For SEC Chief, Not Business as Usual
When William H. Donaldson was named to lead the Securities and Exchange Commission in late 2002, he faced a panel deeply divided over how to answer corporate abuses that had shocked the public and sparked cries for reform.
Two Republicans on the five-member commission were extremely wary of saddling companies with new costs. The two Democrats believed Enron Corp.’s collapse and other debacles dramatized the need for active government efforts to protect investors.
For many, the expectation was that Donaldson -- a Republican, Bush family friend and Wall Street veteran -- would serve as a quiet caretaker, joining with GOP colleagues to work with business as allies rather than adversaries.
But Donaldson’s 15-month tenure has brought a series of surprises. A man not known for making waves has mounted a personal campaign to overhaul the ethics of corporate America. And in pursuing his activist agenda, Donaldson has found some of his strongest support across the party divide, coming from the SEC’s Democratic commissioners.
“We often see the problem alike, and the need for reform in the same way,” said Harvey J. Goldschmid, the senior Democratic commissioner whose working relationship with Donaldson has become a central dynamic at the SEC. “It’s a collaborative process that has worked extremely well.”
That bipartisan solidarity is not the only atypical feature of a tenure that has departed sharply from business as usual in Washington.
The SEC chairman, 72, has overseen an explosion of rulemaking efforts, as the commission scrambles to regain its stature as a guardian of financial integrity in the wake of corporate scandals and past enforcement lapses.
Toward Independence
He is pushing to end conflicts of interest on mutual fund boards, urging that funds be run by independent chairmen. And he is trying to claim for the SEC its first, limited authority over a fast-growing type of investment favored by the wealthy, known as hedge funds.
Donaldson’s biggest test is yet to come, however. The SEC has drafted a plan to give investors a greater voice in corporate elections, sparking fierce opposition from executives, even as some activists lament that the proposal is too weak.
It’s not clear yet how Donaldson will come down on the matter, but in a recent interview he reiterated his view that investors should be able to do more than merely withhold their votes, and that the SEC was heading toward “a meaningful, well-thought-out middle ground.”
“I think we will do something in this area,” he predicted.
The soft-spoken chairman added with a smile: “We’re not ducking the hard issues. I’ve got the bruises to prove it.”
Donaldson, whose high-powered resume includes stints as an undersecretary of state, head of the New York Stock Exchange and chairman of Aetna Inc., said he wanted companies to build up their “moral DNA.” Then, he maintains, executives will be their own watchdogs, stopping well short of the “red line” of criminality.
“If everyone just skates up to the red line and figures out ways to not go over the red line, we won’t have succeeded,” he said. “ ... There has to be an attitude that says, ‘We’re not going to just skate up to this line. We’re going to have a set of ethics and a code to run this business in a way that is ethical.’ ”
In ordinary times, a Republican SEC chairman might pursue a hands-off business agenda, slashing red tape rather than adding to it. But in the world after Enron, perceptions of an asleep-at-the-switch SEC would be politically dangerous for the White House.
President Bush turned to Donaldson in late 2002 when Harvey L. Pitt quit under fire, leaving behind a demoralized SEC and questions about the agency’s commitment to confront corporate America. He took office in February 2003, with a clear mission to set a different tone.
“Given the crisis under which he came in, I don’t think any anti-reform chairman was going to be acceptable -- either on Capitol Hill or to the investing public,” said Donald C. Langevoort, a professor of law at Georgetown University.
The five commissioners agree on much of the SEC’s routine business, and most of the issues they rule upon do not break down along tidy partisan lines. At the same time, an ideological divide had emerged as one of the panel’s defining features, and Donaldson became the man in the middle.
Republican Commissioner Paul S. Atkins, known for his free-market views, has publicly criticized Donaldson’s aim of requiring hedge funds to register with the SEC. Earlier this year, Republican Cynthia A. Glassman, an economist also cautious about government meddling in the marketplace, derided as a “Band-Aid” an SEC proposal that mutual funds impose new fees to discourage rapid-fire trades, a practice at the heart of recent scandals, although she agreed to let it go out for public discussion.
Atkins and Glassman declined to comment.
Meanwhile, Donaldson has enjoyed strong support for some of his premier goals from Goldschmid and Democrat Commissioner Roel C. Campos, a former communications executive.
In particular, Goldschmid, 64, has forcefully represented a pro-investor agenda. A friendly law professor, he clashed mightily with Pitt and enjoys strong support among congressional Democrats.
Before joining the commission, he served as the SEC’s general counsel and a top aide to former Chairman Arthur Levitt, authoring a rule requiring companies to disclose important information to the public rather than selectively to analysts.
Seeing Eye to Eye
As examples, Donaldson and Goldschmid have led the panel’s support for approaches to end abusive trading in mutual funds and a plan to overhaul stock-trading rules that could benefit emerging electronic markets at the expense of the New York Stock Exchange.
Behind closed doors, they also have seen eye to eye on various enforcement matters.
“They both have a certain patrician quality, a view toward public service and a belief in the role that markets play,” James D. Cox, a professor of law at Duke University, said of Donaldson and Goldschmid. “These are two people that probably have a lot more in common with each other than either one of them has with the other three.”
Donaldson refrained from discussing commissioners individually, and sought to play down the significance of party lines. “My attitude is I’m independent -- I hope -- and not political, and I’m going to vote for what I think is right,” he said recently. “I’m going to listen to all sides, and I’m going to make my vote on what I think needs to be done.”
While he has spotlighted the need for change, it is also true that major initiatives remain in the proposal stage, leaving questions about how hard the chairman is willing to push and the sorts of compromises he is willing to accept.
Consider Donaldson’s goal of giving shareholders more influence in the nomination of board members, a cherished aim of activist investors. When the SEC staff proposal sparked a fierce backlash from corporate America, including a threatened lawsuit by the U.S. Chamber of Commerce, Donaldson slowed the project down. The plan is still being hashed out behind the scenes.
Under the original proposal, large shareholders would be able, under certain conditions, to place the names of board candidates on company mailings and ballots. For example, if at least 35% of shareholders withheld their support during an annual meeting -- which happened recently when 45% of Walt Disney Co. shareholders withheld votes for Michael Eisner as chairman -- dissidents would be able to get an alternative candidate on the ballot at the next annual meeting.
Big companies contend the plan would make it too easy for small blocs of shareholders to disrupt management.
SEC staff are considering ways to ease company anxieties, perhaps by limiting the circumstances under which election challenges could take place. They also may raise the voting threshold to trigger an election challenge, while placating activists by prohibiting votes cast by stock brokerages without instructions of shareholders. In the case of Disney, excluding such votes would have raised Eisner’s withhold tally above 54%.
It is a complex, highly contentious area, and companies and shareholder activists say the fine print will speak volumes about how far Donaldson is prepared to go in challenging corporate leaders. A plan is expected within the next few months.
“Donaldson has been skillful in countering the image” of a feckless SEC, said Cox. “But it remains to be seen whether these initiatives have the bite that is necessary for reform, or whether they will be just milquetoast.”
A Changing Ethos
Insight into the chairman’s views may come from the Wall Street firm that bears his name. Founded in the late 1950s by Donaldson and two other Harvard business school grads, Donaldson Lufkin & Jenrette made its name by offering quality research about a company’s long-term prospects.
The goal was “to really understand a company, to really understand why a company was distinctive,” Donaldson recalled in an interview.
Yet by the 1990s, a drastically different ethos dominated Wall Street. Major firms used hyped-up research to hustle stock sales. More broadly, as research came to focus on short-term earnings rather than long-term worth, companies became preoccupied with “trying to hit the numbers,” he recalled. DLJ was acquired by Credit Suisse First Boston in 2000.
In Donaldson’s view, the current outcry over executive pay is a byproduct of the failure to consider lasting value.
“What the [companies] have to examine is what corporate performance is all about,” he said. “To my way of thinking it’s not just about hitting the numbers.... It has to do with a longer-term appraisal of how good a job” the corporate officers are doing.
Donaldson, who received more than $18 million in various compensation for just over a year’s service at the helm of Aetna in 2000 and 2001, is quick to add that he is not “against people being well-paid,” but wants firms to be “a lot more sophisticated” in setting the proper levels.
He also is troubled by the “erosion” in ethical standards that has become evident in recent scandals and has encouraged his agency to make cheaters “pay the piper.” SEC enforcement actions -- such as fines, forced returns of profits and bars against individuals’ serving as corporate officers -- last year hit a record high of 679.
At the same time, the SEC was deeply embarrassed last September when New York Atty. Gen. Eliot Spitzer revealed widespread cheating and favoritism in mutual funds, an industry the SEC is supposed to regulate.
The chairman managed to defuse the outcry on Capitol Hill, prodding his staff to fire off a dozen proposals to overhaul the industry and eliminate abusive trading practices.
“If you look at the response, it’s been vigorous and tough and thoughtful,” said Bill Baker, a Washington attorney and former SEC enforcement official.
Some observers have reacted differently. Indeed, Donaldson’s approach has raised eyebrows in various circles, and fiscal conservatives have been disappointed at the spectacle of a Republican chairman highlighting the need for new regulations.
This month the Wall Street Journal editorialized against Donaldson’s overhaul plan for mutual funds, arguing that the approach could be explained only by its “great headline value.”
Declared Stephen Moore, president of the Club for Growth, a fiscally conservative political action committee: “I reject the notion that people like Donaldson, by aggressively regulating corporations, are helping investors.” If Donaldson took a more hands-off approach, Moore said, “markets would respond in a more positive way.”
The other side is surprised by Donaldson, as well. “I was very apprehensive at the time of his appointment,” said Robert Monks, a noted advocate of shareholder democracy. “He has very much exceeded my expectations.”
