The War on CEOs
by Robert W. Tracinski
Just as the War on Terrorism dissipates into total inaction—the latest
word is that we will not invade Iraq—our leaders have launched a new war
to replace it: the War on CEOs.
In reaction to a few cases in which corporate CEOs allegedly violated
existing laws against fraud, the Senate has passed a comprehensive set of
new regulations designed to punish the leaders of all of the
nation's corporations. This is not a campaign against fraud, but a
campaign against businessmen—and it will have the same result as any other
crusade against a nation's producers.
Here is what I predict will happen if this War on CEOs is enacted by
Congress and signed by a president eager to appease the
corporation-bashers.
• The harsher the "reforms," the more the market will falter. Every
commentator is asking whether the new measures in Congress are "harsh
enough to restore investors' confidence." They have it backwards. It is
harsher regulation that now poses the greatest impediment to the economy.
An ominous precedent was set by the savings and loan fiasco presided
over by President Bush's father. That crisis also began with the
bankruptcy of a few corporations run by corrupt managers. Then, as now,
Congress whipped itself into a frenzy of resentment at businessmen in
general. They enacted a giant government apparatus to "bail out" the
savings and loans. This was done by finding every savings in loan that was
in financial trouble and forcing it to sell its assets into a declining
market. These unnecessary losses triggered a further wave of bankruptcies
that magnified the financial crisis and dragged it out for years.
This administration shows an uncanny knack for not learning from
history, so expect the same pattern to repeat itself. A vast new army of
SEC regulators, engorged with $300 million in new funds from Congress,
will engage in a witch hunt for any accounting irregularity at any
business, as judged by increasingly subjective standards. Each new
investigation will crash the stock of any company that falls under
suspicion, keeping the market in turmoil for years.
• Corporate financial statements will become less accurate, not more.
Accurate accounting requires personal judgment. Which expenses qualify as
long-term capital investments and which are normal operating expenses?
What is the long-term value of assets whose market price fluctuates from
day to day? What is a realistic projection of future revenues? No one will
want to make these judgments when a ten-year prison sentence awaits those
whose judgment contradicts that of the SEC.
In the future, the purpose of financial reports will not be to impart
information or to reflect the best judgment of corporate management. Their
purpose will be to shield corporate officers from liability by imparting
less information and making no judgment calls.
• Corporations will get less capable CEOs, not better CEOs. Why not
retire early, at a safe level of upper-middle management, rather than risk
spending the next decade of your life in court in or in prison because
someone at the SEC didn't agree with your accountants? Until the current
frenzy subsides—and well after that—expect to see a brain drain from upper
management, with fewer talented people willing to take a corporation's top
spot.
• CEO salaries will rise. The same people pushing the current "reforms"
complain bitterly about corporate leaders' high salaries. (In fact, the
recent scandals merely reaffirm how much an honest, competent CEO is
worth.) The new regulations require that a CEO personally certify the
accuracy of all of the company's financial reports—reports so complex that
it is impossible for one man to verify every fact they contain. In effect,
CEOs will now bear criminal responsibility for the fraud committed by any
employee in the accounting department. Expect them to demand higher pay in
return for this enormous added risk.
• More corporations will move overseas. The corporation-bashers also
complain that companies are moving their headquarters overseas to avoid US
taxes, regulations, and lawsuits. But by intensifying the load of
regulations and the cost and frequency of lawsuits, and by threatening
draconian criminal penalties, Congress is merely increasing the incentive
to move to a country that is not making war on corporations.
The basic principle behind all of these predictions is that you cannot
strengthen America's corporations by making war on the people who run
them. Let us have no illusions about what will happen when we subject the
nation's honest producers to a regulatory reign of terror.
See IRG research reports
