Wall Street.
Mr. President, we realize giving a speech that calls for these proposals would be no small task. But our free-market system depends on the flow of credible information: transparent and reliable reports prepared by honest CEOs and independent boards; certified by accountants who adhere to the highest professional standards; and studied by Wall Street analysts free of conflicts of interest. Is that too much to ask?