Wall Street’s Latest Attack on Capital Markets: ‘Dead on Arrival’

Robert E. McGarrah Jr., capital stewardship coordinator for the AFL-CIO Office of Investment, notes that CEOs are eager to get back to their old ways of doing business—little oversight coupled with lots of freedom to undermine shareholders.  Unfortunately for them, most Americans agree that strong law enforcement, especially in the capital markets, is good for the economy.
 
A Big Business extremist report calling for lax corporate law enforcement, more restrictions on reform-minded state attorneys general like Eliot Spitzer and a do-nothing attitude on CEO pay is “dead on arrival,” according to Richard Breeden, former chief of the Securities and Exchange Commission (SEC).
 
The work group that developed the report initially was recognized as the “Paulson Committee,” but U.S. Treasury Secretary Henry Paulson has moved to distance himself from their findings in recent days. 

The one part of the report not dismissed as dead on arrival contains the proposals aimed at Sarbanes-Oxley reform. Congress passed the Sarbanes-Oxley Act in 2002 in the wake of the Enron, WorldCom and Tyco meltdowns that defrauded employees and union pension plans across the country. The law requires companies to hire independent auditors to certify the accuracy of their financial statements, which must also be signed by the CEO.

Sarbanes-Oxley also prohibits accounting firms from engaging in conflict-of-interest consulting contracts with the companies they audit. The committee’s report largely mirrors the AFL-CIO position on Sarbanes-Oxley and did not call for a substantial weakening of the law, as many expected it would.   

The AFL-CIO union movement for years has pushed for stronger capital market safeguards to protect shareholders and end abusive CEO pay. Following reports of stock options scandals, the AFL-CIO in September urged the “Big Four” accounting firms to determine what role, if any, they had in the stock options backdating of client companies under investigation by the SEC or Justice Department.

Union-sponsored pension funds hold approximately $400 billion in assets and are significant shareholders in many of the companies under investigation.          
 
Conservative columnist Ben Stein may have summed it up best when he asked: “Is it really right for prominent American executives, amid a host of scandals involving other executives looting their shareholders blind, to have the best and the brightest of academe and the Street lobbying for less accountability to shareholders?”

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