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Let the Corporate ‘Crawfishing’ BeginThe Denver Post - by Aldo Svaldi - July 11, 2002
(7/8/02) - "We are going to see an avalanche of (financial) restatements between now and the end of the year," said Allan Koltin, whose Chicago-based Practice Development Institute Inc. is one of the nation's leading consultants to the accounting industry.
More than 2,000 public companies are changing auditors following the conviction of Arthur Andersen on obstruction-of-justice charges. And many are changing management after years of shaky performance.
Experts say the new auditors and managers will distance themselves from the financial sins of their predecessors, and the adjustments they may make to past financial statements will continue to haunt the stock market and erode the public's trust.
Locally, Qwest Communications International best fits the pattern -- a new CEO, a new auditor and accounting practices that are under investigation.
"If there is a time to air all the dirty laundry, it is when the new guy goes into Qwest," said Andre Ratkai, a Denver money manager with Praxis Advisory Group.
A restatement occurs when a company, either voluntarily or under pressure from regulators, admits and corrects mistakes in its accounting. Investors typically anticipate a significant restatement, driving down the stock price.
Two weeks ago, WorldCom Group admitted it had masked expenses and inflated earnings by $3.9 billion, creating the largest earnings restatement in history.
Restatements, in some rare cases, can work in a company's favor.
Shares of Atlantic & Pacific Tea Co. rose Friday after the supermarket holding company reported narrower losses for the past two years.
Min Wu, a doctoral researcher at New York University, said three of the largest restatements ever have come in the past year, and like Koltin she expects 2002 will be unprecedented. The old record came in 1999, when U.S. companies made 204 restatements.
It seems the collapse of Houston energy trader Enron Corp. forced more attention on questionable financial practices, and the apparent demise of Enron's auditor, Arthur Andersen, has put the surviving Big Four accounting firms on edge.
Nearly one out of five public companies in the United States relied on Andersen as auditor, Koltin said. About 800 have already switched auditors and another 1,500 will do so soon.
About 10 percent of the restatements that occur each year come after a new auditor finds problems.
"With any new audit under any new circumstances, you have to get comfortable with past accounting," said Mark Wehrle, Deloitte & Touche's audit partner in Denver.
Added to that initial caution now among auditors is an overriding fear of meeting the same fate as Andersen.
Auditors become cautious Andersen didn't keep as tight control over its local accounting teams and generally was more willing to stretch its interpretations of the rules, observers said.
"Andersen has a reputation of being aggressive in energy and telecom," said Kevin O'Brien, an associate professor at the University of Denver Daniels College of Business. "Anybody that audits an Andersen client has to be careful."
Overall, the mood among auditors has turned more conservative and cautious, said Mark Cheefers, chief executive of the Massachusetts-based consulting firm AccountingMalpractice.com.
Accountants are going to think twice before helping client push the rules.
"If you issue one quarterly statement where you have accepted this accounting treatment, then you could be held liable for it, "Cheefers said. "No one wants to hear about gray areas."
Most firms that have grabbed Andersen clients have also hired former Andersen accountants to help with the audits. Koltin said those accountants should know where the bodies are buried and likely will help uncover them.
As new auditors uncover questionable practices and in some cases fraud, they are likely to come to management. Executives in turn can either bring them to light voluntarily or try to keep them under wraps until forced to reveal them.
"We will see a lot of internal actions by corporations trying to figure out if they have any kind of problems or exposure," said Carr Conway, a senior forensic accountant at Dickerson Financial Investigation in Denver.
Companies that expect to get a pass because they come forward with their mistakes will be sorely disappointed, he said.
Investors, regulators and the stock exchanges are in no mood to show mercy, and depending on the size of the restatement, a company's very survival could be at stake.
One red flag to watch is for a new auditor that either resigns or gets fired.
Burt Bondi, a local Denver CPA with Bondi & Co., said auditors face tremendous pressures and will not get much help from the staff at a company that has serious accounting mistakes or outright fraud.
For that reason, the experts said the best odds for a company coming clean and disclosing a restatement are when a new executive team is working with a new audit team.
Wu said that historically a company will restate earnings and then the CEO, if he or she is going to resign, will do so after the announcement, providing the sacrifice to appease investor anger.
Problems now pop up later But a different pattern has emerged in the past year. A CEO resigns without reference to accounting issues, often after having reaped huge sums in options and bonuses from the company. Months later, a new management team uncovers significant problems.
That, was the pattern with Enron and WorldCom, and it could prove the case in several other high profile CEO departures.
As Jean-Marie Messier walked away from his post as CEO of Paris-based Vivendi Universal on Tuesday, questions surrounding accounting practices at the media giant followed him.
Similar accounting concerns hang over Tyco, Dynegy and Qwest, all of which have seen CEO resignations in recent months.
Should companies try to keep their accounting problems in the closet, as Conway suggests many might attempt, how would they do it?
A new accounting rule change regarding goodwill write-downs might offer them a way to dump evidence of past accounting errors without attracting undue attention, Cheefers said.
Not every company has to take a write-down, but most of those that do will likely take the charge in the second quarter, and they could slip additional charges in what accountants call the "big bath." But Cheefers said U.S. stock markets won't see a recovery until confidence is restored in the financial reporting system.
"I don't see anything to be gained from not bringing it up," Cheefers said of accounting problems.
Constant revelations of fraud, deceit and coverups will only cut into the diminishing shreds of trust investors have in Corporate America.
"If the marketplace has demonstrated anything the last six months, it is that its underpinnings rest in the integrity and reliability of the financial numbers being reported," he said.
CEOs Will Have to Swear to NumbersWall Street Journal – by Paul Beckett – July 6, 2002
July 5 — Some of the nation’s most powerful CEOs are being forced to sign on the dotted line. In a little-noticed move amid the din of corporate-accounting scandals, the Securities and Exchange Commission last week implemented an order that could have major implications — civil penalties or jail time — for errant chief executive officers and chief financial officers at the nation’s biggest companies. It also could lead to a spate of financial restatements in the next few weeks as companies scramble to review their recent results.
The new order requires CEOs and financial chiefs at companies with more than $1.2 billion in revenue last year to swear under oath in writing that the numbers in their companies’ recent financial reports are correct. Companies must comply with the order at the time of their next SEC financial filing, which for most companies will be Aug. 14.
The requirement, which applies to 947 companies, could expose corporate chieftains to civil charges of fraud, or to criminal charges of lying to the government or possibly perjury, if their companies’ numbers turn out to be bogus, lawyers say. The SEC can’t bring criminal charges itself, but regularly refers cases to the Justice Department for prosecution.
Meanwhile, the SEC has proposed a rule that would apply to future filings and could require senior executives of all public companies to certify the accuracy of financial results. That proposal will be taken up by the agency after a comment period ends on Aug. 19.
Currently, top executives at many companies do not sign every filing with the SEC, and when they do it is on behalf of the company and not a personal endorsement, lawyers said.
“We support the SEC’s efforts to restore confidence in the financial markets and it’s an unfortunate sign of the times that the SEC has to ask for this type of certification from America’s largest companies,” said Martin McGuinn, chief executive of Mellon Financial Corp. of Pittsburgh. “There shouldn’t be any impact on CEOs and CFOs if they’ve been doing their job correctly but it will force them to focus if they haven’t been,” he said.
CRISIS OF CONFIDENCE
As the crisis of investor confidence in accounting and financial reporting sparked by Enron Corp.’s demise late last year has exploded, the SEC often has been criticized for not doing enough to clamp down on corporate impropriety. The latest move could be a sign that in the wake of the WorldCom Inc. scandal the government is taking a tougher and more vocal line. President Bush next week is expected to deliver a major speech denouncing corporate shenanigans and to send a message that the government won’t tolerate them. Last week, telecom giant WorldCom admitted to misallocating $3.8 billion in operating costs, and the SEC has brought civil charges of accounting fraud against the company.
To comply with the SEC’s new order, executives at companies from A.G. Edwards Inc. to Zions Bancorp will have to swear in writing that “to the best of my knowledge” no report contained a material untrue statement or omitted a material fact necessary to make the report not misleading. A material fact is generally viewed as one that a reasonable investor would want to know.
Exactly how the phrase “to the best of my knowledge” will be interpreted remains unclear. But lawyers say the SEC will expect signers of the sworn statements, which will be made public, to conduct due diligence on the accuracy of their companies’ results.
Law firm Wachtell, Lipton, Rosen & Katz, in a note to clients, recommends that executives review financial statements themselves and question staff and outside auditors “with respect to anything that the reviewing officer does not understand.”
After the sworn statements are submitted, subsequent revisions of financial reports could potentially expose executives to criminal charges, lawyers said. They added that a criminal case based on lying in a sworn statement is generally much easier to prove than a complex accounting fraud. Companies usually carry directors-and-officers liability insurance, but such coverage may be denied by insurers in cases of fraudulent acts or criminal wrongdoing.
The SEC is expected to use the new order to make examples of prominent corporate wrongdoing. “I have to assume this is a first step, and that the follow-up could be cherry-picking a few CEOs and bringing them before a grand jury on perjury charges,” said Theodore Sonde, a lawyer in the Washington office of Crowell & Moring and a former SEC enforcement official. “How many CFOs are going to have sleepless nights between now and mid-August?”
To give the order even more teeth, the SEC has made it retroactive to include some financial reports already on file with the agency. Executives will have to swear to their companies’ most recent annual report and any quarterly, material-event and proxy filings since then.
“I think it’s completely appropriate in light of the very sad deterioration of investor confidence that has resulted from the accounting mischief that’s gone on in a variety of industries,” said James Murren, chief financial officer at MGM Mirage in Las Vegas.
Mr. Murren, who was a Wall Street analyst for 14 years before joining MGM, said that the prospect of signing his name to the company’s financial reports won’t have much impact on his review of the numbers. “I read every word of every draft anyway,” he said.
The rule change could spark a flurry of corporate earnings revisions over the next few weeks, as companies scramble to review past financial reports in advance of having the boss swear to them. “The intent here is if you’ve got any questions about your 2001 annual report or quarterly reports since then, you ought to look over it real, real hard before you send in a sworn certification,” said SEC spokeswoman Christi Harlan.
Executives do have one out: Rather than swearing to the accuracy of the results, they can give reasons why they can’t sign. If, for instance, they joined the company after the previous financial reports were filed, they wouldn’t be forced to sign. Also, companies that are granted filing extensions will have more time to submit the sworn statements.
Lawyers who have reviewed the SEC’s new order say it is unprecedented in its scope. Fried Frank Harris Shriver & Jacobson, the former law firm of SEC Chairman Harvey Pitt, issued a note to clients raising doubts about the SEC’s authority to take this action.
The note contends that the SEC’s authority to require sworn statements relates to specific matters the agency is investigating. Currently, there is no indication the SEC is investigating all of the nation’s 947 largest companies. “This raises a question as to whether the SEC has authority to do this,” said Dixie Johnson, a Fried Frank partner in Washington and co-author of the note.
“We absolutely have the authority to do this,” countered the SEC’s Ms. Harlan.
In any case, companies aren’t expected to challenge the legality of the order. “In the current environment of public mistrust,” Ms. Johnson said in her note, “it is unlikely that any public company officer will refuse to certify that his or her company’s financial statements are not fraudulent.”
Indeed, companies are expected to go into overdrive to ensure that their financial reports have every “i” dotted and every “t” crossed. “We’re working very diligently to ensure we’re in compliance with this new order,” said Chuck Mulloy, spokesman for Intel Corp. “We need to study our financials quite closely to make sure the CEO and CFO can sign off” on them.
The Imperial Chief Executive – Not!New York Times – by David Leonhardt – June 30, 2002
(6/24/02) - Stephen M. Case, a hero of the 1990's for having built America Online into a multimedia giant, sat on the stage at his company's annual meeting last month, listening to investors mock him for overseeing multibillion-dollar losses.
Jeffrey R. Immelt, following in the footsteps of the lionized John F. Welch Jr. at General Electric, has tried to soothe rebellious shareholders by releasing more information than Mr. Welch ever did, but G.E.'s stock has still fallen more sharply than most others this year.
Meanwhile, Charles R. Schwab, hoping to capitalize on Wall Street's new unpopularity, has appeared in a television advertisement proclaiming his brokerage firm "a different kind of company."
Across the business landscape, the imperial chief executive, hailed not long ago as the savior of entire companies and the driving force behind the turnaround of the American economy, is suddenly under siege. With two prominent executives being indicted in the last month, accounting problems continuing to emerge and the stock market stuck near its lowest level in three years, executives are facing their most significant challenge in a decade or more.
To respond, chief executives have begun a delicate two-step intended to answer their critics and still defeat efforts at systemic change. While proclaiming their own companies to be fully healthy and the recent disclosures about problems at Enron, Tyco International, Rite Aid, Imclone Systems and elsewhere to be a series of exceptions, many executives have become more solicitous of their investors, more open about their financial dealings and more responsive to detailed questions from board members. But few are willing to sacrifice even a sliver of the many privileges and huge pay packages they were awarded in recent years.
"We C.E.O.'s have to do gut checks," said William D. Zollars, the chief executive of the Yellow Corporation, one of the nation's biggest trucking companies, who has been attending meetings with investors that he once would have skipped. "We have to make sure we're playing it down the middle of the fairway, not close to the lines."
For much of the booming 1990's, the nation's chief executives could make the case — and they often did — that they embodied all that was right with America. They received personal credit for nearly every improvement at their companies, accumulating enormous wealth and prestige in the process. Some, like Mr. Welch, who received a larger book advance than the pope, became international celebrities, thanks to fawning magazine covers and idolatrous management tomes.
Today's far different atmosphere has helped contribute to a decline in major stock market indexes even as the economy has apparently emerged from recession, a chain of events that had not occurred since the 1920's.
The actions of just a few chief executives have hurt the images of everyone else. "It's the same thing as when a couple of policemen are found corrupt," said Jean-Pierre Garnier, the chief executive of GlaxoSmithKline, the drug company, echoing the frustration of his peers. "The whole police department suffers."
To others, however, the individual problems that have become apparent since Enron collapsed last December suggest that many of the usual checks on chief executives' power disappeared during the giddiness of the 90's economic boom. Now some investors, who tended to give executives free rein when stock prices were rising, are trying to force changes.
Delivering a Lecture: A Corporate Chief Is Taken to Task
Ten days ago, William H. Miller III, one of the market's most successful mutual fund managers and a recent critic of the board at Starwood Hotels and Resorts Worldwide, picked up the phone to find Barry S. Sternlicht, Starwood's chief executive, on the other end.
Mr. Sternlicht built Starwood into one of the world's largest hotel chains by buying bigger rivals and starting the unexpectedly popular W Hotels, nearly all before his 40th birthday. He forced out many of his deputies along the way, received a raise last year even as profits fell and, provoking Mr. Miller's ire, recently decided not to heed more than three-quarters of his shareholders, who passed a resolution asking for changes to the board.
But Mr. Miller gave him little of the deference to which chief executives had become accustomed in the booming 90's. Instead, Mr. Sternlicht received a lecture on democracy.
"Barry, my issue is simple," Mr. Miller, who runs the $11 billion Legg Mason Value Trust mutual fund, recalled saying. The founding fathers, he said, thought that any issue that could gather the support of three-quarters of the states was good enough to be in the Constitution; shareholders should have the same power over the company they own. "What's good for America," Mr. Miller said, "is good for corporate America."
More broadly, investors and private groups, including the business-sponsored Conference Board and the governors of the New York Stock Exchange, are proposing new rules, including one to limit executives' stock option awards and another to require that many board members have no other connections to the executives reporting to them. Regulators at the Securities and Exchange Commission and elsewhere have become more aggressive about investigating executives' behavior.
Americans' perceptions of executives' integrity, meanwhile, have dropped sharply since the 90's. People now say public officials in Washington are more honest and ethical than business leaders, a switch from earlier years, according to the Pew Research Center for the People and the Press.
"We now have too many examples for people not to conclude there's a pattern," said Scott C. Cleland, the chief executive of the Precursor Group in Washington, which advises investors. "We have a deep crisis of confidence."
Chief executives have proved adept in recent years at avoiding nearly every attempt to curb their power, and they have an important ally this time. The Bush administration is emphasizing the enforcement of existing laws over the passage of new ones, which the White House says could make companies less efficient and slow the economy. Having watched the political standing of the nation's captains of industry drop, however, administration officials have stopped comparing President Bush's management style to that of a chief executive and have harshly criticized some business behavior.
"You should get on the tabletop and scream out against the abuses that have been done," Treasury Secretary Paul H. O'Neill advised executives in a speech last week. "This is not what we think is responsible behavior," added Mr. O'Neill, a former chief executive of Alcoa. "We don't like it any better than anyone else."
'Times Have Changed': Forfeiting Millions After Complaints
At the very least, the most opulent behavior of the last decade has become more difficult to justify.
Christos M. Cotsakos, the chief executive of the E*Trade Group, the online brokerage firm, had made something of a joke of his willingness to throw away money. During the 2000 Super Bowl, a company ad showed a monkey wearing an E*Trade T-shirt and clapping, with a tag line saying, "Well, we just wasted two million bucks." After the monkey's star turn during this year's game, Mr. Cotsakos himself appeared on camera reading a newspaper with the headline, "Monkey Flops. Silliest Ad in Game History."
Flavors of FraudNew York Times – by Paul Krugman – June 29, 2002
(6/28/02) - So you're the manager of an ice cream parlor. It's not very profitable, so how can you get rich? Each of the big business scandals uncovered so far suggests a different strategy for executive self-dealing.
First there's the Enron strategy. You sign contracts to provide customers with an ice cream cone a day for the next 30 years. You deliberately underestimate the cost of providing each cone; then you book all the projected profits on those future ice cream sales as part of this year's bottom line. Suddenly you appear to have a highly profitable business, and you can sell shares in your store at inflated prices.
Then there's the Dynegy strategy. Ice cream sales aren't profitable, but you convince investors that they will be profitable in the future. Then you enter into a quiet agreement with another ice cream parlor down the street: each of you will buy hundreds of cones from the other every day. Or rather, pretend to buy — no need to go to the trouble of actually moving all those cones back and forth. The result is that you appear to be a big player in a coming business, and can sell shares at inflated prices.
Or there's the Adelphia strategy. You sign contracts with customers, and get investors to focus on the volume of contracts rather than their profitability. This time you don't engage in imaginary trades, you simply invent lots of imaginary customers. With your subscriber base growing so rapidly, analysts give you high marks, and you can sell shares at inflated prices.
Finally, there's the WorldCom strategy. Here you don't create imaginary sales; you make real costs disappear, by pretending that operating expenses — cream, sugar, chocolate syrup — are part of the purchase price of a new refrigerator. So your unprofitable business seems, on paper, to be a highly profitable business that borrows money only to finance its purchases of new equipment. And you can sell shares at inflated prices.
Oh, I almost forgot: How do you enrich yourself personally? The easiest way is to give yourself lots of stock options, so that you benefit from those inflated prices. But you can also use Enron-style special-purpose entities, Adelphia-style personal loans and so on to add to the windfall. It's good to be C.E.O.
There are a couple of ominous things about this menu of mischief. First is that each of the major business scandals to emerge so far involved a different scam. So there's no comfort in saying that few other companies could have employed the same tricks used by Enron or WorldCom — surely other companies found other tricks. Second, the scams shouldn't have been all that hard to spot. For example, WorldCom now says that 40 percent of its investment last year was bogus, that it was really operating expenses. How could the people who should have been alert to the possibility of corporate fraud — auditors, banks and government regulators — miss something that big? The answer, of course, is that they either didn't want to see it or were prevented from doing something about it.
I'm not saying that all U.S. corporations are corrupt. But it's clear that executives who want to be corrupt have faced few obstacles. Auditors weren't interested in giving a hard time to companies that gave them lots of consulting income; bank executives weren't interested in giving a hard time to companies that, as we've learned in the Enron case, let them in on some of those lucrative side deals. And elected officials, kept compliant by campaign contributions and other inducements, kept the regulators from doing their job — starving their agencies for funds, creating regulatory "black holes" in which shady practices could flourish.
(Even while loudly denouncing WorldCom, George W. Bush is trying to appoint the man who drafted the infamous "Enron exemption" — a law custom-designed to protect the company from scrutiny — to a top position with a key regulatory agency. And some congressmen seem more interested in clamping down on New York's attorney general, Eliot Spitzer, than in doing something about the corruption he has been investigating.)
Meanwhile the revelations keep coming. Six months ago, in a widely denounced column, I suggested that in the end the Enron scandal would mark a bigger turning point for America's perception of itself than Sept. 11 did. Does that sound so implausible today?
SEC Wants Executives AccountableAssociated Press – by Marcy Gordon – June 17, 2002
(6/13/02) - Washington -- The government moved closer Wednesday to requiring faster and broader disclosure of company changes and to having CEOs personally vouch for the accuracy of financial reports.
Companies also would have to report important changes in their operations much faster and report a wider group of changes under the new rules tentatively approved by the SEC.
The "8-K" form for reporting significant events or corporate changes would have to be filed with the SEC within two business days, rather than the current requirement of five days for some types of information and 15 days for others.
The Securities and Exchange Commission voted to open the proposals inspired by the collapse of Enron Corp. -- to public comment for 60 days. They could become final after that.
Among the new items that would have to be reported in the 8-K:
The SEC acted as the latest drama involving alleged corporate malfeasance unfolded. FBI agents arrested the former chief executive of ImClone Systems, Samuel Waksal, at his home in New York City. He was charged with conspiracy to commit securities fraud for allegedly tipping off two people to sell stock in the biotech company the day before the Food and Drug Administration rejected its application for a cancer drug.
SEC Chairman Harvey Pitt said before the vote it was impossible to know whether the requirement for corporate chief executives to personally certify financial reports could have prevented the Enron debacle. Still, he said, "If we don't learn from history, we're doomed to repeat it."
"This is not a time to be stingy with our regulatory responses to some of the chicanery and fraud" that appear to have occurred at several publicly traded companies, Pitt said.
Said Cynthia Glassman, another commissioner: "I don't think this should be a problem for a well-managed company."
Many investors have been unnerved by Enron's collapse and distrustful of the accuracy of the financial reports of big companies, contributing to a volatile stock market also roiled by sluggish earnings and terrorism fears.
At Enron, many employees whose 401(k) plans were heavily invested in company stock lost their retirement savings when its value plummeted last year and they were prohibited from selling it during a period last fall.
Enron, the energy-trading giant that slid into the biggest corporate bankruptcy in U.S. history in December, used a web of thousands of complex partnerships to hide more than $1 billion in debt from investors and the SEC.
The rules put forward Wednesday by the SEC would require chief executive officers and chief financial officers to certify that all the information in the company's annual and quarterly reports is correct and that the reports include everything that "a reasonable investor would consider important."
The executives would have to affix their signatures to the reports and would be subject to potential enforcement action by the SEC or lawsuits filed by company shareholders.
Business Out of ControlL. A. Times – by John Balzar – June 11, 2002
Last weekend I went shopping for electrical wiring at one of those sprawling home improvement centers. I encountered an employee who was battling to keep his temper in check. He was loading items in a shopping cart and muttering about the world going to pot.
As it turns out, his world is.
Customers are quietly rebelling. For the last six months or so, shoppers have been making a mess in the section of the store he supervises.
He showed me where paint brushes are misplaced and stuffed in with circuit boxes, where drapery rings are tossed in with wire nuts, where a can of custom-mixed paint is left abandoned, now worthless. Each morning, he loads up a cart with products that customers brazenly scatter out of place.
This has always been a problem in retail. But this employee says he's never seen it so bad, and it's getting noticeably worse.
I think I know why. It's a small sign of bigger grief in the land.
You can see it at the grocery store with avocados and bananas that have been squeezed hard with the intent to ruin them, or in the finger holes that penetrate the plastic packages at meat counters. I read it almost every day in my mail. People say it is their justification for stealing music and movies and software over the Internet.
Consumers are mad, and some are declaring petty war against the mighty corporation, against the shenanigans, the double-dealing, the get-rich-quick schemes, the fraud, the self-serving deals--the corporate wrongdoing that splashes into the daily headlines and mocks American values.
You don't have to be a retail vandal or an Internet pirate to understand the ground-level frustration of citizens. It creeps into many, if not most, of the conversations I have with friends, sometimes with startling ferocity.
Americans, if I can generalize, are feeling powerless right now. Not just against the threat of terrorism but against the overindulgences of their own free-market system and the stubborn indifference of Washington.
One of the promises of democracy, the essential promise, is that it will react to crisis.
In this case, it isn't happening. Representative government is inert against the disclosures of corporate corruption, corner-cutting, fraud and unfairness.
It doesn't seem to matter that the allegations grow more numerous and shocking by the week. Headlines tell us that Congress is gridlocked over "reform" of the accounting profession and pension law.
But look past the rhetoric and you quickly see the arguments amount to little more than whether to use squirt guns or water balloons against a high-rise fire. For instance, Congress cannot agree whether chief executives should have to attest to the honesty of their company audit reports. You mean they don't already?
Compare that with the far-reaching retirement "reforms" that business engineered in the late 1970s, when corporations decided they didn't want to offer direct-paid pensions to workers anymore. The 401(k) system was dreamed up as a gradual replacement. Recent studies have shown that business saved 14% to 22% in pension costs in the ensuing years, while the median net worth of American workers, ages 47 to 64, has fallen more than 13%, chiefly as a result of shrinking retirement nest eggs.
Indeed, these changes in pension law explain why today's business malfeasance has become so gripping, at least outside of Washington. Our investment markets are no longer a game played primarily by those who can afford to lose. At last count, 52% of us have our bread-and-butter retirement hopes tied up in mutual funds.
The decline of stocks has meant not just a loss of billions of dollars in savings for millions of workers, but it also has exposed levels of social corruption and avarice that the U.S. has not seen since the Gilded Age at the end of the 19th century.
For a family that has watched its retirement shrivel by one-third while corporate executives rake in nine figures, it is no satisfaction to hear the Bush administration and timid opposition Democrats argue over how many contacts Enron had with the White House. It is of little consolation to listen to regulators promise that market forces will eventually set things right after taking us so far off track.
Americans know exactly what's going on.
A Harris Interactive poll conducted in April found that 87% of those who responded believed that big corporations had too much power in Washington. This was not a measure of anti-business sentiment so much as dismay with politics, because an equal 87% said small companies had too little influence over national policy.
Big corporations have used their power shrewdly. They have sweet-talked the Republicans into forgetting about the values of law and order. They have blunted the wage-earner sympathies of the Democrats.
For that privilege, they'll happily pay clerks to restock the shelves.
Overhauling Corporate BoardroomsCBS MarketWatch – by Matt Andrejczak, – June 8, 2002
(6/6/02) - NEW YORK (CBS.MW) -- The top U.S. stock exchanges are proposing an overhaul of corporate boardrooms to abate investor skepticism about Corporate America's integrity following Enron's spectacular collapse and other recent scandals.
With disgusted shareholders scolding corporate chieftains at annual meetings this year, the New York Stock Exchange and the Nasdaq Stock Market are endorsing corporate governance reforms to restore investor confidence amid the biggest crisis on Wall Street since the Great Depression.
The NYSE unveiled a 13-point plan Thursday on the heels of modest proposals announced Wednesday by Nasdaq. The plans are expected to meet some resistance from the business community.
At this point, the NYSE's plan goes much further than Nasdaq's, which is still weighing similar rules and will be under pressure to match ones proposed by its top competitor. See full story.
SEC Chairman Harvey Pitt urged both stock exchanges Feb. 13 to adopt similar measures. On Thursday, he called the NYSE's proposal "a significant step in addressing major concerns raised by the investing public in light of recent events."
At a press conference Thursday, NYSE Chairman Dick Grasso said it is necessary clean up corporate boardrooms in the post-Enron world but stressed investors should not lose faith in the U.S. financial system.
"We in the corporate community are as outraged as those investors who may have suffered losses," Grasso said. "We need to root bad practices and bad people but not presume the system as a whole is broken." See press conference.
Some of NYSE's proposed rules would:
The NYSE will issue its final report in August after a two-month comment period. The proposed rules will be subject to approval by the Securities and Exchange Commission.
The rules would affect 2,800 companies on the NYSE and could leave roughly 25 percent of them scrambling to comply with stricter independent director standards.
The proposal calls for NYSE-listed companies to have a majority of outside directors that corporate boards decide have "no material relationship" to the company. Independent directors are further defined as those not employed by the company in at least five years.
Current NYSE rules require its members to have three independent directors who have not worked for the company within the past three years.
The new rule could lead to potential pitfalls for some companies.
Beverly Behan, a corporate governance specialist at Mercer Delta Consulting who supported the NYSE plan overall, said companies may have to ditch vital directors.
"If companies just scramble for independence, they may lose some expertise that makes sense," she said.
The NYSE plans to give its member companies two years to implement any needed measures if the rules are enacted.
Institutional investors and lawmakers praised the steps taken by the NYSE, which has been criticized for not moving fast enough to improve its listing standards.
"The measures have real weight to them and will provide a much needed stimulus to boosting investor trust," said John Biggs, chairman of TIAA-CREF, one of the nation's largest pension funds with $275 billion of assets under management.
"Today the New York Stock Exchange has done what my Republican colleagues have so far refused to do -- endorse real reform on corporate governance," commented John LaFalce, the top Democrat on the House Financial Services Committee.
The Business Roundtable, a lobbying organization that represents chief executives of large U.S. corporations, was less enthusiastic.
"The report contains some good ideas that will help restore investor confidence in our markets," said Franklin Raines, chairman and CEO of Fannie Mae. "We plan to work with exchange and its committees to ensure the proposals improve corporate governance."
The Business Roundtable is expected to wage a bitter fight against the proposal to let shareholders approve all stock option plans. It backs the idea that would only require shareholder approval of stock option and restricted stock plans for executives and directors.
In the 35-page report, the NYSE also suggested that the SEC should have the direct authority to bar officers and directors who fail to fulfill their responsibilities.
The report also recommended that companies should be forced to first present financial information on a GAAP basis to investors before reporting pro forma financial numbers.
In addition, the NYSE said the SEC should re-evaluate Regulation FD, which set rules for full disclosure of companies' outlooks to investors.
Retired AOL Time Warner CEO Gerald Levin, New York State Controller Carl McCall and NYSE Public Policy Chairman Leon Panetta headed the NYSE committee that made the recommendations.
Matt Andrejczak is a reporter for CBS.MarketWatch.com in Washington.
Executives' Wealth and Criticism GrowWashington Post – June 7, 2002
Wednesday, June 5, 2002; Page E01
Bernard J. Ebbers, chief executive of WorldCom Inc., was ousted from his job a month ago. But he got something better than a gold watch for his years of service: $1.5 million annually for life -- as long as he keeps up with the payments on his $400 million loans from the company.
L. Dennis Kozlowski, former chairman of Tyco International Ltd., had negotiated for himself a severance package worth more than $100 million -- though his resignation on Monday and indictment yesterday on charges of tax evasion have left the exact amount he will receive uncertain.
George Shaheen left his job as chief executive of Andersen Consulting in 2000 to become head of Webvan, a firm that disintegrated during the dot-com collapse. His18 months' labor there netted the 57-year-old executive $375,000 a year -- for the rest of his life.
After more than a decade of munificent salary-and-stock packages, many of America's corporate chieftains are departing with big retirement packages, provoking anger among some worker and shareholder activists.
"We're seeing the most obnoxious compensation packages in history" at a time when fewer workers have guaranteed retirement income, said John Hotz, deputy director of the Pension Rights Center, a nonprofit consumer organization.
Some company officials defend the arrangements.
Ebbers's pay package "was fairly standard for a CEO of this size company, with his tenure," said Brad Burns, a spokesman for WorldCom. "He founded the company, he was CEO for 19 years, he built it from scratch to a $32 billion company. We certainly think that's fair."
A telephone call to Tyco seeking comment was not returned.
Shaheen declined to comment on his retirement package.
But Hotz said the trend in executive compensation "certainly smacks of a gross injustice when there are huge cutbacks in the retirement system overall for workers."
In 1978, about 38 percent of workers were covered by defined benefits plans, which gave them a certain level of retirement income, and about 18 percent were covered by plans that required them to invest on their own for the future, according to the Employee Benefit Research Institute. By 1997, only 21 percent of workers had guaranteed retirement incomes and 42 percent participated in plans that required them to invest on their own, such as 401(k)s. The trend has become even more pronounced in the past five years, according to the EBRI.
At WorldCom, for example, workers who have been with the firm the longest have had traditional pension plans, while workers who have joined the firm in the past decade have been offered 401(k)s instead, so some have both.
To be sure, many workers, particularly in the recent boom market, have done well with 401(k)s, with the average worker aged in his or her sixties holding $177,000 in a work-based retirement investment account, said EBRI fellow Jack VanDerhei, a business professor at Temple University. But these accounts leave aging workers dependent on their own investing savvy and general market trends at the time of their retirement.
"The investment risk has been shifted from the employer to the employee," VanDerhei said.
That's not the case, however, for many of the top-earning execs, who are getting plush pension packages even if they performed poorly.
"It's the old pay-for-failure phenomenon," said Patrick McGurn, director of corporate programs at Institutional Shareholder Services. "They can go out and make any decisions they see fit, knowing they'll be bailed out down the line if they screw up."
Meanwhile some shareholders are saying enough is enough.
More than 50 percent of Bank of America shareholders voted in April to urge the board of directors to seek shareholder approval for future severance packages that exceed more than twice an executive's base pay and bonuses.
Early last month, about 56 percent of shareholders at Norfolk Southern Corp. voted that the board should seek shareholder approval for all executive severance packages. Norfolk Southern spokeswoman Susan Bland said the vote isn't binding on the board but that the shareholders' views "would be considered" in the future.
Other recently departed executives also walked out the door with hefty retirement packages.
Jack Welch, former chairman of General Electric Co., who stepped down from his job in September, received a pension of $9 million per year. A GE spokesman declined to comment on the retirement package.
Charles L. Watson stepped down last week as chairman at the troubled energy company Dynegy Corp.
He'll get more money by going than he would have if he had stayed in his job for the remaining eight months on his contract. According to compensation consultants, his severance package will range between $18 million and $33 million, depending on how some clauses are interpreted.
Dynegy spokesman Don Nathan declined to comment on how much Watson will receive, or on whether the board believed the amount was appropriate. "The matter of compensation is an issue between Mr. Watson and the board of directors," Nathan said.
Carol Bowie, director of governance research at the Investor Responsibility Research Center, which tracks stocks for investors, said that today's executive retirement-pay packages reflect the lavish remuneration customary during the recent economic boom and stock market bubble, when executives were able to argue that a skills shortage made their talents more valuable than they had been in the past.
"Boards were under pressure to give whatever it takes to get executive talent," Bowie said. "They would offer anything."
Chief executives negotiated their salary and retirement packages with boards that often included directors handpicked by the CEO.
"The pay of CEOs is being set by 10 friends of management, which includes one token woman and one token minority," said Graef Crystal, a former compensation consultant who has become a vocal critic of what he views as excessive pay and perks for top executives. "The other six are CEOs themselves. They don't come with a philosophical distaste for high pay. To the contrary, they think it is wonderful."
Crystal said he believed the growth in CEO retirement income mirrors what has happened with executive pay. In 1973, Crystal said, the average CEO made 45 times more than the average worker at his firm. Now, the average CEO makes 450 times more than the average worker, he said.
Compensation consultant Alan Johnson, managing director of Johnson Associates, said executives were able to negotiate such pay packages because of a sort of market euphoria that most people eagerly accepted. "You could say, 'My stock is up a billion dollars, I'm a super-being, and so I am clearly worth it,' " Johnson said. "We were all drinking the Kool-Aid."
Qwest Shareholder BattleAssociated Press – by Carrie Spencer – June 7, 2002
(6/4/02) - DUBLIN, Ohio (AP) - Qwest Communications International Inc. retirees on Tuesday failed to rally shareholders behind two proposals for new restrictions on how executives are paid at the struggling telephone company.
Only 27 percent of Qwest's shares were cast in support of a proposal that would have required shareholder approval of severance packages for top executives.
About 39 percent of the shares backed another proposal which said that growth in the value of the company's pension fund should not be a factor in calculating executive bonuses
The proposals, both of which also failed last year, had needed at least 51 percent to pass. Ninety-one percent of the available votes were cast at Tuesday's meeting.
Qwest, the local phone company for most of the Northwest and Rocky Mountain regions, had recommended rejection of both shareholder-originated proposals.
Institutional Shareholder Services, an influential provider of proxy voting advice to major investors such as mutual funds, had recommended approval of the pension-related proposal and rejection of the severance proposal.
A group representing retirees from U S West, the name of the phone company before it was acquired by Qwest two years ago, had lobbied to pass the measures by sending letters to major shareholders, including billionaire Philip Anschutz, who owns 18 percent of the company's stock.
Qwest, beset by a federal probe into its accounting methods as well as a severe downturn in business, said it held the meeting in Ohio because the company has about 2,000 employees in Dublin.
But critics said the meeting was moved to avoid the backlash from former workers and investors who suffered huge losses as Qwest stock fell from a high of $64 in March 2000 to its current level of about $5 a share. About 20 Denver retirees made the trip to Ohio.
Chief Executive Joe Nacchio tried to reassure investors that Qwest will recover, but spent most of the meeting fielding questions from shareholders angry that he took in more than $100 million last year while their holdings all but vanished.
Last year, Nacchio received a $1.2 million salary, $1.5 million bonus and $24.4 million in deferred compensation from 1997, most of it paid in stock, said Drake Tempest, executive vice president and general counsel. Nacchio also sold $74 million worth of Qwest stock.
"It is the ultimate greed," said retiree Jaclyn Prokesh of Denver. "Is it fair to the people who built this company to be denied the financial security they have earned?"
Prokesh, 69, who retired in 1984 after 32 years with the company's former Mountain Bell unit, said she doesn't like to count her stock loss, but estimated it at more than $275,000.
Nacchio attracted a sarcastic "awww" from audience members when he said he's lost money from the stock collapse as well.
"I'm not asking for sympathy," he said. "All I'm saying is my interests are aligned with yours."
Harvey Hoffman, 74, of Denver, who worked 34 years for U S West, was disappointed the two proposals didn't pass. He said he had periodically bought U S West and then Qwest stock for his granddaughter.
"How would you like to tell a high school senior that the stock will be of little help to pay for her education," he said. "Is it any wonder that retirees and shareholders are angry and frightened?"
Qwest had argued that the severance proposal would limit flexibility in arranging competitive pay packages for executives. The company also denied that pension credits have been used to inflate income. In materials sent to shareholders, the company said credits are not a major part of determining executive compensation.