Robert Litan, AEI-Brookings Joint Center:
Mr. Litan began the discussion by summarizing his new Joint Center book, “Following the Money: The Enron Failure and the State of Corporate Disclosure.” He outlined four points regarding the recent corporate scandals. First, with the exception of the flawed non-expensing of stock options, U.S. GAAP standards were not responsible for the fraudulent financial information. Rather, there was a massive failure in the enforcement of those standards. Second, the Federal Accounting Standards Board (FASB) is subject to excessive political forces, exemplified by the expensing of stock options. Therefore, market-driven standards are preferable to ones set by political institutions. Mr. Litan’s third point addressed the current reforms. Although he agreed with some reforms like the independence requirements for boards of directors, he was skeptical of others, such as criminal penalties, auditor rotation, preventing auditors from entering non-audit businesses, and CEO certification of financial statements. Finally, he estimated the total impact of these scandals on the United States economy at forty billion dollars a year in terms of lost Gross Domestic Product.  

Mr. Litan closed with a few observations on the long-run challenges that face disclosure. First, he recommended that the SEC begin experimenting with non-financial indicators that would help investors appreciate and understand the sources of intangible value. Second, he predicted that the Internet would enable companies to more frequently disclose financial information for the public to analyze. More frequent reporting would reduce the pressure on companies to meet quarterly targets. Finally, he proposed competition in standards between the U.S. system and the international system so that companies could choose the standard under which they want to report.

Paul Volcker, Former Chairman, Federal Reserve Board:
Mr. Volcker argued that the recent corporate scandals were reflections of a pervasive, systemic problem with corporate governance. Although he shared some of Mr. Litan’s views on reform, he differed on several others. He agreed that political concerns undermine the proper setting of accounting standards, that companies should be required to report intangible assets and off-balance sheet items, and that stock options should be expensed.

He disagreed, however, with Mr. Litan’s argument that auditors should be allowed to enter non-auditing businesses. He maintained that conflicts of interest preclude the disciplined auditing of a firm. He mentioned, for example, the potential conflicts that arise when a firm both audits a company’s taxes and advises that company on how to reduce its taxes. Mr. Volcker concluded by praising the Sarbanes-Oxley reforms and stating that efforts at self-regulation and self-oversight have failed.

Laura Unger, Former Acting Chairman, Securities and Exchange Commission:
Ms. Unger also believes that the failure in corporate governance is systemic and not a matter of a few “bad apples”. She addressed the issue of whether more regulation or market-oriented solutions are required to resolve these pervasive failures in corporate governance. She criticized Sarbanes-Oxley as burdensome for small business and capital formation.

Rather than rely on specific regulations, Ms. Unger proposed improving corporate governance through enforcing moral principles, accounting principles, and disclosure principles. According to Ms. Unger, we now have the opportunity to create a system of disclosure that does not reflect a specific rule, but a new culture guided by these principles. An example would be public companies providing more information, disclosure, and materials—disclosing everything that a reasonable investor would want to know. She thinks that applying these principles globally presents a significant but worthwhile challenge. She did, however, raise several questions about applying principles of corporate governance globally, including, “Will there be sufficient enforcement across the board, country by country, given the different cultures of enforcement? …Without even-handed enforcement of these principles will we ever really achieve the global market that investors feel safe in?”

Robert Glauber, President, National Association of Securities Dealers:
Mr. Glauber addressed the issue of competition versus convergence in accounting standards. He conceded that competition in accounting standards has some virtues, such as promoting regulatory innovations, but expressed significant reservations.

Specifically, he argued that competition would inhibit capital flows and cited two reasons. First, regulators and exchanges are not interested in listing stocks of issuers that do not use or even reconcile their financial reports to the accounting standards prevailing in their own local markets. Second, most investors will not invest in international securities that are not listed on a local market. Mr. Glauber concluded by emphasizing that convergence is more useful than competition for improving market performance, market transparency, market integrity, and investor protection.

Question and Answer Session:
The questions following the panel discussion reflected a variety of concerns about corporate governance reform. Two of the questions addressed the treatment of stock options. Mr. Volcker responded by saying, “I do think that it would improve stock options if you had some kind of retention period of some length and it would help with the most egregious abuses of them.” None of the panelists thought that stock options should be eliminated altogether. Responding to a question on auditor rotation and the problem of having only four auditing firms, Mr. Litan proposed a new firm composed of the accounting partners of major firms who had “clean” reputations. Another question concerned the responsibility of institutional investors to forewarn other shareholders of a company’s impending financial troubles. Ms. Unger and Mr. Glauber agreed that although institutional investors should play a stronger role in corporate government issues, such as the selection of independent directors, they are constrained by market forces. Finally, on the question of company board independence from management, Ms. Unger said, “I think the single most important provision that I can see is the ability or requirement that the independent directors meet independently of the Chairman and CEO.” Mr. Litan, however, warned of the unintended consequences of board independence when he said, “you could get a number of companies that will have these ‘independent’ people, but they won’t know anything about the company, and the companies may be performing worse than they would have otherwise.”