Bush's strong call for accountability is a good first step toward rebuilding a relationship of trust between a corporation and the investing public. Echoing the 10-point plan he put forth on March 7, the President said he wants greater corporate disclosure. And he wants to punish those who are guilty of misconduct. But it remains to be seen whether giving the SEC more resources and stronger regulatory power over the roughly 14,000 public companies that file annual 10-K statements with it can restore America's trust in corporations.
Bush's desire to "disgorge" CEOs of bonuses and incentive compensation if financial statements have to be restated because of misconduct puts the brakes on executives lining their pockets while their company burns and should send the clear message that if you don't play fair, you don't get to keep the spoils. The threat of jail time for those who are found guilty of deliberate misconduct may be just the ticket that's needed to force top executives to think before they engage in questionable practices, and handsomely compensated auditors to just say no or walk from a client rather than turn a blind eye. One important new rule: The SEC will now require the CEOs and CFOs of the 945 public companies with more than $1.2 billion in revenues to certify in writing and under oath that reports filed with the SEC are complete and accurate. Knowing that they face personal liability if they make false statements clearly elevates the consequences for corporate officers who fail to live up to their fiduciary accountability.
But will Bush's recommendations alone result in a more ethical corporate mentality? If the President's suggestion is that following the law always results in ethical behavior, sadly the answer is no. As soon as any new regulations go into effect there will be a flurry of activity to figure out how to maximize a company's profits (or the appearance of profits). Smart people will spend their days trying to figure out how to get the most favorable tax treatment or handsomely reward top executives in such a way that no laws are broken. For the same reasons that companies in the past have flocked to incorporate in a particular state or chosen to freely issue stock options, any new set of regulations will find astute and aggressive professionals looking for ways to meet the letter of the law while missing its spirit.
But people will always try to find a way around laws. The important thing is to create good laws, and enforce them vigorously. As Bush pointed out in his speech today, the government's job is not to eliminate the risk from investing. It's to create a transparent system where everyone has access to accurate information about the financial state of a company. The President's call in March for "plain English quarterly disclosures" monitored by the SEC to make sure they represent a fair and accurate financial state of the company will help create more transparency in the markets. If investors are given fair and accurate information, then some of the responsibility falls on them to make sure they understand what they're investing in along with the inherent risks involved. If a corporation doesn't measure up, then investors, particularly large institutional investors that manage billions of dollars, wield the threat of putting their money into a company that does. In a truly transparent relationship, ethical responsibility falls on more than just the corporation.
The President still has a long way to go. One troubling early sign was his response at a press conference Monday night when questioned about his own financial dealings with Harken Energy in 1990. "In the corporate world, sometimes things aren't exactly black and white when it comes to accounting procedures," he said in responding to a question about his role in selling off the majority stake in another company to artificially inflate Harken's profit statements. The answer sounded like he was condoning taking advantage in business by hiding behind accounting machinations.
If the President truly wants to elevate the importance of ethical behavior in business, a good first step would be to acknowledge how rich rewards have made artful interpretations of legal accounting too enticing. In fact, it's finding a way to make accounting procedures more black and white that will go a long way toward instilling public trust.
Jeffrey L. Seglin (firstname.lastname@example.org) is the director of the graduate writing and publishing program at Emerson College in Boston, writes the monthly "The Right Thing" business ethics column for the Sunday New York Times, and is the author of "The Good, the Bad, and Your Business: Choosing Right When Ethical Dilemmas Pull You Apart" (Wiley, 2000)