After the Fall

The experts weigh in on how to prevent future Enrons.

Griep: With respect to the conflicts, we are paid by the issuers for ratings. They’re a dominant source of revenue. The market provides strong discipline. The ratings and the rationale for the ratings are made public; they are under the scrutiny of all our participants. The business is clearly dependent on reputation and the quality of the ratings themselves.

When we move into areas that present potential conflicts, there are clear, established processes and procedures to protect against them, and the track record is extremely strong with respect to conflict avoidance or any evidence of conflict in the ratings themselves.

I know that the ratings industry has fended off questions about political pressures in terms of downgrades at Enron. Are political pressures a problem for Standard & Poor’s?

Griep: There is no political pressure. All issuers have a strong interest in what a rating is, and they’re lobbying with respect to the outcome of our decisions. But other market participants do not get actively involved in trying to influence that process.

We think the reputation of rating agencies is clearly based on their independence, and so we think maintaining that independence is a fundamental part of the value that rating agencies provide. With respect to maintaining our NRSRO [nationally recognized statistical rating organization] status, we have said that while we acknowledge the need for some oversight in working with the SEC, further regulation would be unwarranted, and could jeopardize that independence.

Peter, what are some of the things that shareholders will be asking for in weeks to come?

Clapman: I can talk about what TIAA-CREF is doing. We’ve had two continuing shareholder issues: board independence and “dead hand” poison pills, although that practice is pretty much going out because, I think, of our shareholder proposals.

This year we have two new ones. One is a proposal that companies should put stock-option plans to a shareholder vote, even if they are broad-based. The second initiative is to look at companies that have accounting firms of long duration, where there hasn’t been a rotation policy for a long time, and where there is a disproportionate degree of nonaudit fees compared with audit fees.

We’re asking for reports from the company as to their analysis of the independence of the accounting function. It’s a rather broad proposal, because we weren’t comfortable getting that precise in that area; and maybe companies will decide, when they speak to us about it, that they’ll just do the report rather than have the issue go to a shareholder proposal.

Final question: 50 years from now, will the Enron hearings have the same kind of significance as the Pecora hearings that followed the crash of 1929? That was a sea change, resulting in the creation of the SEC.

Hill: I’d say the only way the Enron hearings would have the same [impact] is if we did a lot of stupid things. But I don’t think we have to do that much. There were a lot of things that needed to be done in the 1930s, and we did a lot of them. But this time, we’re talking for the most part about tweaking the system, not putting in a whole new system.

What is the worst thing Congress could do? Federalize standard-setting?

Hill: Yes.

Unger: I agree with Chuck, in terms of sea change. I think we arrived at the correct regulatory scheme back in the ’30s. The objectives and foundation of that regulatory scheme still make sense. The question is, have the regulators and the industry kept pace with the increasing sophistication of Corporate America?

So I think it’s a ripple, but not a sea change.

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