Commentary: The SEC Needs a Reformer, Not a Pretty Resume

If the right résumé and good intentions were all that mattered, William H. Donaldson would be just the man to lead the Securities & Exchange Commission. As co-founder of a brokerage firm, CEO of the New York Stock Exchange, and founding dean of the Yale School of Management, Donaldson has the experience to know how Wall Street can mistreat investors and what needs to be done to set it straight. Colleagues praise his leadership and political savvy--both sorely needed at a battered SEC. And in nominating the 71-year-old Donaldson on Dec. 10 to chair the agency, President George W. Bush is once again reaching into the past for a reassuring image of integrity.

But investors should not be satisfied with sparkling credentials or a pledge to crack down on boardroom offenders. The crisis in Corporate America demands serious reforms--and on many key issues, Donaldson's long career record is silent at best. Last spring, when lawmakers were hammering out new codes to guide corporate governance, Donaldson was a director at Aetna Inc., defending limits on shareholder rights that a Harvard University professor termed "dictatorial." Donaldson "has not been an exemplar or an advocate of good corporate governance," says Nell Minow, editor of The Corporate Library, a corporate governance research service.

Donaldson's record on accounting and enforcement issues is worrisome, too. At the NYSE in the early 1990s, he fought to let foreign companies list their stocks without meeting tougher U.S. accounting rules. And in 1999, the SEC censured the Big Board for failing to catch illegal trading by floor traders on his watch.

If he wants to rise above this record, Donaldson will have ample opportunities at the SEC. The new chairman's first priority must be to revitalize the stillborn Public Company Accounting Oversight Board by naming a strong, independent leader. Donaldson may have to butt heads with the White House, which appears reluctant to back reformers for that job.

He'll be feeling the heat from corporate and financial interests, too. They are lining up to undermine rules the SEC must write to implement the Sarbanes-Oxley corporate reform act. So far, the agency is taking a hard line, even going beyond what the new law requires in many cases. But he "will have to withstand an avalanche of lobbying," warns Patrick McGurn, vice-president at Institutional Shareholder Services, which advises pension funds on proxies.

On Wall Street, Donaldson must lock in permanent rules to ensure that analysts give investors unbiased stock picks. He'll also need to break up the Street's cozy method of doling out shares in initial public offerings.

Corporate cleanup isn't the only hot issue awaiting the new chairman. Rules to protect investors as stock trading migrates to cyberspace are long overdue. And a shareholder-oriented chairman must use his bully pulpit to educate the investor class on protecting its 401(k)s from the next bear market.

Donaldson also has to fight for his own agency. Outgoing Chairman Harvey L. Pitt, who resigned on Nov. 5, wouldn't go to the mat for the $300 million spending boost the chronically overworked agency needs. If Donaldson wants to rally his troops--and stop key staff from rushing for the exits--he must persuade Bush to boost funding immediately, rather than pledging hikes for 2004. Fortunately, Donaldson has leadership skills and the savvy to avoid Pitt's political snafus.

Donaldson's record of shaking things up is more mixed. The brokerage he helped found in 1959, Donaldson, Lufkin & Jenrette Inc., defied the NYSE when it became the first member firm to go public. But as the NYSE's CEO, Donaldson couldn't get the Big Board's specialists to open trading 30 minutes earlier to help overseas investors. And he resisted linking the NYSE to fledgling electronic exchanges that made it faster and cheaper for investors to trade stocks.

Which Donaldson will show up at the SEC? His background makes him a chairman straight from Central Casting. But with the job of reform so far from finished, just looking the part won't be enough to assure investors the markets aren't rigged.

By Mike McNamee and Amy Borrus

With Emily Thornton and Heather Timmons in New York

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