[Congressional Record Volume 148, Number 92 (Wednesday, July 10, 2002)]
[House]
[Pages H4472-H4473]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
PUNISH UNETHICAL CEOS
The SPEAKER pro tempore. Under a previous order of the House, the
gentleman from Iowa (Mr. Ganske) is recognized for 5 minutes.
Mr. GANSKE. Mr. Speaker, I am outraged by the corporate scandals that
are causing so much pain to Americans. I have listened to fellow Iowans
who worked for the natural gas company that merged into Enron tell me
with tears in their eyes that most of their pensions were wiped out in
the Enron collapse.
Workers are taking it on the chin. WorldCom is laying off more than
17,000 people. Many more at other companies are legitimately worried.
Besides the workers and pensioners directly affected, almost 50 percent
of Americans now invest in the stock market and some are looking at
their lifetime investments become pennies in a matter of days. The
stories of greedy executives who cut corners to make themselves a
profit at the expense of everyone else are becoming a daily occurrence.
This has become such a problem that the loss of faith of investors in
the capital markets threatens our Nation's security.
So how did the capitalist threaten capitalism? For the CEO's victory
is measured in profits to boost stock prices to enable them to cash in
options. It is clear that some CEOs overaggressively pursued paper
profits, even if it meant cheating the investors who provided the
capital. These CEOs used various strategies to cheat others. Let me
simplify their executive self-dealing.
I am indebted to columnist Paul Krugman of the New York Times for
this example. Imagine the manager of an ice cream parlor who wants to
get rich the easy way. First there is the Enron strategy. The ice cream
manager assigns contracts to provide customers with an ice cream cone a
day for the next 30 years. He deliberately underestimates the cost of
providing each cone. This ice cream CEO then books all the projected
profits on those future ice cream sales as part of this year's bottom
line. Suddenly he appears to have a highly profitable business and
sells shares in his store at inflated prices.
Then there is the Dynegy strategy. Ice cream sales are profitable.
But the ice cream manager convinces investors that they will be
profitable in the future. He enters into a quiet agreement with another
ice cream parlor down the street, each to buy hundreds of ice cream
cones from the other every day or, rather, pretend to buy, no need to
go to the trouble of actually moving all those cones back and forth.
The result is that this ice cream manager now appears to be a big
player in the ice cream cone business world and sells shares at
inflated prices.
There is the Adelphia strategy. The ice cream scam artist signs
contracts with customers and gets investors to focus on the volume of
contracts rather than their profitability. This time he does not engage
in imaginary trades. He simply invents lots of imaginary customers.
With his subscriber base growing so rapidly, analysts give his ice
cream business high marks and he sells his shares at inflated prices.
Finally there is the WorldCom strategy. Here the greedy ice cream
manager does not create imaginable sales. He simply makes real costs
disappear, pretending the operating expenses like the cost of cream,
sugar and flavorings are part of the price of the new refrigerator. So
his unprofitable business looks like it is highly profitable and is
borrowing money only to purchase new equipment. Once again, the ice
cream executive sells his stock options at inflated prices.
Mr. Speaker, back in the Great Depression Congress passed the
Securities and Exchange Act of 1933 and 1934. We created the SEC to
enforce those laws. The results were protections like boards of
directors, independent accounting firms, government regulators. But the
system still relied on trusting the competence of the directors, the
integrity of the CEOs, the accuracy of the accountants and the
abilities of regulators.
It is clear that today the foundation of personal integrity has been
eroded by the lure of huge personal profits.
I have been concerned about the need to separate an accountant's
consulting function from his auditing work for several years. I
supported former SEC chairman Arthur Levitt on his proposal to do that
2 years ago.
So, you ask, what is Congress doing to fix this serious problem?
Well, we have held a series of hearings in my committee. Most of time
the CEOs take the Fifth. But the House of Representatives has now
passed two important pieces of legislation. First, we passed the
Pension Security Act, and I will amend this statement with the details
of that. Then we passed in the House in a bipartisan fashion the
Corporate and Auditing Accountability,
[[Page H4473]]
Responsibility and Transparency Act. I will also add some material to
my statement on the details of that legislation.
These bills, Mr. Speaker, wait to be acted on by the Senate.
President Bush has also outlined a plan and many of his suggestions
we need to look at. Those that cannot be implemented by SEC regulation
we should act on.
I think that the rule of law requires that those CEOs who have
committed malfeasance, who are no better than street thugs, should
spend time in jail. Now that would send a real message. Those
responsible for fraudulent strategies like the hypothetical ice cream
manager I have talked about should end up in the slammer.
I am outraged by the corporate scandals that are causing so much pain
to Americans. I've listened to fellow Iowans, who worked for the
natural gas company that merged into Enron, tell me with tears in their
eyes that most of their pensions were wiped out in the Enron collapse.
Workers are taking it on the chin. WorldCom is laying off more than
17,000 people. Many more at other companies are legitimately worried.
Besides the workers and pensioners directly affected, almost 50% of
Americans now invest in the stock market and some are looking at their
lifetime investments become pennies in a matter of days. The stories of
greedy executives who cut corners to make themselves a profit at the
expense of everyone else are becoming a daily occurrence. This has
become such a problem that the loss of faith of investors in the
capital markets threatens our nation's security.
How did the capitalists threaten capitalism? For the CEOs, victory
was measured in ``profits'' to boost stock prices to enable them to
cash in options. It is clear that some CEOs over-aggressively pursued
paper ``profits,'' even if it meant cheating the investors who provided
the capital. These CEOs used various strategies to cheat others. Let me
simplify their executive self-dealing. Imagine the manager of an ice
cream parlor (example courtesy of Paul Krugman, New York Times) who
wants to get rich the easy way:
First there's the Enron strategy: The ice cream manager signs
contracts to provide customers with an ice cream cone a day for the
next thirty years. He deliberately underestimates the cost of providing
each cone. This ice cream CEO then books all the projected profits on
those future ice cream sales as part of this year's bottom line.
Suddenly he appears to have a highly profitable business, and sells
shares in his store at inflated prices.
Then there's the Dynegy strategy. Ice cream sales aren't profitable,
but the ice cream manager convinces investors that they will be
profitable in the future. He enters into a quiet agreement with another
ice cream parlor down the street: each to buy hundreds of cones from
the other every day. Or rather, pretends to buy--no need to go to the
trouble of actually moving all those cones back and forth. The result
is that this ice cream manager now appears to be a big player in the
ice cream cone business world and sell shares at inflated prices.
And there's the Adelphia strategy. The ice cream scam artist signs
contracts with customers, and get investors to focus on the volume of
contracts rather than their profitability. This time he doesn't engage
in imaginary trades, he simply invests lots of imaginary customers.
With his subscriber base growing so rapidly, analysts give his ice
cream business high marks, and he sells shares at inflated prices.
Finally, there's the WorldCom strategy. Here the greedy ice cream
manager doesn't create imaginary sales. He simply makes real costs
disappear by pretending that operating expenses, like the cost of
cream, sugar, and flavorings, are part of the price of the new
refrigerator! So his unprofitable business looks like it is highly
profitable and is borrowing money only to purchase new equipment. Once
again, the ice cream executive sells his stock options at inflated
prices.
Back in the Great Depression, Congress passed the Securities Exchange
Act of 1933 and 1934 and created the SEC to enforce those laws. The
results were protections like boards of directors, independent
accounting firms to ensure that the numbers were correct and government
regulators to supervise the rules. But the system still relied on
trusting the competence of the directors, the integrity of the CEOs,
the accuracy of the accountants, and the abilities of regulators.
It is clear that today that foundation of personal integrity has been
eroded by the lure of huge personal profits.
Most corporations are honest, but the bad apples have severely
damaged the reliability of the reported data upon which people make
investment decisions. There is no question that the malfeasance of
Arthur Anderson, the schemes of CEOs, and the ineptitude of the boards
of insular directors of huge companies like Enron, Global Crossing,
Xerox, Dynegy, and our second largest long distance carrier WorldCom,
has spooked investors.
I have been concerned about the need to separate an accountant's
consulting function from his auditing work for several years and
supported former SEC Chairman Arthur Levitt on his proposal to do that
two years ago.
What you ask, is Congress doing to help fix this serious problem?
Well, my Committee has held numerous hearings on these scandals, even
taking testimony under oath from these CEOs (most have taken the
Fifth).
The House of Representatives has now passed two important pieces of
legislation with bipartisan votes to address the security of retiree's
pensions and to help secure the financial future of America's investors
and employees.
First we passed the Pension Security Act (H.R. 3762). This bill:
Bars company insiders from selling the own stock during ``blackout''
periods when workers can't make changes to their 401(k)s.
Give workers new freedoms to sell their company stock within three
years of receiving it in their 401(k) plan.
Fixed outdated federal rules that discourage employers from giving
workers access to professional investment advice.
Empowers workers to hold company insiders accountable for abuses.
Requires that workers be notified 30 days before the start of any
``blackout'' period affecting their pensions.
Then we passed in the House, in a bipartisan manner, The Corporate
and Auditing Accountability, Responsibility and Transparency Act (H.R.
3763). This legislation works to end abuses like those made by Enron
and Global Crossing. It strengthens corporate responsibility, reforms
accounting oversight, and increases corporate disclosure. It will:
Restore confidence in accounting standards.
Increase corporate disclosure and responsibility.
Protect 401(k) plan participants.
Reduce analyst conflicts of interest.
These bills wait to be acted on by the Senate.
President Bush has also outlined a plan that Congress should act on
such as requiring corporate CEO's to personally vouch for the veracity
of their companies' financial disclosures, prohibiting CEO profit from
false financial statements, setting up an independent accounting
regulatory board and requiring accounting best practices, not simply
minimum standards. Where these proposals can't be implemented by SEC
regulation, Congress should act to do so.
Capitalism will survive this latest onslaught. It is clear, however,
that government has a hand in making sure that the average investor
gets information that isn't ``cooked.'' Honesty is, ultimately, the
best policy.
I also think that the rule of law requires that those CEOs who have
committed malfeasance, who are no better than street thugs, should
spend time in jail. Now that would send a real message to CEOs, CFOs,
boards, and accountants in the future that these types of schemes will
not be tolerated. Those responsible for fraudulent strategies, like the
ice cream manager I hypothesized earlier in this letter, should end up
in the slammer.
____________________