The answer, I’m afraid, is no. At least not yet. And I’m not being some cynical newsie. It’s just that you usually don’t get reform until the people who need to be reformed recognize that there’s a problem. Despite all the pronouncements and blue-ribbon commissions–many of which have worthy suggestions–they don’t remotely represent the views of the people who are truly in a position to make change: America’s chief executive officers.
Our M.B.A. president doesn’t seem to think much is wrong. Bush said Friday that “95 percent or some… huge percentage of the business community are honest and reveal all their assets, got compensation programs that are balanced, but there are some bad apples.’’ He even opposes a key reform that resident sages like Warren Buffett and Alan Greenspan consider vital to producing honest corporate numbers: treating stock options as an expense on earnings statements. The fact that options value isn’t subtracted from profits has led corporations to give loads of them to CEOs, who make huge profits when the stock rises, but lose nothing when it falls. Standard & Poor’s, not exactly a hotbed of radical activity, is now counting options as an expense when computing profit figures for the influential S&P 500 Index. Vice President Cheney, a former CEO himself, has been noticeably silent on issues of reforming the way corporate America keeps its books. One possible reason is that the company he once ran, Halliburton, is now being investigated for accounting changes adopted during his tenure.
For all the talk from business organizations, we haven’t heard much from working CEOs themselves. But there are exceptions, like Henry Paulson Jr. of Goldman Sachs and Dick Grasso of the New York Stock Exchange. Paulson was especially outspoken. “American business has never been under such scrutiny. To be blunt, much of it is deserved,” he said at the National Press Club in Washington recently. These guys deserve big credit for guts, because they’re risking the wrath of their peers, alienating customers and inviting scrutiny of their institutions, which, they readily admit, are far from perfect.
In separate NEWSWEEK interviews, Grasso and Paulson said they have plenty of support among corporate chieftains. But when pressed for specifics, Paulson provided none, and Grasso produced just one: a laudatory letter from John Dillon, CEO of International Paper. But Dillon is head of the Business Roundtable, which already has proposed reforms.
Here’s why the CEO silence matters. When the market was going great guns during the ’90s, corporate America proclaimed that the market’s performance was proof that companies were doing the right thing, and that critics of huge executive pay packages and boards cozying up to CEOs were just cranks. Now that the market’s down, CEOs are hiding under their boardroom tables.
What will it take to get business to change? Even more bad stock-market news. And we’ve already got plenty. At Friday’s close the S&P 500, a proxy for the broad stock market, was down 35 percent from its high in March of 2000. If you make the very generous assumption that the market will rise 10 percent a year compounded, it would take until the end of 2006 for the S&P to regain the ground it’s lost. So the market would have gone nowhere for almost seven years. If the market’s a report card, that’s a pretty lousy grade. A failing one, in fact.
Even with today’s heightened scrutiny, many in the business world are sticking to their old ways. Imaginative “pro forma” numbers, tailored to companies’ needs rather than based on objective standards, are still around. And brief tours of two of the areas in the greatest need of reform–accounting and Wall Street–show there’s a long way to go before the players shape up. Accounting first. Given the collapse of Arthur Andersen as a result of the Enron disaster, you’d think the Final Four accounting firms would be begging for forgiveness, given how many accounting problems are plaguing the market. But you’d be wrong. They’re lobbying against strengthening regulation. The only thing resembling “reform” is unloading their consulting businesses, which was forced on them by events.
Rather than pushing to clean up accounting rules, the Final Four push hyperaggressive tax shelters for companies and ultrarich individuals. And, of course, they’re promoting the worst abuse of all: moving corporate headquarters (but not people) to places like Bermuda to duck U.S. taxes on U.S. income. The justification is that it’s legal. True. But it sticks everyone else with a bigger tax bill, and convinces average people that big business is out to rip them off.
The public spanking of the accounting industry is rivaled only by the one given recently to Wall Street, and in particular to Merrill Lynch. It’s one thing to assume that Merrill and other big brokerage houses routinely peddled stocks they knew were trash. But it’s quite another thing to see proof. Who can forget the Merrill e-mails, exposed by New York Attorney General Eliot Spitzer, showing how analysts privately disparaged stocks they praised in public? So what is most of the Street doing? Lobbying to get state regulators off their backs. Many state regulators are more aggressive than the federal Securities and Exchange Commission, so Wall Street wants them to butt out.
In fact, if it played the game straight, Wall Street might be far more profitable than it is now. Just look at the success of Edward D. Jones, which is growing so fast that it may soon have more brokers than any other firm in the country. Jones, based in Des Peres, Mo., doesn’t engage in high-profit games that disadvantage customers. It doesn’t peddle high-cost house-run mutual funds, it doesn’t promote trading stocks with borrowed money, which is dangerous for customers but profitable for the firm. It refused to let customers do Internet trading because it feared they’d hurt themselves. And it almost never gets involved with brokerage-house syndicates that get huge fees to peddle stock to retail clients.
Yet the firm says its profitability–its pretax profits as a proportion of its capital–are almost the same as high-return firms like Goldman Sachs and Morgan Stanley. Customers trust Jones, and are willing to pay for service. A classic example of why involves GE. In November of 2000, Jones analyst William Fiala downgraded GE stock, then trading at $54.44. (Friday’s price: $28.95.) This infuriated GE, which Wall Street treats deferentially because of the fees its business generates. But “we didn’t have a $50 million banking deal to lose,” Fiala says, explaining why he could downgrade GE with no fear.
Jones doesn’t have a national ad campaign. But Charles Schwab is running a splashy campaign mocking the boiler-room ethos of Wall Street. Schwab’s pitch: its brokers will do what’s best for you because they work on salary, not commissions.
In the long run, maybe the Joneses and Schwabs will scare Wall Street straight. And maybe CEOs will be scared straight if enough of them have their reps destroyed or end up in the slammer. But I’ll bet that before that, the market will start going up or a big new news story will surface. The Reform of the Month Club will move on. And corporate America, not big on introspection, will revert to its old ways until the next crisis. That’s not cynicism, just reality.
