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The Nation | NEWS ANALYSIS

Corporate Reform Has a New Ally

Fearing free-market backlash, business elites and GOP conservatives champion an overhaul.

November 18, 2002|Peter G. Gosselin | Times Staff Writer

WASHINGTON — For almost a year now, the Bush administration has resisted becoming deeply involved in tackling the corporate fraud and gimmickry that have shaken the nation's financial markets and have demolished a series of prominent companies.

And with the GOP sweep of this month's congressional elections, President Bush has been politically freed of the need to take decisive new steps -- even as his Securities and Exchange Commission has been set adrift by the departure of its embattled chairman and a new accounting oversight board has been left similarly rudderless by the exit of his choice to head that panel.

But far from falling by the wayside, the cause of reform has been embraced by a powerful coalition of conservative Republicans and elite business leaders who fear that failure to follow through on a promised overhaul of the nation's corporate sector could cause a damaging backlash against the free-market system.

"The cost of doing nothing is further erosion of investor confidence," warned Sen. Richard C. Shelby (R-Ala.), who vowed no letup in reform as the president's party assumes control of the Senate and Shelby takes the chairmanship of the Senate Banking Committee. "We cannot go down that road anymore."

Administration officials need to "keep challenging the [stock] exchanges and corporate America to deliver on their promises of transparency and integrity" or risk letting the reform drive falter, said Larry W. Sonsini, chairman of the high-tech law firm of Wilson Sonsini Goodrich & Rosati in Palo Alto and a key member of the New York Stock Exchange panel that produced some of the year's toughest overhaul proposals.

However, he added, "there is not any independent pressure coming out of Washington anymore."

To be sure, the administration has played a pivotal role at key moments in the debate to date. White House officials have encouraged federal prosecutors to seek indictments against top executives of the most troubled companies. The president has advanced overhaul proposals at several points during the year.

In recent weeks, administration officials have said they are moving expeditiously to fill the vacancies at the top of the SEC and its newly formed Public Company Accounting Oversight Board, and they have gone out of their way to tout the SEC's tough-minded approach to the scandals, saying the agency has brought more enforcement actions and forced the disgorgement of more funds than their predecessors in the Clinton administration.

But they have not detailed their plans, and Bush generally has preferred to follow, rather than lead, on the issue. He waited more than two months after Enron Corp.'s December collapse had destroyed the jobs and savings of thousands -- many in the president's home state of Texas -- before offering his first worker protection measures. He pointedly refused to endorse the only major legislation to emerge from the year's debacles, the Sarbanes-Oxley Act, until WorldCom Inc. declared the biggest-ever bankruptcy in late July.

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'Bad Apple' Theory

Motivated in part by his focus on war and terror, and in part by his ideological objection to expanding Washington's power over business, the president has hewed to the "bad apple" theory of the scandals -- that a few rogue executives, accountants and analysts are spoiling the corporate "barrel" and that little else is needed besides removing and punishing them.

But that is precisely the view that key reform figures now dispute. "There are definitely some bad apples, but it's very hard to sustain the belief that it's just bad apples," said Kim B. Clark, dean of the Harvard Business School, which is widely viewed as a sort of conscience of the nation's business elite. "We have some serious problems with the barrel as well."

In a recent letter to alumni, Clark warned that "mounting evidence indicates the possibility of systemic flaws in our processes of [corporate] governance and compensation as well as our accounting standards." As a result of the flaws, he said, "the faith of people around the world in the economic system that forms a crucial element of our society has been damaged."

Clark has called a series of five meetings between top executives and senior faculty, two of which have already occurred, to hammer out a comprehensive reform agenda. At its heart, according to takeover defense lawyer Martin Lipton, is a call for "a tectonic shift in power away from the imperial CEO and to outside directors" of corporations.

The reform advocates say that key ingredients for a thorough overhaul already have been put in place.

In June, for example, the New York Stock Exchange adopted stringent new requirements for companies that want their shares traded on the Big Board. These include having boards of directors on which the independent directors -- people with no material ties to the firm -- are in the majority. They also include having the boards' audit, executive compensation and nominating committees dominated by independents.

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