Blame It On the CEOs
Robert F. Froehlke assesses the changes in business practices—and mindsets—over the last two decades
By Jordan Heimer
NEWSWEEK WEB EXCLUSIVE
msnbc.com
Aug. 2 — To mark the 30th anniversary of My Turn, the weekly column written by NEWSWEEK’s readers, we’re republishing highlights from the past three decades, year by year. Accompanying each piece is an update on the author. This week, we revisit Robert F. Froehlke, 79, a former president of the American Council of Life Insurance. He wrote in 1981 about his concerns about excessive government regulation of business.
IN RETROSPECT, ROBERT F. Froehlke finds his 21-year-old arguments almost quaint. Froehlke, a former secretary of the Army and president of the American Council of Life Insurance, wrote in 1981 that government should moderate its regulation of business. “It was sort of an intellectual argument,” recalls Froehlke, “about how to determine the price of life insurance. The public wasn’t interested.”
In his My Turn, Froehlke saw the issue of cost disclosure in life-insurance policies as a case of overzealous government regulation—an example of how skewed media coverage and excessive drive by a regulatory agency ended up costing the industry and consumers millions of dollars. “Regulations not only protect the public against irresponsible entrepreneurs, but they also give responsible businesses a better chance to compete with those who would observe no ground rules whatsoever, if they could,” he wrote at the time. But, he added, “there are just too many regulations and too many regulators that go beyond the role of umpire to pursue their views of social perfection at the expense of economic good.”
Corporate America, of course, has changed dramatically since then. And given the recent spate of accounting scandals, Froehlke does not believe those changes are for the better. Today, he is no longer so critical of federal regulators. “I think if I was going to write an article today, I would say there are villains,” says Froehlke—a retreat from his previous argument that there were no evil officers, only adversaries. “The villains are obviously the CEOs, the CFOs and the accountants. The fact that they are relatively few in number has really nothing to do with it, because our capitalistic society is so dependent on trust.” Froehlke believes corruption affects the economy especially adversely because it damages investor confidence. “The investor has to believe that their information is good, and that the accountants are doing a good job.”
While the CEOs of companies involved in accounting fraud have been written about repeatedly, Froehlke believes the criticism has not been evenly distributed. “Management is too often overlooked. I don’t hear too much criticism of boards of directors. If I was on the board of Enron, on the board of Global Crossings or WorldCom, I would be hanging my head in shame, and particularly if I was on the audit committee.” It is not that Froehlke wants to see more names dragged through the mud, but that he thinks accountability is essential to restoring confidence in the economy. “Investors are not going to invest unless they think management is doing a good job for them, not for the CEO and the CFO.”
Couldn’t these scandals have occurred during the hands-off days of the Reagan administration as well? No, says Froehlke. “I believe there has been a change in attitude. How in the world can you justify some of the incomes of corporate officers? And I’m not speaking of people who make $1 million. But when they get up to hundreds of millions of dollars, that is just plain greed. How do you explain that to the investor? [The high amount] doesn’t really affect the company that much, but it does affect the psychology of stock holders.”
In 1981, Froehlke accused the media of occasionally being counterproductive to the process of writing laws, whipping up a furor over an issue that pressed politicians into passing regulations without fully understanding the issues. However, in 2002, where the line between good and evil is more clearly drawn, Froehlke has softened his criticism of the media. “Unfortunately, the negative sells and the positive doesn’t. That’s human nature. But I think the media has done a pretty good job. If I were writing it would be equally harsh.”
However, Froehlke is not a fatalist. Amidst the recent trend of heralding the death of capitalism, or the erosion of American economy, Froehlke still believes in the system. “I suppose greed is endemic to human nature. But not just to capitalism. Look at China. Look at the U.S.S.R. As long as you have humans you are going to have a certain amount of problems.” And Froehlke believes that as the Enrons and Tycos of the corporate world make up a small fraction of the business world, the right government action could go a long way to restoring investor confidence. “I think the Sarbanes’ bill [on corporate reform] is going to go a long way toward solving the accounting problem. And I think the regulation is good.”
Froehlke also believes that President George W. Bush is a “good human being” who needs to answer questions about his sale of shares in Harken Energy weeks ahead of bad news that drove down the stock prices. “Full disclosure is going to solve an awful lot of problems,” he says. “When you don’t disclose, human beings suspect. If you fully disclose, there is nothing to suspect.”
As to the future of government regulation, Froehlke is confident that some positives will come out of the last few months. “I was reading in the paper the other day that GE has joined a number of other companies in [voluntarily] treating stock options as an expense. I think that is very important. I think loans to officers absolutely should not be allowed. I think that very tight regulations are needed on when officers of a corporation can sell their stock. We should tax outrageous salaries.” And Froehlke has his own wry views about corporate duties. “It isn’t that the boards of directors are dishonest, but I don’t think they realize how much responsibility they have. I think the trial lawyers will very soon impress upon them how much responsibility they have.” |
