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WorldCom Fallout

July 1, 2002 at 12:00 AM EDT


TERENCE SMITH: Joining me now to discuss the WorldCom financial fallout and corporate responsibility are newspaper editorial page writers and editors from around the country: Susan Lee of The Wall Street Journal; Bob Robb of The Arizona Republic; Cynthia Tucker of The Atlanta Journal-Constitution, and Nolan Finley of The Detroit News. Welcome to all of you.

Susan Lee, as an economist and as somebody who writes about this all the time, when you watch this — another revelation practically every day — how do you read it? Is it a collapse of the system? Is it several bad apples?

SUSAN LEE: Well, it is especially I think for conservatives — and I’m speaking for myself — it requires an enormous paradigm shift. And that is our concern has always been or my concern, that you have to protect the financial markets from corporate America.

And now when I’m looking at this stuff, I’m thinking, no, no, I’ve gotten it wrong. I have to protect the financial markets from, I’m sorry, not from government regulation but from corporate America. It’s a reminder to us that corporate executives’ interests are not exactly the interest of investors, and for me, who’s always said government regulation has a problem, that’s the problem, this has been amazing.

TERENCE SMITH: Nolan Finley, how do you read this and where do you place the blame?

NOLAN FINLEY: Well I’m not sure what we’re dealing with here is a shortage of regulation but rather a deficit of morality and ethics in the executive suite. We have laws in place that require full and honest disclosure of assets and liabilities. These executives chose to either bend or break those laws, and they’re paying a heavy price for it. Their companies are either in bankruptcy or headed that way. Many of them have lost their job. The stock has plummeted so I feel the marketplace is working.

TERENCE SMITH: They’re paying a price, of course, Nolan Finley but so are the stockholders.

NOLAN FINLEY: Well, and the stockholders are. Perhaps this will be a spur for increased shareholder activism, a return to that. Shareholders need to do a much better job of demanding of the companies they invest in, demanding better accounting procedures and better, just a better, to better serve the owners of the company.

TERENCE SMITH: Cynthia Tucker, give us your perspective on this and who’s to blame.

CYNTHIA TUCKER: I could not disagree more. That is absolute nonsense. How is the average shareholder, who owns no more than a few shares of the average major conglomerate — anywhere from, say, 100 to 5,000 shares — that shareholder doesn’t have the influence or the power to demand of corporate executives that they turn over the books.

For heaven’s sakes, Arthur Andersen claims not to have known what WorldCom was up to. And they had access to the books. How in the world can the average shareholder get access to that kind of information?

I was very cheered by what Susan just said because it is true that conservatives for so long have condemned government regulation as the problem. In fact, I think the scandal has helped to shift the pendulum to show us once again that government regulation is absolutely necessary, and government oversight.

TERENCE SMITH: Bob Robb, Cynthia Tucker is only one voice among many calling for more government regulation to step in and supervise all of this. Is that the answer?

BOB ROBB: Well certainly you’re going to see an effort in Congress and in the SEC to increase the degree to which corporate audits are independent and at arm’s length and probably to broaden the scope of activities that perhaps are declared an illegal business practice. But the main action I think will occur in the markets themselves. After all, the independent corporate audit was an invention of corporations seeking to gain advantage in attracting investor money.

In this market, which has been depressed because of this and, as previously mentioned, some stocks in particular have been hit, which have complicated or questionable accounting practices, there will be a premium placed on corporations trying to develop additional steps that they can take themselves to assure investors that their accounting practices are sound and honest and that their books can be relied upon.

And I suspect the activity that occurs in the market itself will ultimately be more fruitful meaningful than what occurs by regulators in Congress.

TERENCE SMITH: Susan Lee, what about the question of the law? There are proposals now to, in effect, criminalize some of this behavior. Do we need prosecution first and regulation second?

SUSAN LEE: I would certainly like to see a whole bunch of these people go to jail. I think the demonstration effect of having corporate executives go to jail is very, very strong, particularly for other corporate executives, and I would like the jail not to be – and this sounds very bad of me – but I don’t want it to be Club Fed. I want it to be a place like Attica. I think what they have done is very serious, and that should be done before we start thinking about regulation.

TERENCE SMITH: And what impact, Susan Lee, would it have on the market if that was done, if that was on the front page of the newspaper?

SUSAN LEE: Well, I think the market would be very cheered up because the market would say, “aha, they know if they do this again, they’re going to go to jail. That might stop them from doing this again not because they have some altruism but because they don’t want to go to jail.”

TERENCE SMITH: Nolan Finley, where do you come down on that? Is that the image you want to see?

NOLAN FINLEY: Of course. If they break the law they should be punished for it. But the law already holds them accountable for fraud and they should be prosecuted. I don’t know that we need a whole raft of new laws to prevent this.

TERENCE SMITH: Well, there’s a proposal, for example, already in discussion to make CEO’s responsible, liable, for the accuracy of the financial statements of their company. Is that reasonable?

NOLAN FINLEY: That is reasonable. If they signed their name to it, they should stand behind it.

TERENCE SMITH: And make them personally and if necessary criminally liable?

NOLAN FINLEY: If there was criminal fraud. I mean, that’s a hard thing to prove. Where do you separate incompetence from criminal intent? I would hate to be the person who had to sort that out.

TERENCE SMITH: Cynthia Tucker, were do you turn on this for an answer? You say the shareholders can’t be expected to do it. Where and specifically what would you like to see?

CYNTHIA TUCKER: Well, I would like to see a combination of both – much stiffer criminal prosecution and stronger government regulation and oversight. I think both are absolutely necessary.

For heaven’s sake, some guy goes out and robs a convenience store of $7 with a steak knife; we put him in a very serious prison for a very long time. Yet, these corporate CEOs go off, go out and rip off investors and pensioners for billions of dollars, and we’re talking about making civil cases against them. Maybe they pay a fine for which they have to give up a few million of the hundreds of millions that they have gotten illegally.

So, no, I agree with Susan. There needs to be much more strenuous criminal prosecution. But we also need stronger government oversight. After all, the prosecution kicks in only after we’ve caught them doing something wrong. But stronger government oversight might stop them from doing these things in the first place.

TERENCE SMITH: Bob Robb, you spoke earlier of confidence in some of the existing laws and institutions in the market itself. What about the Securities and Exchange Commission, is it doing the job it should? Does it need to be revised or revamped in any way?

BOB ROBB: Well, certainly I think the present leadership inspires neither confidence nor a sense of being afraid of its activities. There may need to be — the Bush Administration may need to look at a change in leadership. But – and I do believe that there have been examples of very egregious corporate wrongdoing, and the individuals who engaged in that conduct to the extent it is illegal should be prosecuted extensively and aggressively, such as President Bush has suggested that he would.

But I think it’s important that we concentrate on the individuals who do the wrongdoing. By making the decision to go after Arthur Andersen as a corporation, for example, the federal government removed from the marketplace a revamped Arthur Andersen that was emerging under Paul Volcker, that would have been exclusively devoted to doing these independent corporate audits.

Well, I think the market would have benefited from having such an entity, and the government’s decision to prosecute Arthur Andersen criminally, rather than going after individual cases of wrongdoing, we moved what would have been I think a beneficial competitor in the independent corporate audit market from the marketplace.

TERENCE SMITH: Susan Lee, from your perspective on Wall Street, what’s been the impact of this on the markets — not just dollars and cents but on mood and confidence?

SUSAN LEE: Well, I think there is an enormous erosion of confidence. You can see that most clearly in the inflow of foreign money, which has almost dried up. Foreign capital are saying maybe there are better opportunities someplace else or I’m going to wait and see what happens with the corporate governance scandal in the United States.

And unfortunately, that’s beginning to have some sort of effect on corporations themselves. They’re pulling back; they’re paying back debt. While they’re doing that along with a weak stock market you’re not going to get capital investment, which is what you really need to come out strongly from this recession.

TERENCE SMITH: Nolan Finley, what’s your view of the impact of this on people’s confidence in the system, in the market, in addition to Susan’s point about overseas confidence?

NOLAN FINLEY: Well, confidence is the number one motivator in the market. And these corporate boards are going to have to take the necessary steps to reassure investors that they are operating openly and honestly and they have good accounting procedures in place. And I think that will be the ultimate solution to this crisis. There is no preventive here in a regulatory scheme but if these companies hope to attract investor dollars. They’re going to have to restore investor confidence.

TERENCE SMITH: Cynthia Tucker, President Bush’s name was mentioned earlier. What have you heard form him that you’ve liked; what – has he played the role you want him to play or does he have more to do and more to say?

CYNTHIA TUCKER: Well, Terry, President Bush has belatedly come to the table understanding that there are going to have to be a lot stronger criminal prosecutions of corporate executives. For the longest time, the president, like many conservatives, resisted any stronger regulation.

He didn’t say anything for the longest time about stronger criminal prosecutions. He tended to defend business practices, to claim that there were just a few bad apples out there, but his address on Saturday was a very strong one focusing on very aggressive criminal prosecution; I liked that.

And I’m looking forward to an address he’s expected to give later this month where he’s expected to outline more of the procedures he will back. So I’m hoping that he will call for stronger government oversight and regulation as well.

TERENCE SMITH: All right. We’ll, stay tuned. Thank you all four very much.