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THE FREE
MARKET NEEDS NEW RULES By : Sen. John
McCain
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July 08, 2002 - New York Times - In a string
of corporate failures and scandals from Enron to
WorldCom, we have seen the first principles of free
markets - transparency and trust - fall victim to
corporate opportunists exploiting a climate of lax
regulation. I have long opposed unnecessary regulation
of business activity, mindful that the heavy hand of
government can discourage innovation. But in the current
climate only a restoration of the system of checks and
balances that once protected the American investor - and
that has seriously deteriorated over the past 10 years -
can restore the confidence that makes financial markets
work.
Congress and the president must work
quickly to frame new legislation and reform corporate
governance and government oversight. And I would add one
more suggestion. The president and Congress should ask
for the resignation of Harvey Pitt, the chairman of the
Securities and Exchange Commission. While Mr. Pitt may
be a fine man, he has appeared slow and tepid in
addressing accounting abuses, and concerns remain that
he has not distanced himself enough from former clients.
The need for government action and oversight is
clear. Corporations fabricated revenues, disguised
expenses and established off-balance-sheet partnerships
to mask liabilities and inflate profits. Executives
maximized their compensation with stock option plans
that burdened their companies with huge costs hidden
from investors. Venerable accounting firms, having
looked the other way as companies cooked the books,
shredded documents to hide their misdeeds. Although
American tax policy encouraged them to do so,
corporations that move their legal headquarters offshore
to avoid paying taxes appear conspicuously ungrateful to
the country whose young men and women are risking their
lives today to defend them.
Reforms must ensure
a complete separation of the auditing and consulting
services provided by an accounting firm; a firm that
audits a company must be prohibited from providing any
consulting service - ever - to that company. Legislation
sponsored by Senator Paul Sarbanes would create an
Accounting Oversight Board to establish and enforce the
standards for audits of publicly traded companies. But
this oversight board should be completely independent
from the industry, financed either as part of the S.E.C.
or a separate agency.
Stock options, while a
legitimate and valuable form of employee compensation,
must be identified as an operating expense in a public
company's financial reports. Top executives should be
precluded from selling their own holdings of company
stock while serving in that company. Executives should
be allowed to exercise their options, but their net gain
after tax should be held in company stock until 90 days
after they leave the company.
Executives should
be required to return all compensation directly derived
from proven misconduct. Also, a corporate compensation
committee should be made up of members of the board who
have no material relationship with the company or
personal relationship with its management. Indeed, the
entire board should be similarly independent, with the
exception of the chief executive.
Top executives
should be required to certify personally that the
company's public financial reports are accurate and that
all information material to the financial health of the
company has been disclosed. If their certification is
false, they should go to jail.
Government should
remove egregious conflicts of interest in
"full-service'' financial institutions. Investment
services, including research, should be separated from
lending, underwriting and securities trading.
Even as we take these and other necessary
actions, asking for the resignation of Mr. Pitt would
help show the public our seriousness. During his first
10 months as S.E.C. chairman, he did not participate in
29 of the commission's votes, most of which involved his
former clients. To address corporate misconduct, he
seems to prefer industry self-policing to necessary
lawmaking. Government's demands for corporate
accountability are only credible if government
executives are held accountable as well.
What is
at risk is the trust that investors, employees and all
Americans have in our markets and, by extension, in the
country's future. To love the free market is to loathe
the scandalous behavior of those who have betrayed the
values of openness that lie at the heart of a healthy
and prosperous capitalist system. |
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