Ignore the Whines of Corporate Reform Opponents

The timing couldn't have been worse. Just as the corporate class was preparing its last-ditch assault on a variety of reform initiatives, a flurry of indictments and trials has come along to remind everyone exactly why these folks need to be reined in.

This is the same crowd, you'll remember, that once argued that the problem was only "a few bad apples." Now they are making the rounds in Washington peddling the nonsense that reform has gone too far, costs too much and even jeopardizes the risk-taking that gives the U.S. economy its competitive edge.

Let's start with the hokum about runaway compliance costs.

A survey by Financial Executive International found that the first-year costs to comply with new regulations ranged from roughly $280,000 for companies with up to $25 million in sales to $4.7 million for companies with more than $5 billion in revenue. By my calculation that works out to be somewhere between 0.1 percent and 1 percent of sales -- hardly an excessive fee for restoring investor confidence and reducing the cost of capital.

Much of the cost of compliance has to do with beefing up internal controls. Companies used to argue that they already had them. Now they argue that they are too expensive. It's hard to see how they could be both.

If you were wondering whether the controls are necessary, look no further than the ongoing trial of former Tyco International executives L. Dennis Kozlowski and Mark H. Swartz. There's been all sorts of testimony about huge bonuses awarded and loans made with hardly any documentation showing when and by whom they were authorized. That is precisely why internal controls are necessary.

More to the point, it is a tad disingenuous for corporate directors to say they knew nothing about the skulduggery that went on during their watch, as many have, and then turn around and argue there's no need for better internal controls.

We also hear a lot of whining about how the cost of annual audits has jumped 30 percent because of all the new rules. But remember that one of the reasons corporate fraud was allowed to flourish was that the big accounting firms had been using audits as "loss leaders," hoping to make up the difference with lucrative consulting services that wound up compromising their integrity. Now that the consulting is verboten, audits are priced to reflect what they really cost, which ought to be viewed as a good thing.

Nothing has the corporate class more riled up, however, than the Securities and Exchange Commission's proposal to allow shareholders to nominate competing directors if more than 35 percent withhold their votes for the company slate. In lobbying against the idea, the Business Roundtable sheds crocodile tears over the erosion of states' rights and raises the specter that labor unions and other "narrow" interest groups will turn corporations away from their only legitimate purpose, which is to meet the next quarter's profit number. What the Business Roundtable really means, but doesn't have the guts to say, is that corporate democracy is a sham and if investors don't like the way a company is run, they can sell their shares and put their money elsewhere.

As Michael D. Eisner and fellow Disney directors discovered last week, that arrogant attitude no longer cuts it with investors. And this disenchantment is likely to play out further this spring as investors in 40 large companies get the chance to vote on a resolution put forward by a coalition of labor unions that would limit chief executive pay to $1 million in salary, $1 million in bonus and $1 million in stock and stock options. Most of the companies tried to keep the resolution off proxy ballots, as they have with past efforts to limit compensation, but this time they were overruled by a newly invigorated SEC staff.

The SEC's new chairman, William H. Donaldson, deserves credit for resisting intense pressure to pull back on this broad corporate reform agenda. While some may view him as a traitor to his party and the corporate class, he has proved to be a steadfast champion of the American investor.

© 2004 Washington Post

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