Gut Check Time
Anyone who has read the financial pages of almost any American newspaper can rattle off a slew of American corporations who actions are truly criminal. And the political group most damaged by these revelations has been the national Republican party, whose leaders have had close ties to many of the rogue corporations. But the Democrats are in danger of squandering an opportunity, not just an opportunity for political gain, but an opportunity to save American business from its own excesses.
The question is not merely whether the Democrats can paint the Republicans with the brush of scandal. Democrats should and perhaps even will press President Bush, Vice President Cheney, and Army Secretary Thomas White for details on how their respective insider roles at Harken Energy, Halliburton, and Enron allowed them to make millions of dollars in profits while ordinary shareholders lost all or most of their holdings. The question is also whether Democrats have the guts to point to the rot at the heart of American business.
The men and women who manage American public companies supposedly work for the benefit of their stockholders, the actual owners. The men and women who serve on the boards of directors of those companies supposedly oversee those executives. The men and women who certify the financial statements of those companies supposedly work to verify the truth of the numbers in and underlying those statements. Finally, the men and women at the large stock brokerage firms supposedly work unimpeded by the firms that underwrite stock issues.
The past few months have shown that these suppositions are all too often false. Corporate executives have received so much stock in the form of options that they benefit immensely from short-term gains in stock prices, not from the long-term health of their companies. Corporate directors have been either complicit in or ignorant of the games that executives have played. The audit divisions of the large accounting firms have ignored abusive behavior, while their tax and consulting arms have devised all manner of arcane tax shelters. And the brokerage arms of the large Wall Street firms have been all too happy to tout the stocks promoted by the underwriting arms of the very same firms. The idea that corporations become more valuable by becoming more profitable has become the idea that corporations become more valuable by becoming more clever with their financial statements.
The market was a panacea in the 1990s for both Democrats and Republicans on Capitol Hill. There was no need to restrict the consulting divisions of accounting firms. There was no need any longer to keep the brokerage firms separate from the investment banks. For the Republicans, this stance was a natural stance because their natural constituency were the corporations that benefit from unfettered capital. Democrats like Joe Lieberman took a similar stance because they sought to move their party to the right to get a share of that constituency for themselves.
It should be clear by now that the American financial market cannot police itself. Left to their own devices, some public companies, advised by the large accounting firms, will do nearly anything to make their financial pictures look artificially better. Some will find ingenious ways to reincorporate in jurisdictions like the Cayman Islands or Bermuda, where corporate taxes are nil and shareholders have few, if any rights. Some will use tax shelters to reduce the taxes that they and their executives need to pay. Some will make phony sales with subsidiaries, affiliates, or competitors to inflate revenues. Some will make their financial statements as obscure as possible, to keep anyone, including their shareholders, from figuring out what their really own and really owe.
The Bush administration has already demonstrated its fealty to American corporations, because many of its key players come from its top ranks. Paul O'Neill, its Secretary of the Treasury, formerly the CEO of Alcoa, has said that the problem with schemes by American industries to avoid corporate income taxes is not the type of schemes, but the fact that the tax exists. Harvey Pitt, the head of the Securities and Exchange Commission, formerly a consultant to all of the large accounting firms, has proposed the formation of a laughably weak panel to oversee public accountants.
The Republican party is probably so beholden to corporate American that it cannot divorce itself: the bulldog of a party that in Theodore Roosevelt's time railed against the trusts has become a lapdog. It will be easy for the Democrats to talk loudly about the Republican corporate problem, but it will also be easy for the Democrats not to do much, because corporate favor means campaign money. The Democrats will need to risk the wrath of corporate America if they want to tie the Republicans to the worst aspects of corporate America.
The various corporate scandals affect more than just the sound bites for the 2002 and 2004 elections. Someone needs to protect Americans from the worst practices of corporate America. When companies like Enron or WorldCom get caught, they impode, taking not just retirement savings or stock holdings, but also thousands of jobs with them. Republicans are prepared to have government do as little as possible. Democrats need to realize that it is time for the government to do whatever is necessary to keep corporations and their advisors honest.
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