After Enron: Corporate Reform One Year After Bush’s Ten-Point Plan

One year ago, in the height of the Enron/ Andersen scandal, President Bush unveiled his "Ten-Point Plan to Improve Corporate Responsibility and Protect America's Shareholders." How far have we come since then in restoring public confidence in Wall Street and Corporate America, and how did Bush's vision for corporate reform stack up against the proposals developed by Congress?

Simply put, Washington's efforts to restore public confidence in Corporate America have been short-sighted. Between the dot-com meltdown and the spate of corporate accounting scandals, Americans indeed are asking serious questions about whether they can trust the rosy financial stories peddled by companies, accountants and financial analysts. But because companies have laid off workers, destroyed retirement savings and fled to offshore tax havens; and because many citizens around the world view the war in Iraq as a way of enriching oil companies, Americans' outrage towards big business stems from more than just bad accounting. It comes from broader public questions regarding companies' commitment to society, and whether they are living up to our collective expectations of decency and social responsibility. And a year after Bush's Ten-Point Plan, Washington has yet to address the fundamental changes in the way corporations conduct their activities in our economy.

Bush's original Ten-Point Plan was centered around the themes of transparency, corporate governance, and accountability. But it was a weak proposal that largely relied on self-policing by the very actors who proved themselves incapable of acting in the public interest. The public soon rallied behind the more aggressive corporate reform bill sponsored by Sen. Sarbanes (D - Md.) and Rep. Oxley (R-Ohio); and in July 2002, Bush bowed to political pressure and signed it into law.

The Sarbanes-Oxley Act provided more accountability over accountants and auditors, stiffened fines for law-breaking corporate officers and directors, limited insiders from selling stock during "blackout periods" and directed the SEC to create new rules for financial reporting. But even the Sarbanes-Oxley Act, though an improvement over Bush's proposal, does not go far enough to curb corporate corruption and shady accounting.

Transparency

Efforts to improve transparency in financial reporting have been myopic. Bush's Ten-Point Plan emphasized the need for investors to receive timely, critical information and proposed that CEOs personally vouch for the accuracy of financial statements. These points were echoed in the Sarbanes-Oxley bill. CEO sign-off on financial reports may provide some collateral benefit for the environment through improved general corporate reporting - including environmental liabilities. But a visionary proposal would give investors what they truly want out of corporate transparency - the whole story about a firm, including information that allows the public to judge whether a company is ethical, responsible, credible and trustworthy.

This means that companies must fairly and accurately report their financial performance; but equally as important, they must also discuss corporate responsibility issues in their SEC filings. In particular, disclosure of corporate responsibility issues (such as worker, community and environmental concerns) would help investors discern the ethical companies from the unscrupulous ones.

When a company "manages earnings" by indefinitely postponing booking its environmental liabilities, not only does it injure shareholders, it also potentially harms communities and impacts environmental health. Similarly, shoddy labor-related disclosure can hurt both employees and investors; companies generally do not disclose much about the quality of labor-management relations until a strike is imminent or declared, which is far too late: by that time the company, its shareholders and its workers are all adversely affected. Thus, keeping environmental and labor matters off the balance sheet is especially dangerous, because it can harm not only investors, but workers, human health and the environment as well.

Increasing disclosure about companies' environmental and social performance would also help restore public confidence in Corporate America in a way that cannot be addressed by just making sure the balance sheet is accurate. It would help address broader public concerns regarding whether companies are living up to our expectations of decency and social responsibility.

Governance

Bush's next three corporate responsibility proposals focused on making corporate officers more accountable by curbing bonuses when companies cook the books, barring criminals from serving in corporate leadership, and requiring more speedy disclosure when corporate officers buy and sell their own company's stock. Though his proposals were a good start, they were weaker than what the public demanded and ultimately got.

For example, a few months after Bush's Plan was unveiled, Sen. Leahy (D-Vt.) drafted his Corporate Fraud and Criminal Accountability Act, which called for a 10-year felony for defrauding shareholders. As Leahy's proposal began attracting support, Bush began echoing calls for tougher sentences by proposing that the maximum prison term for mail and wire fraud be doubled from five years to 10 years. And after the Corporate Fraud Accountability Act was introduced, giving the SEC authority to bar directors and officers without court approval, Bush followed this lead with a call for banning CEOs that abuse their power. Even in the realm of funding for the SEC -- the top cop on Wall Street -- Bush called for an immediate additional $20 million for SEC enforcement, plus a 20 percent budget increase, while Democrats demanded a 77 percent budget boost for the agency.

Washington's attempts to crack down on corporate crime are a good start. But while corporate leaders certainly should be held personally accountable, the idea that corporate criminals simply uphold their fiduciary responsibility is a poor solution to the recent corporate scandals. The misery that has accompanied these meltdowns has shown that companies have betrayed more than just shareholders.

The Enron case in particular illustrates how a range of constituencies was affected by the company's dirty dealings -- from allegations of human rights violations and corruption surrounding a power plant in India, to its controversial pipeline through a rare Bolivian tropical dry forest, to a proposed energy project on sacred Native American burial ground. Indeed, Bush himself highlighted the broader impacts and responsibilities of companies when he originally unveiled his plan, saying, "The bottom line of the balance sheet defines a business's goal, but not the sum of responsibilities of its leaders. Management should respect workers. A firm should be loyal to the community, mindful of the environment."

But despite this assertion, the governance reforms proposed by Bush and Congress do not advance accountability or responsibility towards workers, community nor the environment. Instead the plans only serve to ensure that corporate managers are narrowly accountable to shareholders for misdeeds such as accounting fraud and insider trading. Like shareholders, other stakeholders, including workers and communities, take risks and help build corporate wealth, but Bush's plan ensures that a company's duties towards them are conveniently left to mere volunteerism.

Accountability

Finally, the last proposals in Bush's Ten-Point Plan related to reforming the auditing and accounting industry. He recommended rules barring auditors from consulting if it compromises independence, creating an independent regulatory board, ensuring the independence of the Financial Accounting Standards Board, and requiring auditors to regularly compare the quality of their financial controls with best practice.

Sadly, Bush's proposed reforms amounted to more business self-policing and business as usual, and fell short of Washington's other main accounting reform proposal, Sarbanes' Public Company Accounting Reform and Investor Protection Act. However, both proposals lack adequate levels of government oversight and fail to provide investors with sufficient legal recourse for auditors' liability in cases of securities fraud. The Private Securities Litigation Reform Act (1995), made it much more difficult to bring lawsuits against accounting firms, and established a system of proportionate liability rather than joint and several liability for accountants.

Both proposals on "auditor independence" also provided very little independence. Before Washington uttered any decree on separation of auditing and consulting functions, major accounting firms already took steps beyond Bush's proposal and the Sarbanes-Oxley bill by separating their auditing and consulting functions completely. And the administration critically mistook the concept of auditor independence with the concept of separating auditing and consulting services. As long as a company can hire and fire its own auditor - whether that firm provides consulting services or not - that auditor cannot truly be independent. Sarbanes's bill began to address this issue by requesting a Government Accounting Office study on mandatory rotation of accounting firms, but stopped short from requiring real auditor independence.

Conclusion

The largest scandal in American business history has finally prompted President Bush to address corporate responsibility and accountability, albeit reluctantly, as demonstrated by his weak proposals. Unfortunately his proposals seemed only to buck up, as stronger Congressional actions led the way.

But overall, the story that Washington believes and retells is that Enron, Arthur Anderson, Tyco and others were just a few rotten apples in an otherwise unsullied barrel. But the American public knows at a gut level that Enron, WorldCom, and ImClone's corporate misbehavior are not isolated cases. These stories tell of how big business's unchecked power and greed can create misery for ordinary people. In searching for answers, it is not enough to stick to Milton Friedman's famous maxim that "the one and only social responsibility of business is to increase profits so long as it stays within the rules of the game." Business must be given a renewed directive to work for the public good, and the rules of the game must be changed to reflect that public mandate.

To view Bush's Corporate Responsibility Plan, click here