Has Corporate America No Shame? Or No Memory?
Truth be told, I had been wondering why Henry M. Paulson Jr., previously top dog at the Goldman Sachs Group – already a power, already a wealthy man – would have wanted to be Treasury secretary. After all, he couldn’t stop the Bush administration from pushing for tax cuts when they definitely were not needed, could not affect the vast current account deficit, could not do much about income inequality or the vast chasm that exists between whites and blacks in earning power and wealth in this country. I am sure much of what motivated him was his wish to be a good citizen and to do the civic duty of a successful, capable man. But he might have also been moved by the wish to do some good for his old pals on Wall Street. This is what’s going through my mind as I read about the Committee on Capital Markets Regulation, an “unofficial” panel of concerned citizens; its creation in September was disclosed in an announcement featuring kind and encouraging words from the selfsame Mr. Paulson, in his role as the secretary of the Treasury.
This committee, to be headed by a distinguished professor of law at Harvard – no, not the noted anti-establishment law professor Duncan Kennedy, but Hal S. Scott – will study whether securities regulation and litigation that actually protect shareholders are harming American “competitiveness,” which Mr. Paulson has said is an important issue for him. There are big names on this commission: R. Glenn Hubbard, former chairman of the President’s Council of Economic Advisers and now dean of the Columbia Business School, and John L. Thornton, chairman of the Brookings Institution and a former president of Goldman Sachs. (There it is again, the real government of the United States.) There are also heads of big financial firms, manufacturers, and – now, this is a shock – accounting firms.
They are going to study, among other issues, whether having private shareholder suits against corporations that defraud stockholders should really be allowed under Section 10b of the Securities Exchange Act of 1934; whether state attorneys general like Eliot Spitzer of New York, the best friend the American stockholder has had in at least 50 years, should be allowed to bring lawsuits against corporate defendants in securities cases; whether accounting firms should be held liable when they don’t catch frauds of companies they are auditing; and whether corporate officers who have committed fraud are being treated too harshly under criminal laws.
When I follow this subject, my mind goes back to three little things. First, I remember my beloved genius economics professor, C. Lowell Harriss, at Columbia, saying in 1963, “When you say ‘corporations’ you should be thinking ‘the widows and orphans who actually own the stock and the company.’”
Then I think of a bon mot by my late beloved dad, Herbert Stein, a chairman of the Council of Economic Advisers under President Richard M. Nixon and for many years a fellow at the American Enterprise Institute. Many years ago, when I was to be an expert witness for Goldman, Sachs in a securities fraud case, I asked my father, “Wouldn’t this just make me a lackey of the exploiting class?” To which my father said: “Well, if you’ve got to be a lackey, you might as well do it for the exploiting class. They’ve got all the money.”
(Pop said it as a joke and I didn’t do it, but it sounds as if some folks behind ivy-covered walls got the message.)
And, finally, I think of the exciting days of about 15 or so years ago when the nation was wracked by the savings-and-loan crisis and the Drexel-Milken junk-bond schemes. It turned out that the accounting firms had been derelict in catching the frauds, protecting the stockholders and protecting the nation’s taxpayers, who eventually had to pay more than $100 billion to salvage the nation’s savings and loans.
How did accountants respond? With sackcloth and ashes? Far from it. They hired huge lobbying firms, became major backers of the Republican Revolution of 1994 (a main goal of which was to protect accountants, for some odd reason – yes, that was actually in the Contract With America), and got legislation passed making it far harder to sue accountants in fraud cases.
Now, we have corporate America as flush with cash as flush can be. Corporate profits are setting records, by some measures, even as wages stagnate. The stock market, as measured by the Dow Jones industrial average, has been reaching record highs. Corporate executives are paid on a scale that would make a bank robber blush. But what’s this? There are also major corporate frauds: backdating of stock options, which is really just insider trading in a big, big way; undisclosed executive pay and “gross ups” for paying taxes; stupendous looting in the form of “going private” transactions where management buys assets from stockholders at below-market prices and becomes rich in the process; and many others. And there are straight-out accounting frauds in which major players actually go to the Graybar Hotel along with people who did their thieving with guns instead of computers.
This, apparently, is just too darned much for the nabobs of American corporate life. To them, being terribly rich with other people’s money apparently means never having to say you’re sorry — or even being responsible under law. And if the law says you’re responsible, change the law, Jeeves.
So, enlisting some of the biggest brains in the academic world, like John C. Coffee Jr. of Columbia Law School, a genuinely smart guy, they are going to work on proposals to lighten up (my phrase) on corporate misconduct. Basically, they are going to try to get private securities cases to be virtually closed down, in favor of having cases only from the Securities and Exchange Commission.
(This would be a bad joke. The S.E.C., for example, has taken almost no action on “spring loading,” a particularly nasty form of insider trading and something like backdating, as reported passionately in The New York Times by Floyd Norris. If the S.E.C. cannot see spring loading as worthy of censure, why even have the S.E.C.?) They are going to try to shut down some future Eliot Spitzer, the only man in the country with the guts to take on even the most ornery Wall Street potentates. I shudder to think what else they are going to try to do.
Don’t get me wrong. Powerful people have studies that prove their points, and then they lobby Congress, federal regulators and state legislatures to get what they want. This is how the world works. This is called working the system, dealing with the world as it really is. But is it really right for prominent American executives, amid a host of scandals involving other executives looting their shareholders blind, to have the best and the brightest of academe and the Street lobbying for less accountability to shareholders? Is there any higher goal at all for management than serving the stockholders openly and honestly? Is “competitiveness” even a meaningful word, compared with honesty and integrity in serving the owners of the company? What can “competitive” mean in this context? Would a hospital be more “competitive” if it didn’t have to take care not to kill its patients when it operated on them?
Too many of our corporate chiefs are already paid too much. They already have too many layers insulating them from accountability to the law and to their stockholders. Our businesses are plenty competitive if you measure by profits – and how else would we do it? (Long ago, we gave up doing it by how we treat workers, a scale on which we would be in a lot of trouble.)
It’s fine for corporate bosses to be lobbying to keep themselves at the trough. That’s what we expect of them. But Mr. Paulson is sworn to represent all of the people, not just the powers that be on Wall Street. He is way, way too high up the pay scale to be their lackey.
Maybe it’s time for him to back off this committee and start thinking of a legacy that includes law, integrity and responsibility to more than just the chosen few of Wall Street and the corporate boardroom.