Bush Shuns Proposal to Increase Execs’ Liability

President Bush rejected calls to hold corporate executives more personally liable in investor lawsuits, fearing such a step might spur a rash of litigation, administration officials said Thursday.

In formally announcing a set of reforms designed to protect investors from the kinds of abuses seen in the Enron Corp. collapse, Bush said corporate officers must be held to a higher standard. He proposed that executives who mislead investors or sign off on inaccurate financial statements be required to return bonuses or be barred from serving at public companies.

“The people who run public companies owe a special obligation to these investors, many of whom have put their savings and future security on the line,” the president said. “Reform should start at the top. The chief executive officer has a daily duty to oversee the entire enterprise.”

But Bush declined to endorse a proposal advocated by his own Treasury secretary, Paul H. O’Neill, that would have made it harder for corporate executives to rely on company-paid insurance policies to pay the legal costs of defending them in cases brought by investors or others claiming that the company misled them.

The president feared such a requirement might encourage investors to sue corporate officers, administration officials said.

“It is important to provide sound regulation and remedies where needed, without inviting a rush of new lawsuits that exploit new problems instead of solving them,” Bush said.

Bush also decided that such a proposal was unnecessary because insurers already have the power to refuse to cover legal costs incurred by corporate officers and directors in the event of fraud or willful misconduct.

Democrats immediately blasted the president’s plan as inadequate.

“Paul O’Neill was much more aggressive in his recommendations about what ought to be done,” said Sen. Tom Daschle (D-S.D.), the Senate majority leader. “There is no penalty for corporate fraud in the president’s proposals.... So I think that it falls short of what would have to be the minimum standards.”

O’Neill, who is part of the president’s high-level working group that is drafting post-Enron reforms, had proposed making it more difficult for executives to use insurance coverage to cover the legal costs of dealing with claims of negligence or misconduct.

The working group may still include such a provision in its own recommendations, which have not yet been released.

Bush unveiled a 10-point plan Thursday to protect shareholders, improve corporate disclosure and tighten oversight of auditors.

The plan would bar corporate executives from profiting from their mistakes or lack of oversight by giving the Securities and Exchange Commission the power to demand that bonuses and other performance-based compensation be returned if financial statements are found to be misleading.

“We need to make sure that when there are material restatements of earnings that can be traced to management or CEO errors, CEOs should not be allowed to profit from those transactions,” a senior administration official said Thursday.

Such a rule might have forced Enron officials to return millions of dollars they collected through bonuses and stock options. But the administration official stressed that the investors should not expect a guarantee.

“Businessmen can make boo-boos,” the official said. “When you invest in a company in which a businessman makes a mistake, a business judgment mistake, no one wants to have anyone be guaranteed for those returns. And we’re trying to be very careful to steer away from that issue and still leave investors on the hook for the choices businessmen make about business.”

Another provision of the president’s plan, similar to the ban on securities brokers who act in bad faith, would bar executives who abuse their power from serving as leaders of public companies.

Roy Smith, a finance professor at New York University, said the president’s plan is not as ambitious as other proposals but may represent a good compromise.

“It looks pretty toothless, but it may be the best that you can come up with from a political standpoint,” Smith said.

He called O’Neill’s proposal to make executives more personally liable for legal bills “impractical.”

“If you did that, the best people won’t become CEOs,” Smith said. “You won’t be able to hire anybody who’s good.”

He said such a government rule also would infringe on the free-market rights of companies and insurers to decide the terms of their policies.

Times staff writer Richard Simon contributed to this report.