I don’t know when it will happen, but I guarantee you that the current bout of anti-corporate St. Vitus’s Dance will eventually seem ludicrous in hindsight. But it looks like the hysteria will continue to rage for awhile longer, as there’s a congressional election coming up and Dick Gephardt, who would walk on puppies to regain control of Congress, will die before he lets the issue die.
Still, maybe in a year, perhaps two, someone will say, “Remember when we fed Bernie Ebbers’s privates to a half-starved badger on The Tonight Show? Maybe that was taking things too far. I mean, did we really have to make his kids hold the badger?”
The most obvious sign that we’ll regret this feeding frenzy: The Senate passed a bill 97-0 containing a bunch of arcane reforms and draconian punishments that — I can guarantee you — very few senators thought through. Now, in theory, it is certainly possible for unanimous votes to reflect sound thinking and measured approaches to public policy. But it is never the way to bet.
In the early 1990s, during a profoundly mild recession which ended a full year before Bill Clinton focused like a laser on the economy, but which the media and Democrats portrayed as divine punishment for America’s decision to elect Republican presidents three times in a row, Congress decided it was morally wrong for CEOs to get big bonuses. (Wow, that’s a long sentence). Companies were downsizing and executives were getting big cash bonuses. That sounds wrong, right? So let’s ban it, Congress reasoned (actually they taxed salaries over $1 million, but same difference really).
In response, corporations started offering huge stock-option packages. The problem, we’ve now rediscovered, is that stock prices need not be the best indicators of corporate health. Rather than give an executive a cash reward tied to a broad range of variables, including not only stock price but market share, profit, etc. — or, if he prefers, a line of credit at unpainted-furniture stores — corporations relied solely on stock options. The idea was that CEOs would be “incentivized” (a verb whose ugliness is surpassed only by the misuse of “impacting”) to do what is best for the company, because what is best for the company is good for the stock price.
But stock prices are only one indicator of corporate health (I have a friend who made a fortune on Wall Street who always said the best companies were willing to screw shareholders when necessary). And, unfortunately — as a few CEOs discovered — sometimes it’s a lot more difficult to do what’s best for the company than to do what’s best for the stock price.
It’s like tying a doctor’s compensation to the “ping!” of his patient’s heart monitor. That’s a great system so long as the doctor recognizes that the “ping!” is merely an imperfect indicator of the patient’s health. But once you get a doctor who realizes that it’s a lot easier to fiddle with the wires to make the monitor keep pinging, while the patient sucks eggs — then the system is a mess.
The point of this gross oversimplification is not to invite e-mail from people who think stock prices are the Rosetta stone of corporate worth. Rather, it’s to note that many of today’s problems can be laid at the feet of the “reformers.”
This doesn’t mean Congress shouldn’t do anything now; it does mean that it shouldn’t try to do everything now. And if the choice is between Congress trying to do too much and doing nothing at all, I’ll opt for nothing every single time.
Sure, if someone broke the law by defrauding investors or lying to the government, let’s tag ‘em and bag ‘em. But does anyone think the business community hasn’t gotten the message already? There’s nothing like bankruptcies, lawsuits, and criminal prosecutions to focus the minds of businessmen. And all of that is happening already, which is why the Dow Jones Industrial Average is being measured on the Kelvin scale these days. Raise your hand if you think there are a lot of CEOs out there who are still eager to cook the books because the current punishments are merely professional disaster, financial and social ruin, and five years in jail — but that if the Senate bill is enacted, those same CEOs will follow the straight-and-narrow because the jail sentences have been doubled to ten years? Businessmen don’t attribute the WorldCom and Enron meltdowns to bad luck. “Ken Lay must have eaten some bad clams” is not the reigning explanation among Merrill Lynch analysts.
DON’T JUST DO SOMETHING, STAND THERE
I’ve written many times in favor of doing nothing on all sorts of policy issues. In any debate, the law of unintended consequences is the conservative’s greatest ally. Pick a “reform” — from campaign finance to welfare — and you’ll find the law at work and see the wisdom of Chesterton’s observation that “progress is the mother of problems.” Child-safety caps have led to more deaths, because the “protection” they offer has lulled parents into greater laziness about leaving dangerous medications around children. Mandatory bicycle helmets for children seem to have contributed to a similar increase in bike accidents. Rent control makes housing more expensive for poor people and gives unfair subsidies to the middle and upper classes.
Calvin Coolidge noted long ago, “When you see ten problems rolling down the road, if you don’t do anything, nine of them will roll into a ditch before they get to you.” If Congress had taken this advice a decade ago, maybe the financial scandals of today wouldn’t be so bad.
But no, Washington must “fix” the situation, just like it fixed things when it nixed corporate bonuses. Democrats in particular — with me-too Republicans following behind like over-eager kid brothers — are sure this is an ailment only Washington can cure. The day after the WorldCom news broke, CNN’s Judy Woodruff asked Dick Gephardt how he could possibly claim this was a political issue. Gephardt responded: “Well Judy, this is not just a political issue. It is an issue for the whole country.”
Got it? It’s not “just” a political issue — it’s bigger than that. But if you’re going to peel it down to its core, it’s political.
And that’s why the lawmaking process of the Senate bill was eerily similar to how street gangs expel members. Accountants and CEOs had to walk a gauntlet of reform as senators kicked, beat, and spit on them. It seemed every senator wanted to get in at least a nipple twister (purple nurple, to those of you who went to my summer camp) before the bill was passed, lest they seem anything less than fully committed to “reform.” Whenever a CEO started to scramble to his feet, some Patrick Leahy would come out of nowhere to pile-driver the sap in the kidneys. Which would have the effect of riling up Byron Dorgan’s bloodlust — who in turn would start biting an accountant’s ankle. Not all of the blows landed, of course. There were over 100 proposed amendments, after all. But the net result was a bidding war of steadily increasing criminal penalties and ever-escalating outrage over the practices of companies whose accounting procedures are still far more straightforward than Congress’s. When the Senate votes 97-0 in such a climate, you know not enough people have asked, “Wait, have you thought this through?”
Obviously it’s impossible to predict what the law of unintended consequences will produce here. That’s the funny thing about the unforeseeable. But there are a few likely suspects:
‐ As Robert Samuelson notes today, one provision says that “any scheme or artifice” found to have defrauded investors is now a crime. That’s not the kind of thing prosecutors might abuse, now, is it?
‐ Auditors can now be sued for a whole host of things “they should know.” This could end up being a massive new sop to class-action lawyers. Shocking that a Democratic bill would have anything like that in it.
‐ The new accounting control board will answer to no one and can fund itself by fining companies at will.
‐ The new rules will probably force out smaller accounting firms from auditing public companies by making compliance too expensive and risky for all but the biggest accounting firms. That means more consolidation among the supposedly evil big accounting firms.
But the new bill does not yet require CEO castration by hungry badger. Maybe that will come up during the conference committee. I’m pretty sure Tom Daschle drafted similar legislation involving wolverines…