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Home > Columnists > Steve Forbes |
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Reform
Stocks Stink--Is The Economy Next? NEW YORK - The financial markets are not worried about the past. They fear the future. Why? Because some of the "reforms" Washington may hastily enact to "prevent corporate wrongdoing" could do immense harm to the economy. Not since 1929 to 1932 has the government seriously contemplated such destructive acts. As the Forbes Silicon Valley bureau chief, Quentin Hardy, put it on Forbes on Fox, "Washington should not confuse corruption with risk-taking." Especially dangerous are those changes that would undermine one of the great, essential pillars of past and future prosperity: the limited-liability corporation. In today's feverish atmosphere, even business executives and free-market economists, academics and politicos have lost sight of the need to preserve this utterly critical instrument. In a corporation, the potential losses of officers and investors are limited to the amount they invest in the entity. For example, if today you were to buy, say, 100 shares of General Motors (nyse: GM - news - people ) for about $5,000, your maximum risk would be that $5,000. But prior to the advent of the corporation, your liability as a shareholder would have been that $5,000 plus everything else you owned. With losses limited and gains unlimited, people have been, until now, willing to invest in a rapidly growing number of new enterprises. Businesses have expanded to sizes and complexities previously unimaginable. The corporation structure has thus made possible the creation and widespread distribution of an ever-expanding cornucopia of new products and services. The same principle led to fundamental changes in personal bankruptcy laws--debts could be wiped out or rescheduled without someone having to go to debtors' prison. Yet the White House, Congress and the Securities and Exchange Commission are moving us toward a modern version of the debtors' prison concept: If a company goes broke, send the CEO to jail. Criminalize failure? Far-fetched? If only it were so. The SEC is mandating that CEOs and other top officers of the 945 largest public companies personally sign off on their companies' financial statements. What a preposterous and pernicious idea--despite its short-term political appeal. Executive officers already have legal and fiduciary obligations. It's one thing to punish those who willfully commit fraud and other well-defined crimes, quite another to jail or ruin people for bad judgment, mistakes or for taking risks that go wrong. Does Washington really want to make unsuccessful risk-taking a criminal offense? Are we, in a fit of anger, going to throw away the legal and commercial advances of the past 300 years because most of us have recently lost a lot of money? There are plenty of laws already on the books for genuinely criminal acts. Crimes in corporate suites have been committed. Jail those crooks. But for God's sake, don't make failure itself a crime. Doing so will give us stand-put, always-looking-over-their-shoulder, fearful-of-their-own-shadow CEOs. The result will be economic stagnation. Remember, most new businesses fail within their first few years. An improved standard of living comes from innovation. Innovation means risk-taking. What top executive would bet his company the way Tom Watson did IBM (nyse: IBM - news - people ) in the early 1950s on mainframe computers, the way Bill Gates bet Microsoft (nasdaq: MSFT - news - people ) in the mid-1990s on Windows, if he knew failure would tempt prosecutors, politicians and bureaucrats to destroy him? As for having CEOs sign off on their companies' financial statements--how would members of Congress like to be personally liable for every appropriations bill they pass? Members haven't a clue as to the details in most of those spending bills. Would they be willing to personally sign off on the income tax code they have been creating over the years? Mandate that, and they'd all end up in the hoosegow. Arcane accounting debates shouldn't be fodder for courtroom trials and criminal indictments. President George Bush was pilloried for saying it, but he was right in observing that many accounting issues "aren't exactly black and white." Stock options? Books have been written on whether they should be expensed. Let the markets decide that issue. Left to their own devices, markets will come out emphatically in favor of retaining stock options, especially for startups. Without stock options, high-technology America would have developed at only a fraction of the pace it's done for the past 20 years. If politicians and accountants are wise--a big assumption--they would not toy with the idea of arbitrarily expensing options. Leave well enough alone. Congress is setting up yet another accounting oversight board, creating a hotbed of mischief. In one version, a majority of the board's members cannot be accountants. Ignorance is bliss! The board is being given incredible powers, among them the right to paw through the financial documents of clients of any accounting firm auditing the books of publicly held companies. That's an open invitation for fishing expeditions for greedy trial lawyers, publicity-hungry pols, ambitious prosecutors and envious bureaucrats. Sensible reforms are on the way regarding corporate governance. Having most of the members of a company's board, as well as all the members of its audit, compensation and nominating committees, be truly independent is sound. Mandating that shareholders and independent directors formally approve stock-option plans is another good idea. Options are a great concept, but they've been abused. Washington should stick to these kinds of reforms. Forget the idea of burning unsuccessful but honest executives and entrepreneurs at the stake. America's Founding Fathers well understood the dangers of what they called public passions--what might now be described in Washington as sheer hysteria. President Bush should saddle up and stop the stampede.
The World's Best Whiskey Tours - 8/29/02 12:01:00 AM ET Whether you're a fan of single malt or sour mash, a visit to a distillery will give you a warm glow. Sony-Ericsson Venture In Jeopardy - 8/30/02 2:41:37 PM ET Ericsson's CEO threatens to bail out if handset sales don't pick up. He might've made it worse. Mutual Fund Investors Leave The Building - 8/30/02 2:29:10 PM ET Nearly $53 billion left the funds in July. Maybe it should have stayed for the rally. America's Best-Dressed Billionaires - 8/26/02 12:00:00 PM ET Simon Doonan, Barneys New York's creative director, picks the five most stylish American billionaires. WorldCom Ex-CEO Made $11M Off Salomon IPOs - 8/30/02 4:20:56 PM ET Top current and former WorldCom execs made millions from IPOs made available by Salomon, records showed.
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