From the WSJ Opinion Archives
THINKING THINGS OVER
A Silver Bullet for Human Nature?
The best business reform is self-correction.
When the government fails in its most basic functions--say, protecting our citizens from foreign enemies--no one at the FBI or CIA loses his job, we all gather around to salute the flag and Washington gives us yet another bureaucracy. But if business stumbles--say a minor recession and the collapse of stock values many had thought inflated--businessmen are hauled into court, and the air is full of proposals for "reform."
It's no use complaining about this little irony, I suppose. Indeed, scrutiny, competition and the clear bottom-line test of success or failure are the tools business uses to improve its performance. Over time that performance scarcely demands apology. As Henry Paulson of Goldman Sachs pointed out in his widely noted speech last week, since June of 1981 the economy has almost doubled and created 40 million jobs, while the stock market is up 2 1/2 times.
Yet after a decade-plus bull market and a heady millennium run-up, it was certainly time to shake out the miscreants. CEOs are gone from Enron, WorldCom, Dynegy, Arthur Andersen, Adelphia Communications, Tyco and others. Two executives, J. Clifford Baxter of Enron and C. Dana Rice of El Paso Corp., are dead as apparent suicides. Analyst Henry Blodget is gone from Merrill Lynch, which has donned $100 million of sackcloth and ashes. And Mr. Paulson and the New York Stock Exchange exhort business to clean up its act.
Experience warns against a rush to judgment; in past business-reform frenzies it proved wise to take some time to ponder where the actual sins lie. A jury clearly is having trouble deciding whether the government has proved beyond a reasonable doubt that the Andersen partnership is a felon. Some of those Enron off-balance sheet entities do look criminal to me. Adelphia and Tyco CEOs used public companies as private piggybanks. Something has clearly been awry with accountants and Wall Street analysts.
Yet somehow I doubt that there's a silver bullet to cure these problems. In particular, legislative champions should be warned, remember FIRREA. the Financial Institutions Reform, Recovery and Enforcement Act of 1989 prolonged the recession, and doubled the taxpayer cost of cleaning up the savings-and-loan mess, itself the result of "reform" legislation of the 1930s.
Reform emerging from the Senate sausage-grinder this time around is certain to include various bonanzas for the tort lawyers. Great classes of shareholders will get $1.39 each, or maybe a coupon for a discount on future purchases, while the lawyers affecting to represent them pocket billions. The asbestos lawsuits alone have done more economic damage than any Enron.
Congenital cynics and hard-edged news hounds are likely to scoff at the business community's own efforts to reform. It's always possible to point to brainstorms that haven't been adopted. The current hobbyhorse is charging some estimate of the value of stock-option grants against current expenses. Opinion grants are currently relegated to footnotes because they don't have an impact on corporate cash flow--a point weighty enough, it seems to me, at least to merit a little reflection.
Last week's NYSE proposals would surely be helpful. The theme unifying slippery accounting, insider loans and the like is oversight failure. Boards of directors are suppose to supervise chief executives and to police corporate integrity. There is of course a delicate balance between the board's mission of oversight and the chief executive's mission of leadership and decision making, but events suggest we've recently been in an era of deification of CEOs.
The Big Board's proposals are directed squarely at tipping the balance back toward directors. It proposes to require that all listed companies have a majority of independent directors, and only independent directors on audit, nominating and compensation committees. Independent directors would meet in regular executive sessions without management. The proposals would tighten the definition of independent directors, and ban compensation other than director's fees for members of audit committees. In addition, the exchange offers a long checklist for codes of practice and behavior, at least forcing boards and managements to think about these problems.
Mr. Paulson has some further intriguing suggestions. He proposes that option recipients be required to hold their stock for "significant periods of time," and in cases of bankruptcy subjecting CEO's to a "claw-back" provision for profits on stock sales in the previous year.
He also raises interesting accounting questions. He says, for example, "the overly complex rules-based approach underpinning US GAAP is ripe for manipulation." The International Accounting Standards being promulgated by the European Union are instead "principles-based," which their backers argue is superior.
Clearly an interesting and healthy debate is just getting under way, though it too is unlikely to produce a silver bullet. The most important correction, indeed, is self-correction. People, even accountants and investment bankers, do learn from experience. Perhaps CEOs will even learn to pay less attention to the analysts who have proved so fallible. Not least, I would hasten to add, burned investors should learn that shares go down as well as up.
The truth is that analysts, CEOs, directors and investors too were caught up in one of those periodic moments of human euphoria. Better corporate governance will help at the margin, but if you're going to find a cure, it will have to cure human nature.
That being unlikely, it may be worthwhile to ask what triggered the euphoria that prevailed around the turn of the millennium. Milton Friedman, Arthur Laffer and others nominate Alan Greenspan's go-and-stop monetary policy, but that's a story for another day.
Mr. Bartley is editor of The Wall Street Journal. His column appears Mondays in the Journal and on OpinionJournal.com.
