washingtonpost.com
Corporate Reform Could Go Too Far
By Steven Pearlstein
Friday, July 18, 2003; Page E01
In my hand is a news release from the Business Roundtable that would have
been unthinkable 18 months ago.
Back then, the Roundtable's president, John Castellani, was adamant in an
interview that Enron was really just one bad apple and that there was no
need for new laws or regulations requiring fundamental corporate reform.
Now, in a sign of just how far the Roundtable has retreated, Castellani
boasts about how many of the biggest corporations have gone beyond the
reforms mandated by Washington and are voluntarily embracing ideas such as
regular meetings of independent directors (55 percent) and new procedures
for shareholders to talk directly with the board (66 percent).
The timing of this release may be no coincidence. The Roundtable is
anxious to forestall the next installment in the reform process -- a new
rule making it easier for shareholders to nominate their own slates of
directors. Some of the corporate lobbying against the idea has been a bit
overdone, with that "end of capitalism as we know it" quality to it. But I
do wonder whether we've reached that tricky point in the reform cycle
where the political momentum is such that the risk is of going too far
rather than not going far enough.
In the case of allowing shareholders to nominate directors, for example,
much of the rationale seems to be based on the romantic notion that
corporations should be laboratories of democracy, with open annual
elections for all directors, and majority and minority factions. In
practice, I suspect running a corporation requires more stability and
internal harmony than the democratic model allows.
Of course, there will be situations when a corporate board repeatedly
insists on being more responsive to management than shareholders. But the
way to deal with such situations, it seems to me, is to provide a
mechanism for shareholders to register a vote of no confidence in the
directors. They should have access to the proxy packet to lay out their
case and solicit votes for the annual meeting. And if they garner a
shareholder majority, only then should they gain the right to nominate a
competing slate of directors.
Such an arrangement probably would satisfy neither the Roundtable nor the
die-hard reformers. But at the moment, it looks like a sensible compromise
that has attracted serious interest from the Securities and Exchange
Commission staff and a majority within the agency.
A similar compromise is needed on the equally contentious issue of stock
options.
The passion surrounding this arcane accounting question certainly suggests
that stock options have been tarred as the primary source of corporate
malfeasance during the '90s boom. In truth there were many villains --
just as there were many companies where options were used to attract
employees and give them performance incentives. Last week, Microsoft
joined the growing list of companies that have concluded that restricted
stock or simple cash bonuses are better ways to compensate employees than
stock options. I suspect they are right. But at the same time, I don't see
why the accounting system or the tax code should try to dictate such a
result or even tilt the decision in that direction. This is something best
left to the marketplace.
Along those lines, the best policy was probably laid out by Sen. Carl
Levin of Michigan long ago: Don't require companies to "expense" stock or
stock options granted to employees, but don't let them take tax deductions
for them, either.
Although stock and options obviously have value, calculating that value
involves the kind of guesswork that only undermines the credibility of a
company's income statement. Why not simply record all the information
about the options on the balance sheet, along with all the other corporate
liabilities, and let investors and analysts make all the adjustments they
want if they want to think of options as an annual operating expense?
In the end, the problem with stock options was not that they were used to
manipulate earnings and fool investors -- it's that they gave executives
too great an incentive to manipulate earnings through other means. Or put
another way, it was how stock options were misused that was the
fundamental problem, not how they were accounted for.