Senate OKs Ban on Loans to Executives

The Senate on Friday unanimously voted to prohibit public companies from making personal loans to their top executives, further toughening a far-reaching bill on corporate regulation expected to gain final approval next week.

President Bush, in his speech Tuesday on Wall Street, called on companies to ban insider loans. But Democrats who control the Senate went further, voting to write the ban into law.

“This is wrong. It must be stopped,” said Sen. Charles E. Schumer (D-N.Y.), who proposed the ban. “Why can’t these corporate executives go to the bank like everybody else?”

Corporate loans have gained scrutiny after disclosures that insiders at Enron Corp., WorldCom Inc. and other scandal-plagued companies received huge company loans even as the businesses were suffering massive losses. The issue also was highlighted by a new focus this week on low-interest loans that Bush received from Harken Energy Corp. while serving on its board in the late 1980s.

The loan ban was one of several amendments to an accounting reform bill that has become the vehicle for other proposals to crack down on corporate corruption. Another amendment, unanimously approved Friday, would extend a requirement for chief executives to certify the accuracy of their company’s financial statements to include executives of U.S. companies that move to offshore tax havens such as Bermuda.

The virtual unanimity developing behind the bill, sponsored by Sen. Paul S. Sarbanes (D-Md.), was demonstrated by a 91-2 vote to limit debate. That means a final vote is likely to occur Monday.

The Senate action came as Bush sought to highlight his own efforts to respond to the spate of corporate scandals, meeting with the leaders of his newly established Corporate Fraud Task Force.

Bush created the task force to better coordinate government efforts to prosecute corporate corruption cases. White House Press Secretary Ari Fleischer said the task force demonstrates “that this government will take every action necessary against people who cook the books or change the numbers in any type of fraudulent way.... I think corporate America knows the government is serious about this.”

Fleischer refused to be drawn into a discussion of the particulars of a corporate reform bill that Bush would sign, even as Senate Majority Leader Tom Daschle (D-S.D.) renewed his call for the president to give “clear and unequivocal” support for the measure. Daschle said such a signal from Bush would make it more likely that a tough bill will emerge from Congress.

The Senate bill would have to be reconciled with a measure approved by the GOP-controlled House. Democrats say the House bill doesn’t go far enough to make corporate officers more accountable for their financial statements and ensure that accountants fully and honestly audit company books.

Although the Senate bill goes further than Bush’s reform proposals, it has been gaining support even among Republicans who usually oppose increased regulation.

Sen. Larry E. Craig (R-Idaho), one of the chamber’s most conservative members, told colleagues Friday, “A good many stockholders, a good many pension plans, a good many retirement plans, are asking us, ‘What are we going to do about the meltdown that occurred in corporate America?’ ”

Senate Minority Leader Trent Lott (R-Miss.) said he will vote for the bill, increasing the pressure on Bush and House Republicans to also support it.

But Sen. Phil Gramm of Texas, a key Republican on financial issues, cautioned that the final bill could change dramatically once House-Senate negotiators meet to reconcile their differences.

Some lawmakers are continuing efforts to strengthen the Senate bill, arguing that it still would not go far enough to restore investor confidence shaken by scandal.

A bipartisan group of senators--led by Carl Levin (D-Mich.) and John McCain (R-Ariz.)--plans to try Monday to get a vote on a measure that could lead to requiring companies to count stock options as an expense on their books. But they are expected to be blocked.

They were the two who voted Friday against limiting debate on the bill. Levin says current stock option accounting rules allowed Enron to greatly inflate earnings.

Opponents of expensing stock options, which give the right to buy company shares at a set price in the future, have said it is difficult to estimate the future value of options.

In his Wall Street speech, Bush called for shareholder approval of stock options to executives.

The loan ban added to the Senate bill--which provides an exception for home loans--drew criticism from some quarters.

Kevin Murphy, a USC professor and executive pay specialist, said the ban “is an ill-advised, knee-jerk reaction” to the scandals. Such loans play a useful role in recruiting executives by helping them buy company stock, and executive stock ownership is prized by public investors, he said.

If the ban does become law, companies will find other ways to compensate top managers, said Jeffrey Christian, chief executive of Christian & Timbers, an executive search firm in Cleveland.

Separately, Rep. Henry A. Waxman (D-Los Angeles) sent Bush a letter urging him to set a “powerful example for our nation’s senior executives” by donating all or a portion of the profits from the sale of nearly $850,000 worth of stock in a Texas-based energy firm 12 years ago. Just weeks after Bush sold the stock, its value plummeted.

White House spokeswoman Claire Buchan dismissed the letter as “more political posturing.” Bush has disputed the notion that he had sought to enrich himself improperly or to hide the transaction.

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Times staff writers Edwin Chen and James F. Peltz contributed to this report.