Shattered Trust

Will the government's accountability plan restore investor confidence?

“I’m extremely disappointed,” says Mansie Booker Jr. of the steady stream of corporate misdeeds that have rocked the stock market. Booker, a 58-year-old television production coordinator for the city of San Bernardino, California, says his wife, Mary, 60, is almost ready to pull out of stocks. “You don’t know which company is going to be next in terms of scandal.” A few years ago, the heat of the tech sector was firing up the market. Now it appears the only thing cooking in corporate America is the books.

The Bookers’ sentiments echo that of most investors who, after witnessing a slew of reports and allegations of corrupt accounting practices, are reluctant to pour any more money into the stock market, no longer accepting Securities-and-Exchange-Commission — required financial information as gospel. Corporations ranging from Adelphia Communications to Xerox Corp. are finding themselves under scrutiny, as skeleton after skeleton is uncovered in corporate closets.

And all the while, the market continues to free-fall (see chart). The Dow Jones industrial average index opened at 9,379.20 on Oct. 23, 2001 — the day after Enron announced that the SEC was investigating its accounting practices with its partnerships. By July 11, 2002, the Dow would shed 6%, to open at 8,800 amid a steady stream of accounting scandals from corporate America.
Desperate to repair investors’ shattered trust in the battered equity markets, President George W. Bush proposed a series of actions that include:

  • Longer, harder jail time for executives convicted of mail and wire fraud, document shredding, and other transgressions
  • Steps by the SEC to freeze questionable payments to executives from companies under investigation
  • An end to executives receiving personal loans from corporate boards
  • The creation of a “financial crimes SWAT team” at the Justice Department headed by Deputy Attorney General Larry Thompson, an African American
  • Requirements that most corporate directors be independent

At the root of it all is greed. The overuse of stock options has been a “root cause” of corporate excess, according to B. Kenneth West, senior consultant of corporate governancefor TIAA-CREF in New York City. “When executives have a carload of options, they may do anything to get the public to think the company’s stock price should go up,” he says.

Now that stricter oversight of public companies is in the headlines, what’s likely to come to pass? “One is that [the U.S. government] is clearly going to call for more corporate governance measures,” says Shawn Baldwin, chairman and CEO of Capital Management Group Investments L.L.C. (No. 9 on the BE ASSET MANAGERS list with $1.8 billion in assets under management). He says that although individual investors may fear the market at this point, asset managers and other institutional investors will continue to play the stock market. “Institutional money has to be placed somewhere, so the fiduciary stewards of these plans are going to start looking for strong governance measures at the companies before investing in its stock.”

Baldwin says that although he hasn’t lost any clients as a result of investor distrust in the equity markets, he and other asset managers have

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