Home  >  News & Publications  >  Corporate America's New Accountability Corporate America's New Accountability By Scott Harshbarger, 8/19/2003 THE WINDS OF change are blowing in corporate America. Following the fraudulent accounting schemes of the late 1990s, which led to spectacular collapses of companies such as Enron and Worldcom, a new era of corporate responsibility and accountability is being ushered in. The political response to the breakdown was the Sarbanes-Oxley Act of 2002, which broadens the responsibilities of senior management and board members and stiffens penalties. Sarbanes-Oxley, however, is more of an indication of the shift in corporate America than it is a truly revolutionary or final reform. The real pressure to reform is coming from the environment in which corporate America now operates. Organizations such as the Business Roundtable, the New York Stock Exchange, and Nasdaq are all pushing for reform. The press is monitoring enforcement activities and focusing its own investigations on corporate fraud issues. And investors are getting more organized and more educated with each passing day. The heightened level of awareness has made some corporate leaders uneasy, but for most it should be viewed as a valuable window of opportunity. Those who have long invested in integrity and accountability should now be recognizing a return on their investment. With attention so squarely focused on corporate fraud issues, corporations that have always done the right thing should be opening their doors to show the world. Lasting investor confidence can be achieved only in a transparent environment. Investors will tolerate risk only if there is enough transparency to distinguish between business risk and fraud. Regulation alone will not work and runs the risk of stifling businesses if it goes too far. A balance must be struck to preserve the entrepreneurial spirit of our economy while at the same time drawing bright lines distinguishing right from wrong. The challenge to corporate leaders is to define the standards of conduct before regulatory agencies are forced into action by pressure from investors, the press, or a slipping economy. The question is, will the leaders of corporate America do enough? The first real test could be how the issue of executive compensation is handled. After the frenzied 1990s, when most corporate boards of directors deferred to the CEOs and in turn gave them huge pay packages, investors are starting to speak up. Powerful investor activists are taking steps to curb pay packages, and enterprises are going to have to start implementing new forms of compensation. Stock option packages -- once a staple of executive compensation -- may be deemphasized, and pay may become more closely tied to performance. The initial theory behind many of these stock option awards was that it ultimately benefited the shareholder -- the CEO would be compensated with stock option packages, compelling the CEO to focus on building the company's share price and ensuring regular and strong profitability. The criticism of that theory has centered on the idea that compensating CEOs of large corporations with stock options provides a perverse incentive for senior management to drive up the short-term value of the stock. However, for emerging companies the benefits of being able to award stock options are critical to their survival. Attracting top-level talent to high-risk emerging companies requires an equally weighted potential for reward. In that context, stock options seem well suited to attracting talent and providing incentive for growth. The appropriate solution, therefore, depends on the particular circumstances of each corporation. Yet the threat of one-size-fits-all regulation is real. Regulators are debating whether or not to force corporations to expense stock options in order to discourage the practice of issuing them. Meanwhile, the Financial Accounting Standards Board is drafting rules that would require every US company to value and expense stock options. If the leaders of the corporate community take steps to define appropriate standards, regulation may be avoided. ExxonMobil, Amazon, DaimlerChrysler, and Microsoft have ended their practice of awarding stock options. This appears to be a strong first step in redefining compensation to align the interests of the company with the interests of the investor. The trend cannot stop with executive compensation. Leaders must work to define standards for audit committees, independent directorships, and governance policies, including formal business and ethics codes of conduct, in order to avoid further regulation and bring about lasting reform. Experience has taught us that the best results do not come in a one-size-fits-all box. But that is just what corporate America can expect from federal regulators if its leaders do not rise to the challenge of defining new standards in integrity, transparency, and accountability capable of winning back investor confidence. A sluggish economy, a presidential race taking shape around parallel issues of transparency and integrity, and a focused press combine to keep the pressure squarely on corporate America to win back investor confidence. The window of opportunity to rise to the challenge still exists, but how long that window will remain open before new regulations come down is narrowing. The message is clear. Sarbanes-Oxley has fired a warning shot across the deck of corporate America. If the leadership does not respond to the call for change, more regulation is sure to come. Scott Harshbarger was attorney general of Massachusetts from 1991 to 1999 and was national president of Common Cause. He leads the Harshbarger Governance Practice at the law firm of Murphy, Hesse, Toomey & Lehane. © Copyright 2003 Globe Newspaper Company.