Bush mulls tougher rules for CEOs
Penalties could be brought for carelessness, not just fraud
By Jacob M. Schlesinger
THE WALL STREET JOURNAL
Feb. 25, 2002
The Bush administration is exploring ways to make it easier for the government to punish corporate officers and directors accused of misleading shareholders in the post-Enron world, weighing new penalties for mere carelessness, even if an executive doesn’t commit outright fraud.
“ONE OF THE things we’re talking about is to move the standard for CEOs … from recklessness to negligence, which is an important change,” Treasury Secretary Paul O’Neill said in an interview last week.
Though Mr. O’Neill didn’t mention Enron Corp. by name, his comments came after various top executives and directors of the company have insisted that they were unaware of the financial woes that ultimately led to the firm’s bankruptcy filing. Under current standards, that claim makes it harder for those officials to face penalties, since they assert they didn’t actively, recklessly, mislead shareholders. Under the standards Mr. O’Neill suggests, those executives would be more likely to be punished if a judge or arbiter concluded that they were negligent, or should have known about the problems and worked to fix them, even if they didn’t know.
Mr. O’Neill is chairman of the group of top financial policy makers and regulators charged by President Bush to propose a set of reforms on corporate disclosure and governance in the wake of the Enron debacle. The committee also includes Federal Reserve Chairman Alan Greenspan, Securities and Exchange Commission Chairman Harvey Pitt, and James Newsome, head of the Commodity Futures Trading Commission.
Another idea getting serious review from those officials, according to people familiar with the discussions, is to create a new kind of self-regulatory organization to police corporate executives and directors. The organization would act on complaints from shareholders and others, much the same way that the New York Stock Exchange and National Association of Securities Dealers police and penalize their member broker-dealers.
No such body currently exists for CEOs of the companies whose stocks trade on those exchanges. One possibility, floated by Mr. Pitt in a speech here Friday, was to extend the powers of the NYSE and NASD. The SEC chairman said he has asked both organizations “to review their listing agreements, to see whether new obligations for corporate officers and directors can be articulated.”
The high-powered working group overseen by Mr. O’Neill is also exploring ways to raise penalties on executives found to have committed wrongdoing — through commission or omission — by the SEC or a self-policing body. After his speech, Mr. Pitt told reporters he would like to be able to force executives to give up gains reaped by selling stock or stock options shortly before the company’s shares plunge. “It’s very important for me to see that change,” Mr. Pitt said. “It’s a simple notion of taking money that you haven’t earned, and that’s not the American way.”
For all the tough-sounding talk these days out of the likes of Messrs. O’Neill and Pitt, it remains unclear just how far the Bush administration really will go in cracking down on the CEOs of large corporations who worked so hard — and gave so much money — to get President Bush elected.
Indeed, officials are clearly struggling to find what they consider the right balance. On the same day in early January, Mr. Bush responded to the mounting Enron outrage by creating two task forces: one to explore changes to pension policies, one to review corporate governance practices. The pension group drafted its proposals in less than a month. The corporate governance group has yet to reach any conclusions, and people familiar with the process say it could be several more weeks before the members even agree on a set of guidelines.
One specific concern among the president’s conservative economic advisers is finding a way to threaten executives with new penalties without opening the door to more civil lawsuits, a prospect anathema to the core principles of many Republicans. One approach would declare that the new, lower bar to penalties would apply only to administrative processes — to be used by the SEC, arbitrators, or a new self-regulating group — without changing standards for shareholder lawsuits.
Mr. O’Neill appears to have backed off of a proposal he floated a few weeks ago that would bar executives from buying insurance to cover the cost of shareholder lawsuits. The idea drew strong opposition from other administration officials. Asked about it again in the interview, Mr. O’Neill said, “I haven’t decided yet whether I think that’s something we ought to press on the president.” He added: “there’s a good argument made that where people knowingly … mislead through omissions or even commissions, that the insurance doesn’t cover them anyway and therefore it’s not necessary to prohibit coverage.”
As administration officials deliberate over their preferred response to Enron, there are plenty of internal voices for restraint. “From a historical point of view, when one looks at these periods, there’s always too little regulation on the way up, and there’s always the temptation to do too much regulation on the way down,” Lawrence Lindsey, head of the White House National Economic Council, said in a separate interview earlier this month.
When Mr. O’Neill put forth his latest “negligence standard” idea to fellow administration officials recently, both Mr. Pitt and Glenn Hubbard, chairman of the White House Council of Economic Advisers, argued against it, concerned that no matter how it is crafted the plan could lead to more civil lawsuits.
But the iconoclastic Mr. O’Neill — a former Alcoa Inc. chairman who has long delighted in chiding fellow CEOs for failing to adhere to his high management standards — appears to revel in the role of corporate scold. He said that when he raises the notion of tougher governance standards with CEOs, “their eyes get real big, which is OK with me.” If executives look at the White House reforms and “say ‘oh yeah, piece of cake,’ then we probably haven’t raised the bar high enough,” Mr. O’Neill added.
In addition to examining the penalty system for corporate officers, the administration task force is also reviewing new standards for disclosing financial information to shareholders. Among the many proposals under consideration, one would subject major corporations to more regular, thorough SEC financial audits, modeled after the annual Internal Revenue Service tax audits of large businesses.
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