Corporate Reform Has a New Ally

For almost a year now, the Bush administration has resisted becoming deeply involved in tackling the corporate fraud and gimmickry that have shaken the nation’s financial markets and have demolished a series of prominent companies.

And with the GOP sweep of this month’s congressional elections, President Bush has been politically freed of the need to take decisive new steps -- even as his Securities and Exchange Commission has been set adrift by the departure of its embattled chairman and a new accounting oversight board has been left similarly rudderless by the exit of his choice to head that panel.

But far from falling by the wayside, the cause of reform has been embraced by a powerful coalition of conservative Republicans and elite business leaders who fear that failure to follow through on a promised overhaul of the nation’s corporate sector could cause a damaging backlash against the free-market system.

“The cost of doing nothing is further erosion of investor confidence,” warned Sen. Richard C. Shelby (R-Ala.), who vowed no letup in reform as the president’s party assumes control of the Senate and Shelby takes the chairmanship of the Senate Banking Committee. “We cannot go down that road anymore.”

Administration officials need to “keep challenging the [stock] exchanges and corporate America to deliver on their promises of transparency and integrity” or risk letting the reform drive falter, said Larry W. Sonsini, chairman of the high-tech law firm of Wilson Sonsini Goodrich & Rosati in Palo Alto and a key member of the New York Stock Exchange panel that produced some of the year’s toughest overhaul proposals.

However, he added, “there is not any independent pressure coming out of Washington anymore.”

To be sure, the administration has played a pivotal role at key moments in the debate to date. White House officials have encouraged federal prosecutors to seek indictments against top executives of the most troubled companies. The president has advanced overhaul proposals at several points during the year.

In recent weeks, administration officials have said they are moving expeditiously to fill the vacancies at the top of the SEC and its newly formed Public Company Accounting Oversight Board, and they have gone out of their way to tout the SEC’s tough-minded approach to the scandals, saying the agency has brought more enforcement actions and forced the disgorgement of more funds than their predecessors in the Clinton administration.

But they have not detailed their plans, and Bush generally has preferred to follow, rather than lead, on the issue. He waited more than two months after Enron Corp.’s December collapse had destroyed the jobs and savings of thousands -- many in the president’s home state of Texas -- before offering his first worker protection measures. He pointedly refused to endorse the only major legislation to emerge from the year’s debacles, the Sarbanes-Oxley Act, until WorldCom Inc. declared the biggest-ever bankruptcy in late July.

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‘Bad Apple’ Theory

Motivated in part by his focus on war and terror, and in part by his ideological objection to expanding Washington’s power over business, the president has hewed to the “bad apple” theory of the scandals -- that a few rogue executives, accountants and analysts are spoiling the corporate “barrel” and that little else is needed besides removing and punishing them.

But that is precisely the view that key reform figures now dispute. “There are definitely some bad apples, but it’s very hard to sustain the belief that it’s just bad apples,” said Kim B. Clark, dean of the Harvard Business School, which is widely viewed as a sort of conscience of the nation’s business elite. “We have some serious problems with the barrel as well.”

In a recent letter to alumni, Clark warned that “mounting evidence indicates the possibility of systemic flaws in our processes of [corporate] governance and compensation as well as our accounting standards.” As a result of the flaws, he said, “the faith of people around the world in the economic system that forms a crucial element of our society has been damaged.”

Clark has called a series of five meetings between top executives and senior faculty, two of which have already occurred, to hammer out a comprehensive reform agenda. At its heart, according to takeover defense lawyer Martin Lipton, is a call for “a tectonic shift in power away from the imperial CEO and to outside directors” of corporations.

The reform advocates say that key ingredients for a thorough overhaul already have been put in place.

In June, for example, the New York Stock Exchange adopted stringent new requirements for companies that want their shares traded on the Big Board. These include having boards of directors on which the independent directors -- people with no material ties to the firm -- are in the majority. They also include having the boards’ audit, executive compensation and nominating committees dominated by independents.

A month later -- amid a new round of corporate scandals and a steep new dive in stock prices -- Congress and the president settled on the Sarbanes-Oxley legislation, which, among other things, sets up a panel to regulate accountants.

What the advocates fear is that -- with the stock market seemingly stabilized and the Republicans victorious at the polls -- the pressure to complete the reforms will vanish. If it does, they warn, the result will be the loss of a rare chance to improve the independence of corporate boards, the accuracy of corporate accounts and the fairness of capital markets.

“It’s like anything in the political world. When a crisis strikes, you respond. Afterward, you move on and forget what the crisis was all about,” said Leon E. Panetta, a former White House chief of staff and co-chairman of the panel that drafted the NYSE reforms.

Advocates say that early postelection signs have not been promising:

* In the two weeks since the Nov. 5 vote, both SEC Chairman Harvey L. Pitt and chief accountant Robert Herdman resigned after acknowledging they had withheld information about questionable business dealings by William H. Webster, the White House’s choice to head the accounting oversight board. Webster also resigned. An administration effort to quickly replace Pitt with Assistant Atty. Gen. Michael Chertoff fell apart when Chertoff apparently decided he did not want to leave his current job.

The resignations have come at a particularly bad time for the SEC. The agency must decide whether to approve the new NYSE rules for the 2,700 companies on that exchange, and whether to extend some or all of the rules to the 12,000 other firms whose shares are publicly traded. As important, it must organize the new accounting board, a $50-million-plus operation that, by law, must be up and running by April.

* In signing the Sarbanes-Oxley Act in July, Bush agreed that the SEC needs more money to do its job. But White House officials and congressional Republicans blocked efforts last week to add money to a temporary spending measure approved by Congress. SEC officials said the agency can manage by drawing on special funds. But even with these funds, its budget will be only two-thirds the size contemplated by the new corporate reform act.

“They’ve flat-lined the budget,” complained Sen. Paul S. Sarbanes (D-Md.), who co-wrote the new law and must now relinquish the chairmanship of the banking panel to Shelby. “The SEC is limping along with the resources to do its job.”

* Besides seeking to make corporate boards more independent and corporate accounts more accurate, the other major element of the reform agenda has been trying to rid the stock market of conflicts of interest and self-dealing. And here too, there have been setbacks.

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Brokering a Deal

All year, the overlapping issues of research analysts tilting their assessment of companies to sell shares and investment bankers distributing hot stocks to favored clients have been handled not by the administration or the SEC, but by New York state Atty. Gen. Eliot Spitzer. Now, the big investment banks and brokerage houses are ready to settle, but the administration and the SEC are unprepared to talk. So Spitzer is leading the negotiations in closed-door sessions in New York.

Asked Sunday whether Washington shouldn’t be handling the bargaining, Spitzer, a Democrat, asserted that he would have preferred it that way but that “the Bush administration failed to step into this void.”

“I told them way back,” Spitzer said on ABC News’ “This Week,” “you have to play the role of Teddy Roosevelt, that great Republican who understood that when the market rules were not working properly, [you] fixed them.

“Instead, they’re playing the role of Herbert Hoover,” Spitzer charged. “They’re failing to seize the moment.”

Despite such setbacks, advocates predict that they will ultimately be able to salvage the reform agenda for a simple reason: Without the changes, the stock market and the economy won’t rebound smartly.

“Right now, the American public has difficulty distinguishing between Enron and Exxon,” said NYSE Chairman Richard Grasso. “There are thousands of companies who do it right every day and are being tainted by the confusion with the few who don’t.” Investors have to be able to tell the difference or they will continue to demand a “trust discount” that will keep the markets from recovering, Grasso said.

“At the moment, there’s been such an erosion of confidence in the system that it puts a cloud on the economy,” Shelby said. “We cannot afford that.”

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Times staff writer James Gerstenzang contributed to this report.