Managing Expectations
Last June I reported that Jonathan Chait of the LA Times was less than enthusiastic about President Bush's appointment of US Representative Chris Cox to head the Security and Exchange Commission (SEC), the nation's corporate watchdog.
Bush's taste in SEC chairmen was best reflected by Harvey Pitt, his first appointee in 2001. Before his nomination, Pitt spent most of his career representing the industries that the SEC regulates. He began his SEC tenure by replacing career staffers with fellow industry representatives, declaring an amnesty against previous violators and promising, "We aren't going to play 'gotcha.' " Most notoriously, he called for "a kinder, gentler" SEC.
This suited Bush just fine until Enron broke the next year. At that point, having an obvious industry lap dog as SEC chairman proved to be too much of a liability. Bush had to replace Pitt with William Donaldson, an old-line Republican (which is to say, a Republican who occasionally disagreed with the business lobby). Donaldson, a longtime Bush family friend, had a reputation for integrity, but he was not expected to make waves.
Instead, he proved unexpectedly tough. Businesses howled, and now that everybody has completely forgotten about Enron, Bush feels free to force out Donaldson and replace him with the distinctly Pitt-like Cox.
Chait's obection to Cox's nomination highlights a major fault line in the two major parties' views on secutires regulation:
One of the reasons why I chose to write about this matter again relates to the manner in which Chris Cox's name has recently re-emerged: John Fund of the Wall Street Journal penned a column today arguing that Cox's name be submitted for the open seat on the Supreme Court that President Bush had hoped to fill with Harriet Miers. For some, that the WSJ wants to see a pro-business SEC Chairman on the High Court confirms all the worst about the Bush Administration and its links to the business community. And though I think there is very little chance that in today's highly-charged and partisan political environment Cox will get the nod, I don't think it unreasonable to expect that the nation's first MBA President, a Harvard MBA no less, would deem as an attractive candidate a Harvard Law graduate, deputy White House counsel during the Reagan years, and a skilled corporate litigator like Commissioner Cox.
Further Reading
SEC Doubles Up on Enforcers
SEC Seeks More Kaching From Beijing
Tags
SEC
chris cox
government regulation
Cox endeared himself to the business lobby not only through his general pro-business views but specifically with his long-standing crusade to let businesses disguise the cost of stock options. Stock options are a perfectly fine way for businesses to compensate their employees and give them an incentive to participate in the company's growth. The trouble is that corporations can treat them as a cost in their tax statements, without disclosing the cost in their financial statements. In other words, they make themselves look poor to the IRS and rich to their stockholders. Government regulators and reformers in Congress have tried to end this double standard — claiming support from such capitalist icons as Alan Greenspan and Warren Buffett — but corporate lobbyists have squelched them for years, with Cox as their chief water carrier.
How does it help the "free market" to let companies deceive their shareholders? It doesn't. Economists understand that markets are inefficient when one party has reason to believe that the other is withholding crucial information. (That's why many car buyers steer clear of the used car market.) The same problem applies to capital markets when investors can't be sure that management is leveling with them.The last line of the above exceprt is perhaps the most significant as it relates to what Professor Donald Langevoort of the Georgetown University Law Center has called an "expectation gap" in investor protection. The abstract of a paper of his from 2002 reads as follows:
One of the underlying questions in the aftermath of the Enron and comparable scandals is whether securities regulation failed, and if so, what kind of fix is appropriate. To answer that, we have to confront an apparent "expectations gap" in what the law can accomplish. Some investors (and politicians) seek greater confidence than is practicable, and the SEC has the political incentive to contribute to a mythology of "market integrity" - and then manage the fallout when corruption surfaces. This paper explores the SEC's political situation, and then moves on to discuss various reforms - including some in the recently enacted Sarbanes-Oxley Act - designed to improve investor protection. While some reforms do indeed improve securities regulation at the margin, an expectation gap remains.And it is the last line of Langevoort's abstract that is worthy of note: reforms will improve securities regulation but there will remain a gap between what is promised and what can be accomplished. There will always be managers within companies that are not going to level with investors and to suggest that any law can change this fact is to be more than disingenuous. Moreover, it overlooks an important fact about the management of expectations: giving investors a false sense of security about the SEC's ability prevent fraud will lead to greater disappointment and distrust in that body when corporate scandals happen- and they will always happen- than there would have been had realistic expectations be created in the first place.
One of the reasons why I chose to write about this matter again relates to the manner in which Chris Cox's name has recently re-emerged: John Fund of the Wall Street Journal penned a column today arguing that Cox's name be submitted for the open seat on the Supreme Court that President Bush had hoped to fill with Harriet Miers. For some, that the WSJ wants to see a pro-business SEC Chairman on the High Court confirms all the worst about the Bush Administration and its links to the business community. And though I think there is very little chance that in today's highly-charged and partisan political environment Cox will get the nod, I don't think it unreasonable to expect that the nation's first MBA President, a Harvard MBA no less, would deem as an attractive candidate a Harvard Law graduate, deputy White House counsel during the Reagan years, and a skilled corporate litigator like Commissioner Cox.
Further Reading
SEC Doubles Up on Enforcers
SEC Seeks More Kaching From Beijing
Tags
SEC
chris cox
government regulation