February 19, 2004

A Professional Job of Walking on Eggshells

Ron Suskind has been posting documents that crossed ex-Treasury Secretary Paul O'Neill's desk in 2001 and 2002. In the latest batch, I get to observe Treasury Undersecretary Peter Fisher doing a highly skilled and professional job of walking on eggshells.

The latest batch on the Ron Suskind The Price of Loyalty website consists of three sets of new documents: "How to Beat the Press," "Corporate Reform: No New Lawsuits," and "Not to be Publicized": Treasury's Corporate Reform Plan."

I find the most interesting document to be the second: a memo from Treasury Undersecretary Peter Fisher to Treasury Secretary Paul O'Neill reporting on an Oval Office meeting on corporate control and corporate regulation reform that Fisher had just attended, plus a supporting NEC document by Marc Sumerlin. Fisher's memo (along with Sumerlin's) makes it a lot clearer to me exactly why it was that the Bush-Cheney administration's reaction to the corporate governance scandals was so feeble:

To: Secretary O'Neill
From: Peter Fisher
Date: March 5, 2002
Subject: Discussion of Corporate Disclosure Issues

This morning I attended a meeting with the President and Vice President and White House staff in the Oval Office to discuss the attached memorandum as the basis for a discussion of the speech being drafted for the Baldridge Awards.

The memo tracks a document that Marc Sumerlin had been preparing with our input as well as considerable input from the SEC [Securities and Exchange Commission]. Yesterday, I expressed concern that the proposals were too specific for guidance for a speech that I hoped would set aspirational goals for corporate America. The document also lacks the "cross-certification" idea for auditors. Marc suggested that others had strongly resisted this (perhaps through misunderstanding that it would require auditors to know what is going on inside the CEO's head).

Lindsey led the discussion walking through the numbered items. Both the President and Vice President had some difficulty with Proposal #3 in the first section, fearing that it would set too high a standard for CEO's and would lead to excessive litigation. Efforts to explain that [then-SEC Chair Harvey] Pitt thinks of this as creating a safe harbor for CEO's who create reasonable procedures to inform themselves and their shareholders were not convincing. The President also expressed concern about proposal #4 (auditors to assess controls against best practice) in the last section but seemed to accept that this was not intended for public consumption but for Board responsibility.

I did not attempt to argue about the individual proposals but, rather, tried to press the case that the President's speech should focus on what we expect of corporate leaders. I suggested that while government can make some changes both to set better and better enforce minimum standards, the President should clearly distinguish the need for those in positions of public trust, like corporate leaders, to be held to the highest standards; that we should not accept the idea that the current challenge is principally one for government but is for corporate governance. Where there existed concern about whether a particular idea could be implemented by the SEC without creating excess litigation, I suggested that it be turned into part of the aspirational goals. The President reiterated this to the speechwriters; I believe Hubbard and Rove were comfortable with this approach.

Both the President and Vice President wondered whether the ideas reflected in the memo had been shared with "real" CEOs but ultimately, on the theory that the speech would not delve into details, we were discouraged from trying to test market these ideas this afternoon to corporate leaders.

The Vice President had already read a draft copy of the speech and was clearly going to be taking a close review going forward. You may want to call him. I will be happy to answer any questions you may have.

C: Ken Dam, Tim Adams, David Aufhauser

March 4, 2002



On Thursday, you are scheduled to give remarks on corporate governance at the Malcolm Baldridge Quality Awards. The Treasury, SEC, NEC, and CEA have developed eleven specific proposals that you could call on the SEC to implement. The SEC believes it can implement all of these proposals without legislation.... These proposals would provide better information to investors, would make corporate officers more accountable, and would strengthen the accounting system....

I. Providing Better Information to Investors

Proposal #1:Each investor should have quarterly access to the information needed to judge a firm's financial performance, condition, and risks. Companies would be responsible for providing investors a true and fair picture of themselves... in "plain English"....

Proposal #2:Each investor should have timely access to critical information.... [T]he SEC would expand the list of significant events requiring prompt disclosure....

Proposal #3:CEOs must make the disclosure of critical information a top priority.... CEOs must ensure that reasonable procedures are in place....

II. Making Corporate Officers Accountable

Proposal #1:CEOs should personally vouch for the veracity, timeliness, and fairness of their company's public disclosures, including its financial statements....

Proposal #2:CEOs should not be allowed to profit from erroneous financial statements....

Proposal #3:CEOs or other officers who clearly abuse their power should lose their right to serve in any corporate leadership positions....

Proposal #4:Corporate leaders should be required to tell the public whenever they buy or sell company stock for personal gain....

III. Developing a Stronger, More Independent Accounting System

Proposal #1:Investors should have complete confidence in the independence and integrity of the auditors.... [T]he SEC would... prohibit an external auditor from performing any other services to an audit client, if the service compromises the independence of the auditor....

Proposal #2:An independent regulatory board should ensure that the accounting profession is held to the highest ethical standards....

Proposal #3:The authors of accounting standards must be responsive to the needs of shareholders....

Proposal #4:The firm's accounting system should be compared iwth the best, not simply against minimum standards....

In my opinion, Peter Fisher was walking on eggshells in that meeting, and knew he was walking on eggshells. George W. Bush's actions while a director and on the audit committee of Harken Energy may well have been inconsistent with I.3, and were certainly inconsistent with II.4. Halliburton's failure to disclose material changes in accounting procedures that boosted reported earnings while Richard Cheney was CEO were inconsistent with II.1, II.2, II.3, and II.4. The two most powerful people in the Oval Office are being asked to bless and take a public position that their previous actions are part of a public policy problem, are the result of moral failings, and should perhaps be crimes. That's a lot to ask of anyone.

Not surprisingly, given who they are, what they had done in the past, and the fact that Bush at least thinks the big problem in corporate governance is "SEC overreach," Bush and Cheney balk at the jump. Fisher attempts to gentle them--to say that if these seem too strong as legal requirements for corporate officers, why not turn them into aspirational goals? He achieves mixed success.

Moreover, it is clear from Fisher's memo that Bush, Cheney, and a number of those involved in the policy development effort don't understand a number of issues. As Fisher writes, Bush and Cheney don't understand that I.3 is intended to let the SEC write "safe harbor" rules for information disclosure procedures, and cannot be persuaded that then-SEC Chair Harvey Pitt knows what he is doing. "Others" (which from context probably means Marc Sumerlin's boss, Larry Lindsey) don't understand what, exactly, various proposals would require the auditors to know and do).

And then there is the last paragraph of Fisher's memo. Fisher tells O'Neill that Cheney has already seen a draft of the speech--and Fisher certainly has not. "Cheney is running this show," Fisher tells O'Neill. "If this corporate governance reform effort is going to move forward and produce good policy, you need to call Cheney and convince him that you and the SEC know what you are doing."

Posted by DeLong at February 19, 2004 12:44 PM | TrackBack


Not much sign in this process that Cheney is senile, the possibility that was suggested by some of his WMD statements. Here he is lead blocker for Bush, and apparently quite good at it.

Posted by: P O'Neill on February 19, 2004 02:01 PM


The basic problem of corporate audit is emphatically not that there aren't enough rules or "aspirations." It's all a question of agency, in the 1930's Gardiner & Means sense of the word.

Companies are auditing themselves, which is idiotic on its face. Companies need to be audited by somebody who has a vested interest in getting at the truth of the matter. Insurance companies which protected companies and their officers against shareholder suits might be an example of an agent with such a structural interest.

The lefty assumption of the past 150 years or so has generally been that governments were also such an example -- but we have seen in the United States, perhaps the world's most advanced experimenter with regulation in the public interest, from Teddy Roosevelt to Clinton, at least, that the regulated can and will colonise their regulators before regulation gets too effective.

Since government does not work, and self-auditing is plain silly, an insurance-centered stucture looks like a good bet to me.

Note, however, that for this to work there has to be a body of tort law with real teeth. And we'd probably need a change in the law to stop CEO's from putting the yacht in the wife's name -- so they *know* they need the insurance.

Republicans know this instinctively -- which is why gutting the law, "tort reform," is so high on their agendas.

Posted by: David Lloyd-Jones on February 19, 2004 02:23 PM


Wasn't the SEC supposed to be an independent agency?

Posted by: rod on February 19, 2004 02:32 PM


"...but we have seen in the United States, perhaps the world's most advanced experimenter with regulation in the public interest,..."

??? I'd rank the US behind most of Western Europe in this regard.

"...that the regulated can and will colonise their regulators before regulation gets too effective."

Clearly the biggest risk with regulation. Even in Western Europe, where media and elections are less subject to corporate influence, "regulatory agency capture" is often a problem, particularly in France. But because the electoral and media systems are less susceptible to corporate influence, there are fewer outrages such as the underfunding of EPA and SEC enforcement. When outrages occur in Western Europe, they tend to get public attention.

Note: I specifically exclude the UK from Western Europe in the above analysis.

Posted by: Moniker on February 19, 2004 03:40 PM


As I remember, as an aggressive opponent of "excessive regulation", Pitt was regarded as the wrong man for his job. But here he looks like a good guy, compared to Bush.

One of my many grudges against the Democrats is their refusal / failure to make hay of the corporate governance scandals. This evidence looks like a smoking gun on whether Bush contributed to the problem. But so may Democrats were implicated themselves -- start with Joe Lieberman -- that they really couldn't do much.

Posted by: zizka / John Emerson on February 19, 2004 03:56 PM


This issue was never resolved. It was swept under a rug and might not stay there. We have already seen the NG blow back on Mr. Flight Suit. Will Harken and Halliburton blow back on the CEO administration? A lot can happen in 8 months.

Posted by: bakho on February 19, 2004 06:59 PM


It was really interesting to see Brad read between the lines in this post. I first came here looking for an economist's perspective, but I'd be just as interested in more posts from the perspective of someone who's been in government and knows a little about how politics is played. The memos are a window on that world, but having them decoded is even better.

Posted by: Noumenon on February 19, 2004 09:08 PM


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