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Beginning this past Monday, the subject of
competitiveness was placed high on the docket as business and governmental
leaders meet to mull the fate of our financial standing in the world. Discussion of the topic was begun in
earnest soon after the appointment of Henry Paulson as Treasury Secretary in
2006.
Bringing his very profitable experience at the helm of Goldman Sachs,
Mr. Paulson was left with the somewhat difficult task of unifying President
Bush’s pro-business agenda.
Since replacing John Snow, who had wandered off message, focusing his
efforts on deficit reduction and corporate governance, Mr. Paulson has been
actively pursuing a quite different approach.
His belief that, "we must rise above a
rules-based mindset that asks, 'Is this legal?' and adopt a more
principles-based approach that asks, 'Is this right?'" is at the core of
this conference.
Gathering former Treasury Secretary Robert Rubin, ex-Fed chairman Alan
Greenspan, and a host of business leaders including Jeffery Immelt, CEO of
General Electric, Mayor Michael Bloomberg of New York, John Thain of the NYSE
and Ann Yerger, former executive of the Council of Institutional Investors to
discuss the direction of the US financial markets, Mr. Paulson hopes to set
in motion the perceived reforms that business insists will level the global
playing field. Wall Street investment firms are well represented on the
commission as well.
The assemblage was lightly peppered with dissenting voices in Warren
Buffet, who believes that the capital markets are not only healthy but
globally attractive and Arthur Levitt Jr., President Clinton’s SEC
chairman, whose impassioned editorial in the Wall Street Journal recently
suggested that these business leaders should leave well enough alone. Mr. Levitt pointed out that these
business leaders had compromised the Financial Accounting Standards Board and
the government Accounting Standards Board to such a degree as to make them a
moot agency. Greenspan defended Sarbanes-Oxley.
Billed as a weeklong debate, the topics on the table have been greatly
discussed by both Mr. Paulson and recently by the US Chamber of Commerce. At
risk is the chance that should these business leaders fail to reach a
decision, the United
States will falter under the weight of its
own regulations.
The group would like to change the way Sarbanes-Oxley is applied. To do this, the commission has
recommended that the Act, often cited as a knee-jerk reaction to the demise
of Enron and WorldCom and an unnecessary costly accounting rule, be rolled
into the Securities and Exchange Act of 1934. This would give the SEC the power to
pick and choose what should come under the regulatory requirements.
Business has sought to eliminate this legislation since its
inception. But since its passage,
the cost of accounting, which forces the CEO to sign-off on financial
statements, has been drastically reduced.
Worried that too few accounting giants remain – Arthur Anderson
collapsed in 2002 collapsed as a result of their poor auditing practices
– moving (and weakening) SarbOx, many in the group suggested would
allow greater flexibility and increased openness to American stock
exchanges. Among those most vocal
on this subject was John Thain.
Currently, there are only four major accounting firms remaining. Mr. Paulson has urged Congress to
allow these firms to raise capital, whether on the open market or through
private equity. This would allow
the remaining firms to better weather any litigation and possibly loosen the
new conservative nature prevalent in the industry.
Once this is done, restructuring the SEC, also on the agenda would be
a matter of closing one division (the inspections department which monitors
the activity of brokerage firms), diluting its oversight into one of
informality with the securities industry. The suggested changes have been touted
as efficiency based, eliminating overlap while at the same time.
Christopher Cox, the head of the SEC has resisted these changes so far
standing behind the current high standards already in place. His commission has begun the subtle
shift away from investor protection to a more business responsive
stance.
Mr. Cox, who has met extensively with his British counterparts and has
made it clear that adopting their more lax regulations, is not in this
country’s best interest is expected to join
the meeting on Wednesday.
The commission does have one item on the agenda worth
consideration. They have
recommended the portability of employee 401(k) plans to make increased
participation more likely.
Yet this one step forward is accompanied by one step back. The
mandatory enrollment of employees at all companies (excluding the smallest)
through payroll deduction would increase market involvement but the main
beneficiaries would not be the investors but the financial firms that service
them.
And lastly, the group will focus on corporate guidance. Signing off on
your company’s next quarter can come with its problems and the
suggestion to eliminate this guidance is widely cheered by CEOs nationwide. These company chiefs understand that
failure to meet analyst expectations can result in their company’s
share price dropping. On the flip
side, beating expectations is often greeted with exuberance first and
skepticism second.
By removing this exercise, chief executives suggest that their
companies would be allowed to take additional risk over longer periods of
time. Acting as investor
advocates, financial firms analyze this quarterly guidance and offer
recommendations to their clients.
Numerous other institutions also keep a watchful eye on this type of
report hoping to cull some insight on not only the short-term performance of
the company but the overall health of the sector in which it operates.
If you were looking for some sort of investor protection from these
weeklong discussions, you would do well to search elsewhere. With corporate
profits at an historic high of 8% of GDP, the idea of implementing further
changes can seem opprobrious.
Unfortunately, only
a few of the suggested changes require Congressional approval. The remainder requires the likes of
Mr. Buffet or Mr. Levitt and hopefully Mr. Cox to stand tall against this
wave of business-friendly regulation.
Our country still provides the safest environment in which to conduct
business and the most profitable markets in which to list. When like minds met, the consensus is
a foregone conclusion.
Paul Petillo
www.BlueCollarDollar.com
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