SEC Chief Can't Win for Losing

It must be tough to be the head of the SEC, when you know that you'll always be under a microscope - and gun. Business moaned and complained about Sarbanes-Oxley, how regulation would be the death of business on this continent. (Notice how profits are doing pretty well, thank you very much?) Now Christopher Cox is getting pummelled over not having a higher profile during the Bear Stearns financial crisis. Of course, it was the Fed that had to pull the bank out, and Congress that has to deal with how to better regulate the industry (and maybe, who knows?, go back to some of those old deposit requirements that seemed to work so well). I think the problem is that people want someone to blame - anyone. Businesspeople are just regular folk, when you get past the bespoke suits and expense accounts, and they get scared when the entire framework of their world quakes. But I'm not sure there is a happy or short answer. Regulation may work for a while, but will eventually fail as people forget why it was put there in the first place, or someone locates gaps that let them do as they wish. And when things go wrong, we can only blame ourselves. Perhaps a bit less yearning for something from nothing might go a much longer way to sanity.

Roiling Financial Regulation

Today's the day that Treasury Secretary Paulson publicly rolls out his plans, as I understand it, to turn the Federal Reserve into a super regulator of all things business and eliminate a number of independent agencies, including the Securities and Exchange Commission. Although I'm all for trying to have one set of regulations for a given industry - for example, have mortgage lenders responsible to one agency - I think that has natural limitations. At issue is two aspects of firms: how they interact with the global financial infrastructure, and how they interact with shareholders.

The two topics are really separate. If you are focused, by your nature, on the greatest efficiency for doing business, you aren't necessarily looking at the need to keep company shareholders informed and making corporate decisions as transparent to the investors as possible. Putting everything under one roof could be a conflict of interests, and one side or the other might be slighted. Even if you wanted to argue for the combination of the two areas, would doing it under the Fed really be that wise? The agency is semi-autonomous and doesn't directly answer to the government, even if it must keep everyone informed of what it does. I'm not sure that I'd want more extensive power over markets and financial activities regulated by such a body.

JP Morgan to Sweeten Bear Honeypot

It sounds as though JP Morgan may have to up its offer for Bear to $10 a share, and the entire situation is creating an interesting dilemma. ON one hand, the Fed is looking to ensure that commerce continues. It's not that Bear Stearns itself is so important to the economy so much as its position as a middleman in so many transactions. The problem is that if Bear had gone into bankruptcy, then the court would have had no choice under the law but to freeze all transactions in which it took part, no matter what it was actually doing. That could be a big enough hiccough to derail enough commerce that suddenly everything would come tumbling down.

So the Fed wanted to keep this from happening, and I can understand that. But Bear Stearns is a publicly-traded company, and the public that trades the company was pretty upset about the price being only $2 a share when it had gone for as much as $30 on Friday - and that was a loss of two-thirds of its value. According to a New York Times story, shareholders were ready to head to court.

On one hand, I don't have a lot of sympathy for the shareholders. They wanted the high return and were happy to overlook the questionable nature of the business that the bank was doing. Hey, it's capitalism, and there's risk. Why is it that so often so many people who have money to invest suddenly want welfare for the rich? But the intriguing issue is which governmental (quasi or not) agency has precedence when it comes to the conflict of interests? Can the Fed encourage a fire sale, or does the SEC have to come in on the side of investors, who want as much money per share as they can get?

The new offer must be approved by the Fed, which had initially balked at the new price.

If the Fed balks, does the deal come apart? This seems like a deal that is so important to the economy that the Fed is effectively powerless to say no, which means it has little leverage in a negotiation.

A new deal could raise even more questions about the Fed’s involvement in the negotiations. As part of the original deal, the Fed guaranteed to take on $30 billion of Bear’s most toxic assets. The central bank had also directed JPMorgan to pay no more than $2 a share for Bear to assure that it would not appear that the Bear shareholders were being rescued, people involved in the negotiations said Sunday night.

Might not the SEC say, "Sorry, folks, but the directors can't legally agree to such a deal?" I don't know that different branches of business regulation have ever clashed in such a way.

Do Businesses Court Chicken Little?

I noticed on NPR's Morning Edition a story about a mandate in San Francisco to have companies provide paid sick days to employees. One thing that struck me is that one employer after another mentioned how people took far less sick time than they had imagined, and how the cost was far less than what they feared it might be. Some admitted that they had overreacted.

This sounded like the type of behavior the business community accuses environmentalists, shareholder activists, and others of demonstrating. The truth is that hysteria, bolstered by a willingness to stretch facts to support an argument, is all too human a trait. When people give in to it, they actually only support their cause, at best, by inflaming their existing supporters. But through continued exposure to the technique, the people and entities only create fatigue. At worst, they lose the true believers and antagonize their opponents.

Perhaps businesspeople would be better off by not assuming that every civic requirement was going to bury them in rubble, and instead work to admit any real need and then negotiate to find a way to implement changes. For example, when faced with a public that wants to mandate paid sick time - and, I think, with some justifiable desire - then why not work on a trial period. Six months should show beginnings of trends and allow the community and industry to assess the impact of a program and then make decisions based on fact, not fear.

Everyone Talks About Climate Change, No One Does Anything

As the old joke goes, everyone talks about the weather, but no one does anything about it. The same appears to be true about corporations. A new study from consultancy Accenture "surveyed more than 500 business leaders from China, Germany, India, Japan, the United Kingdom and the United States" about climate change. Of those, 45 percent thought that change was "current a major business issue" for their companies. That number jumped to 59 percent when given up to five years for climate change to have an impact on their businesses. However, climate change isn't quite so high on strategic priorities:

Only 5 percent of survey respondents named climate change as their top strategic priority. In no region of the world did that number rise above 8 percent. Just 11 percent of businesses stated that climate change figures as their second or third strategic priority.

Some of the additional findings are interesting. Although two-thirds of the respondents felt a responsibility to manage the impact of climate change, only 42 percent felt "well positioned" to do so. Maybe that has to do with the lack of nuanced understanding of the topic, or it could be the result of concern over shareholder displeasure. And then there are all the other things that executives have to do:

Competing strategic priorities mean that climate change may receive less attention than other business imperatives. Climate change ranked as only the eighth strategic priority for businesses, named by only 16 percent of respondents—lagging behind sales growth (47 percent), cost reduction (46 percent), developing new products and services (45 percent), the war for talent (39 percent), growth in emerging markets (29 percent), innovation (28 percent) and technology (18 percent).

And then there is the triple threat of paying for new technology, trying to get employees and management to act differently, and managing the response to new regulations. In short, companies are highly sympathetic to the problems, but for various reasons cannot or will not make the issue a strategic priority. That suggests calls to let the private sector deal with climate change are effectively the same as suggesting that we all stick our heads in the sand.

The Real Problem of Compliance

I was recently speaking at a meeting with some fairly large public companies. The topic was a relatively new SEC requirement: plain English explanations of executive compensation. After I spoke, there was a lull and it seemed that no one had any questions. And then, just as the organizers were about to move ahead onto something else, one question came, then another, and another, and another.

Actually, I'm not sure that question is the right word. The tenor was more of a statement ... really, a complaint about the prospect of having to spend even more money for compliance. It wasn't the plain English disclosures so much as all the recent waves of compliance issues. The displeasure really came in several parts: the seeming arbitrariness of many of the regulations, the sense that business is starting to exist for the sake of regulation and not the other way around, the attempt of the SEC to push its requirements into other countries, and the cost of it all.

I could understand the displeasure - I've heard much of this from upper level management before - but this spilled forth in a rush of bitter anger that was palpable. Someone did eventually say, "Let's be fair; he's not with the SEC," which did get a laugh, but it was like putting a spark to gunpowder.

What really surprised me, although in retrospect it shouldn't have, is that so many businesspeople from such a range of companies were acting completely emotionally. Their focus was on themselves, understandably, but in a way that did not allow any improvement of the condition. For example, they were literally saying, "The regulations are killing us!" I asked, "Were your revenues higher this year than last? Did you make higher profits this year than last?" The answers were yes and yes. So I replied, "Then it's not killing you." Oh, no, they said, the compliance issues are killing us.

Again, hearing this isn't new, but I found that as I applied some logic to the situation, they wouldn't change their focus. They wanted to remain in pain, which is a pretty common, if perverse, reaction. But complaining only about how something is unfair is useless. Either it is out of your control, in which case you can't do anything about it and should focus on what you can do to minimize the impact, or it is in your control, in which case you should stop complaining because you're doing it yourself.

But many executives apparently are doing neither. They continue to complain and don't make the effort to find a better way to deal with things. For example, I pointed out that Sarbanes-Oxley business controls documentation gets you maybe 90 percent of the way to real business process reengineering, where you can eliminate a lot of waste and work in a more rational fashion. Their reaction? "It sounds good, but I'd like to see you make it happen here." Yet I can imagine the reaction of any of these people if a subordinate took the complaining approach when being told that there was only X amount of time for a given project.

If compliance is that much of a burden, use the courts and lobbying to see if you can get changes. But in the meanwhile, the real problem, as usual, is ourselves. Instead of feeling crushed, find how you can make the weight lighter at least, or see if you can make multiple times more profit from the expense, by actually using the information you get to improve business.

US Agencies Rethinking Financial Reporting

According to the Financial Times (sorry, no free link), both the Securities and Exchange Commission and the Treasury Department are planning studies of a complete financial oversight overhaul:

The rules-based regulatory structure, built up since the 1930s, has been criticised by representatives of the financial services executives, who have called for a more flexible regulatory philosophy akin to one in the UK.

For those that done realize, the US and Europe have taken different directions toward financial controls. In our own land of individualists and rule-breakers, the approach has been an ironic reliance on rules and checklists. If you were able to mark off all the boxes, you'd be safe. The difficulty is that you have to go through all the checklists, even if they didn't really apply to your circumstances, which meant increased compliance costs.

Europe has employed a more principle-driven approach of stating what needs to happen and allowing corporations to find their own ways. It's become popular to invoke this model, particularly among many who think that it will mean an end to "needless" regulation. Personally, I think that many hope a new approach would largely free their companies from regulation, period.

While both models have their strengths and weakness, I'm not sure that the European approach will deliver American companies what they think they want. After all, it's generally easier to satisfy the letter of the law than its spirit. But if you must satisfy principles rather than checklists, aren't you essentially looking at the spirit instead of the letter? Directors and managers won't necessarily be able to say "We followed the checklist" when investors claim a violation of the principles, or spirit. I've found in life that almost every time something seems to be the solution to a problem, it almost inevitably makes things worse. Let's hope that American companies don't rue getting what they asked for.