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Politics : PRESIDENT GEORGE W. BUSH -- Ignore unavailable to you. Want to Upgrade?

To: FastC6 who wrote (281330)	7/29/2002 10:31:02 AM
From: Baldur Fjvlnisson	Respond to of 769667

Intimidating risk-takers is bad for the economy David Ignatius International Herald Tribune/The Washington Post Saturday, July 27, 2002 The wrong medicine for corporate cure PARIS Investors seemed positively giddy at the prospect of new laws to prevent corporate fraud Wednesday, bidding up the Dow by 489 points after House and Senate conferees cut a deal. . I wish I could be as sanguine. But I fear that this belated crusade by the nation's only "distinctly native criminal class," as Mark Twain once described Congress, will make investors' problems worse, rather than better. That's because the new rules and regulations will apply Washington's "zero-defect culture" - its tendency to criminalize failure - to corporate America at precisely the wrong time. . Here's the danger: At the very moment corporate managers need to take more risks and be more creative to revive the American economy, they will instead be more uptight. Instead of the "animal spirits" that power economic growth, the cover-your-backside ethic will prevail. . When you clear away the debris of the 1990s, the best thing about that decade was that it encouraged the idea that it was okay to fail. That invitation to take chances created vast wealth - not just for CEOs but for ordinary folks. According to a recent Business Week study, "the biggest winners from the faster productivity growth of the 1990s were workers, not investors." . I know this nostalgia for the 90s may sound odd now that the dot-com bubble has burst and investors have lost trillions of dollars. But capitalism is, after all, a system of profit and loss, not a guarantee of permanent prosperity. . What powered Silicon Valley was that freedom to fail. I still recall a remark made to me in 1999 by an executive at Cisco Systems, the highest of the high-fliers of that bygone era. "If you hit five out of five, you won't do well here," the Cisco vice president explained. "People like that aren't taking enough chances. If you hit eight out of 10, that's the Cisco way." . Cisco has definitely had a few strikeouts over the past two years. Its stock was trading Thursday at about one-eighth of what it was before the tech bubble burst in March 2000. But that doesn't change the fact that its innovative culture created the routers and other hardware that provide the infrastructure of the Internet. It's a great company, and if people were stupid enough to pay $80 a share for its earnings, that isn't Cisco's fault. . To state the obvious: Economic growth is powered by people who aren't intimidated by the risks of failure. Stagnation, in contrast, comes from people who spend their time looking over their shoulders, second-guessing themselves and others, doing anything to avoid the appearance of making a mistake. . For a preview of what life will be like under zero-defect capitalism, consider the dilemma of CEOs today. Under a new Securities and Exchange Commission order that was promulgated June 27, the chief executives of America's top 1,000 companies must certify that their most recent annual reports and quarterly filings don't contain "material misstatements or omissions." . That certainly sounds like a good idea. Holding CEOs accountable for the accuracy of their financial statements is the best guarantee against fraud. But in practice, the requirement will cause severe problems. . Take the several hundred companies that have had to switch auditors because of the collapse of Arthur Andersen. They have new auditors poring over the books, looking for irregular transactions. Their audit committees are beginning to panic as the date for releasing second-quarter earnings approaches. Someone finds a possible problem that may take weeks to clarify. What's the CEO supposed to do? He's required to sign a statement that his company has a zero-defect filing with the SEC. If he's wrong, he could go to jail, and the new SEC rule doesn't allow him to say, "We'll get back to you on that one." . Does the CEO restate or qualify past earnings reports to protect himself? Do the investors who own his company's stock take a hit to make sure the CEO stays clean? Stay tuned, because this drama is actually going to play itself out at dozens of big companies over the next few weeks. Attorneys who counsel some of the nation's largest companies say there will be lots of earnings restatements, and perhaps even CEO resignations, driven by the SEC's new rules. . In a zero-defect culture, the engine of economic growth begins to freeze up. For this is a barren landscape, where only lawyers can survive for long. . If the new anti-fraud measures make investors feel it's safe to go back in the water, then they're worth all the trouble. But I have a feeling the only folks who'll really be cheering a few weeks from now will be lawyers, who will have to defend the newly criminalized. in March