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CRISIS IN CORPORATE AMERICA | James Flanigan

Others Bolder Than President About Reform

July 10, 2002|James Flanigan

Dissatisfied with President Bush's corporate reform plan, investment overseers across the country are taking matters into their own hands to force corporations and Wall Street investment firms to clean up their acts.

The treasurers of California and two other states say they won't do business with investment banks that allow cozy relationships between their corporate finance and investment research divisions.

And prominent business leaders such as Intel Corp. founder Andy Grove are joining an effort by Peter G. Peterson, chairman of investment firm Blackstone Group, to press for corporate governance reforms.

These efforts represent the stern judgments of prominent people on the corporate scene today.

In almost all cases, these are lifelong business and professional people who know the score--and don't accept Bush's conclusion that a relative few corporate wrongdoers are causing all the trouble.

They believe, as Peterson puts it in a letter to 120 pension and investment funds, that the revelations about corporate malfeasance at Enron Corp., WorldCom Inc., Global Crossing Ltd. and other firms are "a moral cancer and a governance cancer, which must be cut out if our economic health is to be restored."

California Treasurer Phil Angelides, who administers the state's $250 billion in public employee retirement funds, said Tuesday that he will instruct the funds to bar investment banks from doing business with the state unless they separate their corporate finance activities from investment research to avoid conflicts of interest.

The treasurers of New York state and North Carolina agreed last week to take similar actions under a compact with California.

"We have to take consumer action because the president's speech was weak on legislation and weak on investment banking reform," Angelides said Tuesday.

Those three state treasurers are Democrats, and politics may play a part in their reception of Bush's speech. But prominent Republican business figures also are pressing for reform.

"I think our equity culture is in danger," said Robert A.G. Monks, a longtime advocate for corporate reform and director of the federal government's pension fund protection agency under President Reagan. "The people are angry and confused and needed a leader, but the president didn't lead," Monks said.

Groups founded by Monks, including International Shareholder Services and Lens Inc., buy stock in companies to use their status as shareholders to press for corporate reforms.

Peterson, who served as secretary of Commerce under President Nixon, is organizing a Commission on Public Trust and Private Enterprise to unite major institutional investment funds to press for corporate governance reform.

In addition to Grove, Peterson has recruited former Federal Reserve Chairman Paul A. Volcker, former Securities and Exchange Commission Chairman Arthur Levitt, Peter Gilbert, chief investment officer of Pennsylvania's state retirement system, and others to his commission. He stresses that his group takes no financial support from the business community.

The group aims to devise "best practice guidelines" for corporate management and to have the pension funds ask companies in which they own stock to adopt the guidelines or be disciplined by shareholder votes against management or the sale of stock holdings.

That Bush traveled to Wall Street on Tuesday to condemn corporate wrongdoing is encouraging to all of these private and public efforts. The speech raises the visibility of the problem and gives a green light to private reform efforts.

However, even admirers of the speech questioned its effectiveness.

"I like the idea of recapturing funds gained by accounting deception," said Barbara Lougee, professor of accounting at UC Irvine, "but I don't know how it can be implemented. Corporate executives have lawyers."

What measures are reformers most interested in and why? Most focus on accounting reform because deceptive accounting has been at the heart of the repeated corporate scandals.

Many, such as Lynn Turner, a former SEC chief accountant who now teaches at Colorado State University, support legislation by Sen. Paul S. Sarbanes (D-Md.) that would empower a governmental oversight board to set auditing standards. The legislation also would prohibit an accounting firm from performing the basic audit and also doing tax consulting for the same client on grounds of potential conflict of interest.

But the accounting industry has been lobbying against that legislation, Turner says, and pushing a bill that passed the House of Representatives under the leadership of Rep. Michael G. Oxley (R-Ohio). Oxley's bill, which Bush complimented in his speech Tuesday, would place auditing standards under the supervision of an SEC panel that would be guided by accounting companies.

Bush did not refer to other reforms that investment overseers want, including an accounting treatment for stock options that would recognize them as an expense.

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