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Securities & Exchange Commission Chairman William H. Donaldson rose at 4:30 a.m. on a recent Saturday to fly from New York to San Francisco. By lunchtime, he was discussing economics with Nobel laureate Milton Friedman at former Secretary of State George P. Shultz's home in Palo Alto. Then it was on to a two-hour meeting to debate a dozen high-tech executives over Donaldson's insistence that their companies should deduct the cost of employee stock options from earnings. The next day, he spoke at Stanford Law School about restoring business integrity. After taking the red-eye flight back to New York, Donaldson spent Monday, June 2, plowing through paperwork before his wife, Jane, surprised him with a party for his 72nd birthday at Manhattan's River Club.
The clear message: The SEC isn't Bill Donaldson's retirement home. When the former Wall Streeter and lifelong friend of the Bush family took over on Feb. 18, the betting was that he'd be a caretaker, put in to clean up the mess left by former Chairman Harvey L. Pitt and get corporate scandals off the front page long before the 2004 elections. Instead, Donaldson has turned up the heat on wrongdoers, increased penalties for financial fraud, and named a hard-line critic to police accountants.
A caretaker would have stopped pressing Wall Street about its conflicts of interest once state regulators and the SEC had won a $1.4 billion settlement from the 10 biggest investment banks. Donaldson publicly slapped former Street peers who downplayed the charges -- and ordered a new probe of analysts' bosses to find out why they had allowed such abuses. His tough activism has energized the dispirited SEC. Says former Federal Reserve Chairman Paul A. Volcker, a strong backer of accounting reform: "The signs are very good. He's off to a good start."
BETTER INFO. Now, with his own management troika in place and plenty of new funding and staff, Donaldson is charting a bold course aimed at extending the post-Enron reform drive. He has ordered a review of corporate proxy rules that could empower shareholders in fights with management. He's determined to bring the unfettered hedge-fund industry, and its $600 billion in assets, under SEC scrutiny.
In a June 9 SEC report to the House Financial Services Committee, Donaldson signaled that he wants mutual funds to give investors better information about fees, trading costs, and how they pay managers. He's also targeting the aggressive sales practices of brokers and their sweet deals with fund companies.
Donaldson won't always please reformers. He thrilled critics of the accounting profession by picking New York Fed President William J. McDonough to chair the Public Company Accounting Oversight Board. But then his heavy-handed move to force the board to make McDonough its CEO as well fanned fears that the SEC would erode the board's independence. In other areas, notably the future of stock exchanges, Donaldson's conservative leanings could lead to tinkering, rather than fundamental change.
TOUGH COP. Still, his strokes are bold enough to shock traditional Republican constituents -- and create political risks. Big GOP donors on Wall Street could find themselves targets of SEC subpoenas. Donaldson's use of the bully pulpit to push better corporate governance could rile CEOs, as would any SEC attempt to open boardroom doors to dissidents. And accountants and tech executives are drumming up opposition on Capitol Hill to auditing and stock-option changes.
"He's going to have to fight those fights, because there's a lot of congressional backing for those constituencies," says Felix G. Rohatyn, who runs financial advisory firm Rohatyn Associates LLC.
For now, with investors still angry over Enron, WorldCom, and a host of other frauds, White House officials are pleased with their tough cop on the business beat. Many on Capitol Hill agree: "He is showing the kind of leadership we expect of him," purrs Senate Banking Committee Chairman Richard C. Shelby (R-Ala.). But that mood could change as markets recover and the elections draw near. When the White House wants to assure voters that the scandals are over, Donaldson could run afoul of the politicians if, as he vows, the SEC keeps airing Corporate America's dirty laundry.
BRINGING INTEGRITY BACK. Donaldson is used to rattling the Establishment. He got his start at G.H. Walker & Co., the white-shoe bank run by President George H.W. Bush's uncle. But in 1970, he made waves by defying New York Stock Exchange rules to take his brokerage firm, Donaldson, Lufkin & Jenrette Inc., public -- an NYSE first.
Now, Donaldson's push is rooted in deep personal outrage. He's angry that stock research, DLJ's specialty, has turned into a mere selling tool for investment banking. As former chairman and CEO of the NYSE, he was so troubled by conflicts of interest among the Big Board's directors -- and the rich salaries that have proliferated since he left in 1995 -- that on June 4 he lobbied Chairman and CEO Richard A. Grasso to strengthen a reform package before the NYSE board.
And the one-time U.S. Marine rifle-platoon commander demands that business embrace good governance. "We're at a pivotal point in the reestablishment of faith in the business and financial communities," Donaldson told BusinessWeek. "I would like to be remembered for bringing everybody back to a sense of business integrity." (For more of his comments, see "A Conversation with Bill Donaldson".)
Copyright 2003, Bloomberg L.P.
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