Back on the Other Side
Former SEC Chairman Pitt Advises Companies on Governance Policies
washingtonpost.com
By Carrie Johnson
Washington Post Staff Writer
Monday, September 29, 2003; Page E01
Harvey L. Pitt may be in a better position today to force change at the top of corporate America than he was last year when he led the Securities and Exchange Commission.
Pitt has resurrected his career in the private sector by forming a consulting firm, Kalorama Partners, to scrutinize the business procedures and assess the quality of corporate boards when they seek insurance to protect themselves against investor lawsuits. Kalorama gives a kind of seal of approval to a company, giving the insurer an extra level of assurance that it is taking on little risk by writing a policy. His firm works closely with investigators such as his longtime friend Terry F. Lenzner of Investigative Group International Inc. to vet managers and board members, examining their backgrounds, financial holdings and temperaments.
Pitt, who was drummed out of the SEC chairmanship in November after missteps made him appear ineffectual at battling a wave of corporate fraud, now pushes "corporate Darwinism" as a way to police business practices. Companies that do not have aggressive board oversight or strong anti-fraud procedures could be cut off from the market's resources -- capital, insurance coverage and so on -- because they would be perceived as too risky to do business with.
"Despite the significance of regulators and prosecutors, they do not reflect the most significant pressure points requiring companies to reassess their behavior," Pitt said. "The solutions must come from the private sector, where the problems originated."
John Keogh, president of National Union Fire Insurance Co., a Pittsburgh subsidiary of American International Group Inc., has insured companies that have used Pitt's services. Keogh said companies do not necessarily get a break on their insurance rates for following advice from Pitt or similar consultants, including Corporate Diagnostics, run by former representative Jack Kemp (R-N.Y.). But insurers view their hiring favorably. "Having these people involved and taking their advice would improve the risk," Keogh said.
Pitt and his partners, former SEC chief accountant Robert K. Herdman and derivatives expert John R. Sampson, have also planned two-day seminars for corporate directors, offering pragmatic advice on their responsibilities in the post-Enron world.
Pitt's revolving-door act, from defender to enforcer and back, illustrates the awkward position of the few people at the top ranks of the securities industry. Their shifts from jobs representing the interests of Wall Street banks and accounting firms to positions as regulatory cops can heighten the suspicions of investors who believe the system is designed to benefit corporate insiders, not the little guy.
Nell Minow, a shareholder advocate who was sometimes critical of Pitt as SEC chairman, said she does not believe Pitt is taking advantage of his former position in cultivating clients. "In terms of understanding the issues and his personal integrity, I would hire him," she said.
Pitt said he will no longer represent clients before the SEC, even after his one-year "cooling off" period is over. Instead, in two recent cases for clients he declined to name, Pitt devised a legal strategy but another lawyer executed it.
Two of the country's biggest accounting firms, PricewaterhouseCoopers and Ernst & Young LLP, have sent prospective clients to Kalorama Partners. Pitt, who was considered by some to be too close to the accounting industry while SEC chairman because as a private lawyer he had represented most of the big firms, said he will not work directly for any of the Big Four.
In addition to setting up his business on I Street NW, Pitt is edging back onto the public stage by giving speeches and writing a monthly column in a business newsletter, Compliance Week.
He is also starting to throw out ideas for confronting what he believes are some of the misguided incentives at the heart of many corporate frauds. One such incentive, what his successor as SEC chairman, William H. Donaldson, has called "one of the great, as yet unsolved problems," is excessive CEO pay.
Pitt is tinkering with the notion that boards would approve compensation plans that give top-level executives a couple of million dollars of their salaries in cash every year. A "substantial" portion of their total pay package -- "enough to make a real difference," he said -- would be put in an interest-bearing escrow account for several years. If no accounting restatements or shareholder lawsuits are filed during that time, the corporate official would get all of his or her money.
"It is aimed at making sure that, if shenanigans have occurred, there is actual cash available to return to the company or its shareholders, instead of trying to fine the company, which in essence means fining the existing shareholders," Pitt said. "Cash is the universal language."
Charles M. Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, said he did not think Pitt's plan would work because so much of an executive's compensation is in stock or stock options, proving the chance of a big payoff if the executive can get the company's share price up. Focusing on cash pay "is out of sync with the way most deferred compensation is done," Elson said. "The idea is, the real money is to be made through your own efforts, in equity. You get to share in the profits you make."
Pitt noted that cash can be meaningful. At his home, by analogy, his children are docked $1 from their weekly allowance each time they commit a "minor" infraction and $5 for "major" infractions. "They have to know what it is they're getting, and what it is they're supposed to do," he said.
Pitt is rankled when discussing whether corporate directors are doing what they are supposed to do, such as supervising governance and compensation, to earn their fees. He said the upheaval at the New York Stock Exchange over the $139.5 million deferred-compensation package awarded to its now-ousted chairman, Dick Grasso, was a failure of the board.
"In my view we've lost a great chairman, the best chairman the New York Stock Exchange ever had," Pitt said. "To the extent there's a problem here, it's not how much he was paid. It's how they went about the process of giving it to him and telling the public what they were doing. That's not Dick Grasso. That's the exchange."
Pitt said he was astonished by comments made by some members of the NYSE board that they did not understand Grasso's complex employment contract.
"How could you possibly ever say something like that?" Pitt said. "If you can't [explain your decisions] then you should return all the money you were paid for serving on a board."
The notion that Grasso might have refused to accept the huge lump of deferred compensation seems not to have crossed Pitt's mind. Grasso's demise was a strangely evocative replay of his own turbulent exit after just 14 months as SEC chairman -- the inability of yet another high-level securities insider to see the avalanche of investor anger before it wiped him out.
Looking back at his debacle, Pitt said he was insufficiently charismatic and not aggressive enough in his public relations strategy to counteract anger after Enron Corp. collapsed and shareholders lost billions of dollars. Then came the release of e-mail messages from Wall Street that showed that analysts were privately deriding stocks that they recommended to investors.
"Those e-mails confirmed the worst suspicions and fears of the American public," Pitt said. "These guys really don't care about me. They don't give a fig about me. What they really care about is themselves."
Seven months after his departure from the SEC, Pitt, in speeches to corporate audiences, talks about the lessons he learned.
Keep in mind, Pitt warns his audiences, that when a crisis hits one part of the business world, "it's not happening to them, it's happening to you."
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