WEBSTER GOT SUPPORT from the three Republican commissioners, all of whom have ties to the accounting industry, while the two Democrats, who are not associated with the industry, voted against the appointment. The partisan divide grew even wider this week after SEC chairman Harvey Pitt revealed that he had known Webster had, until recently, led the auditing committee of U.S. Technologies, which faces shareholder lawsuits accusing the company of fraud, but had not shared that information with SEC commissioners before the vote. Democrats are now calling for both Pitt and Webster to step down, as investigations are launched into Webster’s appointment. The Bush administration, meanwhile, remains supportive of both men. NEWSWEEK’s Jennifer Barrett spoke with Robert Dunn, CEO of Business for Social Responsibility, a global, nonpartisan, nonprofit organization that works with its member companies and others to promote more responsible business policies and practices, about the damage done to the SEC’s credibility and how–and whether–it can be restored.
NEWSWEEK: How do you think Pitt’s revelation has affected the SEC’s credibility–and that of the oversight board?
Robert Dunn: It’s very important that people have a high level of confidence in the oversight board. And the issues of Mr. Webster’s past involvement [at U.S. Technologies] and the question of full disclosure to the commissioners are unfortunate. It raises questions about the new board and its capacity to operate with complete integrity–and this, at a time when people are really wanting to feel more confident that actions are being taken that merit their trust. What strikes me as unfortunate, too, is if the commissioners acted without all the information they requested.
Congressional Democrats are calling on Harvey Pitt and William Webster to step down. Do you think they should?
I don’t think it’s appropriate for me to comment on whether they should resign or not. We don’t take a political position … But I think everyone who cares about the integrity of the marketplace has a stake in seeing an SEC that is vested with trust, that is seen as contributing to the system. There is an important role for the SEC to play that has been hobbled by inadequate resources and insufficient authority to take action when breaches occur. But anyone would be foolish to think the solution lies just with the SEC. The SEC has a role to play but so does everyone else with a stake in the process.
But how can the new board operate effectively under a man that headed the audit committee of a company accused of fraud?
This isn’t just about the board or the SEC or financial reporting or conflicts of interest or corporate governance but all of these things. Trust takes a long time to build and is easily shattered. Still, the restoration of trust does require that the people in charge act impeccably. Otherwise, it damages the process of restoring trust. The events of the past year have undermined investor confidence in the private sector and in all of the institutions that people have relied upon to ensure the integrity of investments, whether it’s regulatory agencies or professions or the exchanges. I think there is a widespread perception that people’s confidence has been misplaced.
Do you think the oversight commission can still be effective?
The mechanisms in place before the new commission was established proved inadequate, at least on a temporary basis, so I think the oversight board has an important role to play. There is clearly a need to persuade the public that the accounting profession is operating in a way that merits public trust. Identifying good people and providing them with the resources they need and promulgating rules that are fair and balanced and provide greater assurance of the audited financials that companies issue is one piece of the corrective action required to restore investor confidence.
What piece should the private sector play?
There is a broad view within the business community that they have a role to play in restoring trust, too, and can’t just sit back and assume that what the SEC does in and of itself will rectify the erosion of confidence. The business community must show it merits trust and must still have the mechanisms that monitor and penalize when mistakes are made. It will take hundreds of times the number of people and financial resources that the SEC has to restore investor confidence. It’s comparable to the situation with crime on the streets. Police act as deterrents, but keeping crime down also depends on everyone in society who is law-abiding. Within the business community, there might be rogue individuals or companies; but, for most part, the business community is a collaboration of law-abiding individuals. That doesn’t happen because of the SEC’s actions, but because of decisions made in companies every day as to whether they tell the truth and whether they act in ways they show respect for all stakeholders.
If that’s the case, why didn’t companies begin implementing these reforms earlier?
A sense of complacency developed over time. Systems were working and they weren’t scrutinized in a way that revealed deficiencies. People had been focused instead on the challenges and opportunities of the hyperinflated economic circumstances of the last several years. There was this sense that it was a unique moment to enhance profitability and to add value, and they got distracted from the fundamentals … Financial reporting had been viewed as routine and not requiring a lot of executives’ time and attention. People experimented with how far to push the edge, and a number of people fell over the edge in the process. That’s what happens when you push too hard.
Do you think that the newly beefed-up SEC, and the newly created oversight board, can keep that from happening again?
I think it’s helpful to have more investigators. Rather than finding ourselves in a circumstance in the future where so many companies are finding it necessary to restate earnings and adjust financial reports, we should create a mechanism that forces people to take these documents more seriously and ensure more accuracy. That will be very constructive. People rely so heavily on this financial information in making investment decisions that we have to take whatever prudent measures are necessary to restore their confidence or capital will take flight. That is about as bad as anything that can happen for the business community.
How much of the responsibility for restoring investors’ trust lies with Corporate America, and how much with the government agencies that are supposed to look out for investors?
There are times when government engagement is the most efficient mechanism to secure integrity. At the same time, I think it is foolish to expect the government to address the whole host of issues raised by corporate problems or ignore the power and influence that individuals and groups have in their capacity as investors, consumers, employees and citizens, in shaping the rules that govern who has a license to operate and who doesn’t.
How much progress do you think has been made by regulators and by the private sector in terms of restoring investor confidence?
People are engaged but the outcome is still uncertain. It’s not clear yet that there is the kind of determination to stay with the issues until the goals are accomplished. I think there is a fear that we won’t finish the job, and that will lead to another wave of problems sometime in the future that will make correction all the more difficult.
