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 meet, the consensus is a foregone conclusion.