After the collapse of energy giant Enron and the disclosures of huge accounting errors by telecom behemoth WorldCom, confidence in corporate governance is at an all-time low. The markets continue to take a beating as lawmakers scramble to respond to the crisis. But with midterm elections less than four months away, many legislators seem to be more interested in making political hay than fixing the problems (see BW Online, 7/10/02, "The WorldCom Hearing's Target: Voters").
Yet at least some are opting to band together and confront the issues. In a bipartisan move, moderates Paul E. Kanjorski, (D-Pa.), ranking Democrat on the capital markets subcommittee of the House Financial Services Committee, has joined forces with Christopher Shays (R-Conn.), a respected moderate Republican on the same panel, to investigate allegations that Salomon Smith Barney, a Citigroup unit, may have unfairly or illegally allocated shares in hot initial public offerings that it underwrote at the height of the Internet boom.
Kanjorski recently spoke with BusinessWeek Banking Editor Heather Timmons about the crisis of confidence, its effect on the markets, and the future impact on companies and the economy. Here are edited excerpts of their conversation:
Q: What prompted your investigation [of Salomon]?
A: We've received certain information there may have been offerings of IPO shares to friends and family of WorldCom executives.
Q: Generally speaking, what role do you think financial institutions played in the recent [accounting fiascos]?
A: They certainly don't take due diligence as seriously as they should. I attribute that to the whole wave of absentee ownership. There are institutions that have been taking a cut off the top but haven't been investing their own money.
Still, I think the major problem is corporate governance. There are weaknesses, such as a lot of insiders being on the board and money managers not exercising their tremendous strength. They're not involved. They're not asking the right questions. That's what's shocking people.
If you go back just six months ago, legislation to reduce the fees that companies paid to the Securities & Exchange Commission sailed through the House, even as we all knew the SEC needed more funding. When you find out that the SEC doesn't review numbers [on corporations] for three to five years at a time, you have to be a real Pollyanna to think that's adequate.
Q: How will the recent spate of bankruptcies affect the ability of corporations to raise money [in the capital markets] going forward?
A: We have to find a method very quickly to clean the slate so the confidence of investors and money managers can be brought back. I don't see that there will ever be a shutdown of the capital markets. Eventually, money will have to get into the system.
Still, [the government] has been dealing with this in reverse. Recently, we've seen a hue and cry in the President's speech about dealing with corporate criminals. But that's all after the fact. There's a need for the President and Congress to send a message to Wall Street that we want to clean this up in the fastest period of time possible. All companies that are publicly traded need to review their numbers, in the next six months. The solution may even involve a moratorium on lawsuits [as companies compile their numbers].
If we fail to secure the confidence of the investing public, it could have a horrendous effect...and implode the whole economic system. It's not just a few bad actors, it's much wider-spread than anyone suspected. I've seen estimates that 10% to 20% of companies could have to restate.
Q: What are some solutions for companies that are struggling to get capital?
A: Sound operations that need to go to the market are suffering terribly. Perhaps we need some way of creating a Good Housekeeping seal of approval -- a stamp on some of these corporations that would allow them to access the market. Confidence is a very tangible thing, and once it's damaged, it's difficult to get back.
Ultimately, though, the most important thing we need to do is depoliticize the whole issue, quickly. We don't have a system that's full of crooks, but that's the impression that we're giving out around the world. And we're seeing a lot of money retreating from the market because of that.