Let the market punish corporate offenders

August 8, 2002

Free Market Foundation

Politicians are racing around Washington giving the appearance of solving the corporate accounting scandal. But the capital markets are perfectly capable of disciplining their own.

Around the world, markets are crushing the shares and bonds of companies whose numbers give rise to suspicion.

Senior executives are dropping like flies as boards revolt over the collapse of their securities with Tyco’s CEO long gone, Bristol-Myers’s leader on thin ice and Merck being forced to cancel a $5 billion subsidiary financing.

While phoney managerial and financial behaviour is often tolerated by shareholders and creditors longer than logic would dictate, the pendulum eventually swings and investors reject unacceptable behaviour.

The market is even capable of discouraging the use of perfectly legal accounting contortions to make corporate books look better than they really are note the $1.41 trillion in value that has been expunged from U.S. stocks in the past few weeks alone.

Painful as it may be, the capital markets are better at disciplining corporate America than the U.S. legal and regulatory system notwithstanding the fact that certain new laws might make sense, critics suggest.

These might include punishing corporate accounting fraud through requirements that CEOs and CFOs attest to the accuracy of financial statements, requiring a majority of truly outside directors on any public board, requiring audit committees to consist only of outside directors and requiring the expensing of stock options.

Source: Roger C. Altman (Evercore Partners), The Market Punishes Its Own, Wall Street Journal, July 23, 2002.

For WSJ text http://online.wsj.com/article/0,,SB1027377816917225160,00.html
For more on Corporate Management http://www.ncpa.org/iss/eco/

FMF Policy Bulletin\ 30 July 2002