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Industry Wants Tougher Tactics

WASHINGTON — It should be about punishment.<br><br>That’s what retailers, analysts, manufacturing executives and other observers think President Bush should emphasize when he brings his bully pulpit to Wall Street at 11:30 this morning,...

WASHINGTON — It should be about punishment.

That’s what retailers, analysts, manufacturing executives and other observers think President Bush should emphasize when he brings his bully pulpit to Wall Street at 11:30 this morning, angling to restore investor and consumer confidence in the wake of the widening corporate accounting scandals.

In a speech before the Association for a Better New York, Bush is scheduled to lay out his plan to keep corporations honest. His formula is expected to call for stiffer penalties for executives who cook the books and to require corporate chieftains to certify that independent audits are accurate in order to keep blame from shifting.

Bush’s pitch will become part of a chorus of calls for legislation and regulatory reforms at the Securities and Exchange Commission. However, this is the first time the President has selected a forum to confront the corporate scandals.

Previewing his speech at a news conference Monday, Bush stressed his intent to go after corporate bad actors. “I’m very worried about a country that could conceivably lose confidence in the free enterprise system,” Bush said. “Tomorrow I will call for a stronger SEC, more authority, more budget….The important thing is to restore confidence to the economy.”

The President also deflected renewed attention being paid his tardy reporting to the SEC in 1990 of stock in Harken Energy Corp., where he served as a director. The SEC later asked Harken to revise downward its earnings statement. Bush was investigated by the SEC but no evidence of insider trading or other wrongdoing was reported by the agency.

“People are going to attack me based on Harken…that’s nothing new…this is recycled stuff,” said Bush, who also stood by SEC Chairman Harvey Pitt in the face of Capitol Hill calls for his resignation.

For months, starting with the Enron debacle, Congress has been readying a menu of reforms, but there’s still a way to go to a final prescription. The House already has passed one bill, and the Senate Monday took up a competing version.

What politicians seem to be in agreement on is that the accounting scandal is taking a toll on consumers whose pensions and 401K plans are tied to the stock market and corporate performance.

This story first appeared in the July 9, 2002 issue of WWD.  Subscribe Today.

It’s not as if fashion and retailing have been scandal-free: Misstatements of profits and revenues have plagued a number of firms, including Leslie Fay, Sirena and Kmart, and stock manipulation has hit companies like Steve Madden Ltd.

“The damage to our economy is incalculable,” said Rep. Maxine Waters (D., Calif.) Monday at a Financial Services Committee hearing on WorldCom, whose $3.8 billion accounting error she said could cost state of California pensions $580 million.

“Trust in the system is at stake,” said committee member Jim Leach (R., Iowa), calling for more money for the SEC to vigorously pursue white-collar crime.

A growing number of lawmakers are calling for SEC chairman Harvey Pitt’s resignation, including Senate Majority Leader Tom Daschle (D., S.D.) and Sen.

John McCain (R., Ariz.), who on Thursday is scheduled to give a “major policy speech on corporate governance reform.”

Here’s what a cross section of executives from the worlds of fashion and finance said about what they would like the President to address in his speech:

Peter J. Solomon, investment banker, Peter J. Solomon Co.: “In most places, when you do something wrong morally, there is a penalty. In corporate life, there doesn’t seem to be a penalty. If I were President Bush, I would focus not on the process, because the process has a lot of ebbs and flows, but on the issue of physically trying to reestablish standards. Also important is what is the appropriate punishment or penalty for the lack of adherence to those standards.”

Donald Trump: “He’s going to crack down and crack down hard. It’s just inconceivable what’s going on, with WorldCom and all the other scandals. And did you see that story today about [drug giant] Merck? With everything that’s going on, President Bush is going to try to diligently bring order back to the markets, and it’s really needed, particularly when you read on a constant basis about the wonderful world of accounting. It’s very unfair to investors.”

Robert Mettler, ceo, Macy’s West: “He’s in a difficult spot. I think he has to say things that are appropriate, and that’s easier said than done. I think we need to feel comfortable that the country is moving ahead and the idea that the last eight years of growth was not a mirage. There is, certainly, lots to feel good about in the U.S. economy. Although we may feel badly about where we are at the moment, we’re still better off than most of the world’s economies. There is opportunity. We’ve got to root out those people who have abused their shareholders and their employees.”

Art Jones, manager of public policy, Kmart Corp.: “We applaud President Bush’s leadership on the issue of corporate governance. He’s obviously been in the forefront on the issue before, and we look forward to hearing what he says. But we are monitoring what guidelines the SEC and the New York Stock Exchange are giving corporations, as well as what the administration is saying. Remember, we are conducting an internal review. You have to look at all of this from a few different fronts. I believe corporations are doing that and listening.”

Bud Konheim, ceo, Nicole Miller: “What’s he going to say, ‘Be honest’? If people have larceny in their heart and they’re unethical, then a speech isn’t going to help. The President has to say that if the companies listed on the New York Stock Exchange aren’t trustworthy on their own, then the government will have to intervene. The threat of government intervention is the best threat of all. There’s nothing like a bunch of government bureaucrats to scare the hell out of a corporate executive. That’s the threat; everything else is just hot air. Asking dishonest people to be honest is futile.”

Peter Boneparth, ceo, Jones Apparel Group: “By and large, public companies are run with a great deal of integrity. We’ve obviously had a wave here of very large fraud and abuses, which has colored the outlook for investing in general. The short-term and obvious solution will be to severely punish those who have committed fraud, and over the longer term it seems to me that the results of punishment and enforcement of law will create a higher level responsibility in corporate America.

“[Bush] should also stress the U.S. marketplace is still the largest and most liquid in the world. The dollar is still the most important currency in the world. If you keep those two items in perspective with increased vigilance on the part of the regulators, you should be able to restore America as the number-one place to invest.”

Jerry Sandak, executive vice president, Rosenthal & Rosenthal: “I would like to hear him say, ‘Sure, there are a few rotten apples, but the barrel is healthy.’ His emphasis should be on the basic health, integrity and strength of the U.S. economy. I would love him to calm things down by emphasizing the honesty of the vast majority of U.S. companies. Sure, the Enrons and the WorldComs make good copy and are a more interesting story —people always prefer reading about the murdered family to the nice, happy one — but those companies are the exceptions, not the rule.”

Gregg Marks, president, Kasper ASL: “The President has to say that there are thousands of public companies and that it’s only a few that have lost consumer confidence by taking advantage of the system. What’s happened in corporate America is that executive compensation is tied directly into the stock’s performance, so there’s tremendous pressure on stock prices. Unfortunately, there have been a few who have taken advantage of the system for their own benefit. Also, there has to be tighter control by the accounting firms.”

Dick Gilbert, president, Mudd Inc.: “He should really focus right now on getting these major corporations to account for their profits and losses in a very honest way. Number one, you’ve got to push these corporations to be very transparent. They’ve got to open their books up, so that everybody can see what they’re doing. If they don’t, nobody is going to have confidence in this market. He’s got to drive these people to have ceo’s who have strong character.

Tracy Mullin, president, National Retail Federation: “Certainly, the President needs to use his bully pulpit to communicate with the American public that this isn’t the way corporate America should behave. His role really should be to make the public more comfortable with investing.”

Michael Pellegrino, president, Anna Sui: “After what has unfolded with Enron and WorldCom, for people who have invested in those companies directly or through mutual funds, the impact has been disastrous. On the other hand, the trading of stocks, whether directly or through 401K plans, is a very viable, solid economic factor that has worked in this country for years. Bush needs to assure the country that the proper investigation will take place to correct these mistakes and to assure there will be greater scrutiny placed on public companies by the government and the auditors of public companies. Companies now should also take a greater look at themselves, their boards and their senior management to become better watchdogs of their own people.”

Eric Beder, analyst, Ladenburg, Thalmann & Co. Inc.: “The President needs to talk about stricter punishment and a higher level of responsibility, but also needs to talk about how the system is still very strong and the American capitalistic system is still the best economic system in the world for growth. I think we are going to see some executives go to jail to be used maybe as a scapegoat. People see a complete lack of responsibility in terms of corporate America. To restore it, we are going to see new laws or stricter sentencing of corporate criminals. I think you need the economy to once again produce significant growth and people will look at what is driving that, and companies then will get to shine. Corporate criminals in jail, separation of auditing from consulting — all these structural changes in the long run will fix results. “

Linda LoRe, ceo, president, Frederick’s of Hollywood: “Leaders need to be heard from right now. I think Americans in general are feeling a bit nervous. It’s analogous to the Catholic church. The smaller percentage [of companies] are creating the issues overshadowing all of the really good ones out there. I believe very strongly we can weather this storm. The administration needs to be tough and decisive. Bush is going to have to call for action. We need to get rid of the problems and reinstill confidence in the American public.”

Holly Guthrie, equity analyst, Investec PMG Capital: “From a corporate accounting point of view, what he needs to address is the strength of capitalism and how, when fully embraced, it can be a fully productive environment. But one of the most important rules to keeping a healthy capitalist society is the purpose of the government, and their role is to protect citizens from force or fraud. And clearly, this is outright fraud. It seems quite clear the government should insist upon more clearly stated accounting rules. It should all be spelled out. From a Wall Street perspective, we should be solely accountable. Those that are responsible for shaping public perceptions of corporations should be held responsible, and any alternate motives should be fully disclosed. Full disclosure of any ulterior motives should restore confidence, as well as the government saying we are cracking down and getting each company to give details on the different items.”

Ira Silver, economics consultant, professor of economics and finance, University of Dallas: “I think he has to address the loss of confidence in corporate America. The economy in general seems fairly good, but the loss of confidence in corporate America and accounting standards appears to have hurt the stock market, and that is feeding back into consumer confidence, which could derail the recovery. He needs to give people a feeling that something will be done and they can have confidence in financial statements going forward.”

Tom Galvin, chief investment officer, Credit Suisse First Boston: “Bush needs to convince the American public that the rules will not only get tougher, but action will be taken to root out criminal activity. I think coming on the heels of the WorldCom hearing, where the majority of [those testifying] had taken the Fifth [Amendment], it is clear that it has to be more than politicking the issue, but has to come from SEC enforcement of rules. And only then will people feel more comfortable about investment. It is not about accounting, but accountability, and the system will clearly get tougher and the perpetrators will be jailed. Unfortunately, because we are a capitalist society, there has always been a fine line between drive and greed. In the aftermath of these debacles, the system will get tougher. “

Bruce Raynor, president, UNITE: “Unfortunately, what all these scandals have shown is that in many corporations, there is absolutely no sense of accountability to shareholders, to employees, to customers, to anybody. What the government needs to do is say, ‘It’s time for a little law and order.’ If people were in the streets stealing things out of stores, we’d say, ‘Get more police. Get more laws.’ We need more laws. The ceo’s of these companies need to be contained by independent boards. There needs to be auditor independence. There needs to be regulation of the accounting trade. There needs to be laws that require full disclosure to shareholders and the public.

“What President Bush can do to restore confidence in the market is just like when we have a crime wave in the city. The government reacts by bringing in more police and stiffer sentences. He ought to appoint an independent prosecutor to look into contact between [companies] and the government. People have to see that these corporations don’t take their money and manipulate government officials. People need to see that the Republican Party and the President, who are identified with close ties to corporate America, take white-collar crime as seriously as blue-collar crime.”

Jim DeMattei, owner, ViewPoint jewelry showroom: “I think the only thing President Bush could possibly do right now is work to uphold laws that are there to protect the public. He needs to follow through and make sure that people and companies that do illegal things are punished.

Many people have had false confidence in the stock market. The market is a day in Vegas no matter how you look at it. Anyone investing in the market who thought there were not a lot of risks involved was kidding themselves. Businesses need to prove they have sound financials, and very few businesses are going to show 50 percent increases day in and day out — that is a pressure that we have created in the last few years.”Continued from page 2

agreement on is that the accounting scandal is taking a toll on consumers whose pensions and 401K plans are tied to the stock market and corporate performance.

It’s not as if fashion and retailing have been scandal-free: Misstatements of profits and revenues have plagued a number of firms, including Leslie Fay, Sirena and Kmart, and stock manipulation has hit companies like Steve Madden Ltd.

“The damage to our economy is incalculable,” said Rep. Maxine Waters (D., Calif.) Monday at a Financial Services Committee hearing on WorldCom, whose $3.8 billion accounting error she said could cost state of California pensions $580 million.

“Trust in the system is at stake,” said committee member Jim Leach (R., Iowa), calling for more money for the SEC to vigorously pursue white-collar crime.

A growing number of lawmakers are calling for Pitt’s resignation, including Senate Majority Leader Tom Daschle (D., S.D.) and Sen. John McCain (R., Ariz.), who on Thursday is scheduled to give a “major policy speech on corporate governance reform.”

Here’s what a cross section of executives from the worlds of fashion and finance said about what they would like the President to address in his speech:

Peter J. Solomon, investment banker, Peter J. Solomon Co.: “In most places, when you do something wrong morally, there is a penalty. In corporate life, there doesn’t seem to be a penalty. If I were President Bush, I would focus not on the process, because the process has a lot of ebbs and flows, but on the issue of physically trying to reestablish standards. Also important is what is the appropriate punishment or penalty for the lack of adherence to those standards.”

Donald Trump: “He’s going to crack down and crack down hard. It’s just inconceivable what’s going on, with WorldCom and all the other scandals. And did you see that story today about [drug giant] Merck? With everything that’s going on, President Bush is going to try to diligently bring order back to the markets, and it’s really needed, particularly when you read on a constant basis about the wonderful world of accounting. It’s very unfair to investors.”

Robert Mettler, ceo, Macy’s West: “He’s in a difficult spot. I think he has to say things that are appropriate, and that’s easier said than done. I think we need to feel comfortable that the country is moving ahead and the idea that the last eight years of growth was not a mirage. There is, certainly, lots to feel good about in the U.S. economy. Although we may feel badly about where we are at the moment, we’re still better off than most of the world’s economies. There is opportunity. We’ve got to root out those people who have abused their shareholders and their employees.”

Art Jones, manager of public policy, Kmart Corp.: “We applaud President Bush’s leadership on the issue of corporate governance. He’s obviously been in the forefront on the issue before, and we look forward to hearing what he says. But we are monitoring what guidelines the SEC and the New York Stock Exchange are giving corporations, as well as what the administration is saying. Remember, we are conducting an internal review. You have to look at all of this from a few different fronts. I believe corporations are doing that and listening.”

Bud Konheim, ceo, Nicole Miller: “What’s he going to say, ‘Be honest’? If people have larceny in their heart and they’re unethical, then a speech isn’t going to help. The President has to say that if the companies listed on the New York Stock Exchange aren’t trustworthy on their own, then the government will have to intervene. The threat of government intervention is the best threat of all. There’s nothing like a bunch of government bureaucrats to scare the hell out of a corporate executive.”

Peter Boneparth, ceo, Jones Apparel Group: “By and large, public companies are run with a great deal of integrity. We’ve obviously had a wave here of very large fraud and abuses, which has colored the outlook for investing in general. The short-term and obvious solution will be to severely punish those who have committed fraud, and over the longer term it seems to me that the results of punishment and enforcement of law will create a higher level responsibility in corporate America.

“[Bush] should also stress the U.S. marketplace is still the largest and most liquid in the world. The dollar is still the most important currency in the world. If you keep those two items in perspective with increased vigilance on the part of the regulators, you should be able to restore America as the number-one place to invest.”

Jerry Sandak, executive vice president, Rosenthal & Rosenthal: “I would like to hear him say, ‘Sure, there are a few rotten apples, but the barrel is healthy.’ His emphasis should be on the basic health, integrity and strength of the U.S. economy. I would love him to calm things down by emphasizing the honesty of the vast majority of U.S. companies. Sure, the Enrons and the WorldComs make good copy and are a more interesting story, but those companies are the exceptions, not the rule.”

Gregg Marks, president, Kasper ASL: “The President has to say that there are thousands of public companies and that it’s only a few that have lost consumer confidence by taking advantage of the system. What’s happened in corporate America is that executive compensation is tied directly into the stock’s performance, so there’s tremendous pressure on stock prices. Also, there has to be tighter control by the accounting firms.”

Dick Gilbert, president, Mudd Inc.: “He should really focus right now on getting these major corporations to account for their profits and losses in a very honest way. Number one, you’ve got to push these corporations to be very transparent. They’ve got to open their books up, so that everybody can see what they’re doing. If they don’t, nobody is going to have confidence in this market. He’s got to drive these people to have ceo’s who have strong character.

Tracy Mullin, president, National Retail Federation: “Certainly, the President needs to use his bully pulpit to communicate with the American public that this isn’t the way corporate America should behave. His role really should be to make the public more comfortable with investing.”

Michael Pellegrino, president, Anna Sui: “After what has unfolded with Enron and WorldCom, for people who have invested in those companies directly or through mutual funds, the impact has been disastrous. On the other hand, the trading of stocks, whether directly or through 401K plans, is a very viable, solid economic factor that has worked in this country for years. Bush needs to assure the country that the proper investigation will take place to correct these mistakes and to assure there will be greater scrutiny placed on public firms.”

Eric Beder, analyst, Ladenburg, Thalmann & Co. Inc.: “The President needs to talk about stricter punishment and a higher level of responsibility, but also needs to talk about how the system is still very strong and the American capitalistic system is still the best economic system in the world for growth. I think we are going to see some executives go to jail to be used maybe as a scapegoat. People see a complete lack of responsibility in terms of corporate America. To restore it, we are going to see new laws or stricter sentencing of corporate criminals. I think you need the economy to once again produce significant growth and people will look at what is driving that, and companies then will get to shine.”

Linda LoRe, ceo, president, Frederick’s of Hollywood: “Leaders need to be heard from right now. I think Americans in general are feeling a bit nervous. It’s analogous to the Catholic church. The smaller percentage [of companies] are creating the issues overshadowing all of the really good ones out there. I believe very strongly we can weather this storm. The administration needs to be tough and decisive. Bush is going to have to call for action. We need to get rid of the problems and reinstill confidence in the American public.”

Holly Guthrie, equity analyst, Investec PMG Capital: “From a corporate accounting point of view, what he needs to address is the strength of capitalism and how, when fully embraced, it can be a fully productive environment. But one of the most important rules to keeping a healthy capitalist society is the purpose of the government, and their role is to protect citizens from force or fraud. And clearly, this is outright fraud. It seems quite clear the government should insist upon more clearly stated accounting rules. From a Wall Street perspective, we should be solely accountable. Those that are responsible for shaping public perceptions of corporations should be held responsible, and any alternate motives should be fully disclosed. Full disclosure of any ulterior motives should restore confidence, as well as the government saying we are cracking down.”

Ira Silver, economics consultant, professor of economics and finance, University of Dallas: “I think he has to address the loss of confidence in corporate America. The economy in general seems fairly good, but the loss of confidence in corporate America and accounting standards appears to have hurt the stock market, and that is feeding back into consumer confidence, which could derail the recovery. He needs to give people a feeling that something will be done and they can have confidence in financial statements going forward.”

Tom Galvin, chief investment officer, Credit Suisse First Boston: “Bush needs to convince the American public that the rules will not only get tougher, but action will be taken to root out criminal activity. I think coming on the heels of the WorldCom hearing, where the majority of [those testifying] had taken the Fifth [Amendment], it is clear that it has to be more than politicking the issue, but has to come from SEC enforcement of rules. And only then will people feel more comfortable about investment. It is not about accounting, but accountability, and the system will clearly get tougher and the perpetrators will be jailed.”

Bruce Raynor, president, UNITE: “Unfortunately, what all these scandals have shown is that in many corporations, there is absolutely no sense of accountability to shareholders, to employees, to customers, to anybody. What the government needs to do is say, ‘It’s time for a little law and order.’ If people were in the streets stealing things out of stores, we’d say, ‘Get more police. Get more laws.’ We need more laws. The ceo’s of these companies need to be contained by independent boards. There needs to be auditor independence. There needs to be regulation of the accounting trade. There needs to be laws that require full disclosure to shareholders and the public.

“President Bush ought to appoint an independent prosecutor to look into contact between [companies] and the government. People have to see that these corporations don’t take their money and manipulate government officials. People need to see that the Republican Party and the President, who are identified with close ties to corporate America, take white-collar crime as seriously as blue-collar crime.”

Jim DeMattei, owner, ViewPoint jewelry showroom: “I think the only thing President Bush could possibly do right now is work to uphold laws that are there to protect the public. He needs to follow through and make sure that people and companies that do illegal things are punished.”