Self Discipline, Not Regulation, Needed for Ethical Business

Carrie Lukas
|
Posted: Dec 18, 2006 12:01 AM
Self Discipline, Not Regulation, Needed for Ethical Business

Even as the new Congress prepares to convene in just a few short weeks, it’s still unclear exactly what voters can expect in terms of big domestic policy changes. Tax policy, Social Security reform, healthcare policy, the environment—all these issues loom before the new Congress, but Democrats have not yet indicated exactly where they will take the country while in the new majority.

One priority is clear: Paving the way for more ethical government must top the agenda for both parties in the upcoming Congressional session. Democrats need to deliver on their most clearly articulated campaign promise and Republicans have to regain the trust of voters. This may mean Congress will create new laws to limit interaction between policymakers and lobbyists or eliminate earmark appropriations, which invite corruption.

While Congress attempts to clean its house, corporate America would be wise to do the same. Five years ago, the American economy was rocked by some of the biggest corporate scandals in history. Enron and Worldcom collapsed under the weight of massive fraud and corruption, ruining investors and employee pensions while shocking the public.

There were plenty of existing laws broken by Enron and Worldcom senior officials and some employees. But Congress wasn’t satisfied to let the judicial process work and watch the perpetrators get sentenced to prison. Instead, at least in part to demonstrate their disgust for this corruption, Congress created a thicket of new regulations through a law commonly referred to as Sarbanes-Oxley.

Sarbanes-Oxley increased penalties for corporate malfeasance, instituted new requirements for companies’ disclosure of their internal audit systems, and made executives personally and criminally liable for their public financial reports. Not surprisingly, these new requirements entail significant costs for businesses. Compliance with Sarbanes-Oxley has cost companies an estimated $35 billion, a burden that is particularly onerous for small businesses.

Analysts worry that these regulations have made America a less attractive climate for business. These regulations, their costs, and the significant liabilities facing executives and board members may discourage small businesses or foreign entities from listing their companies on an American stock exchange.

America’s business climate already has some significant drawbacks that make companies increasingly interested in locating elsewhere. Our complex tax code includes one of the highest business tax rates in the world. Companies face the specter of high legal costs from our litigation-happy society. Regulations that require businesses to provide expensive benefits and high payroll taxes make hiring American workers costly. Policymakers who complained about a lack of “good” jobs may want to consider if there was any drag from Sarbannes-Oxley and seek ways to make the United States more attractive for businesses.

Sarbanes-Oxley’s intent was in part to do just that by reassuring investors about the security of investing in American companies. Transparency and reliable financial records certainly are critical to ensuring that investors have the information they need to evaluate companies and can comfortably invest their money. Yet policymakers need to carefully weigh if the new regulations’ benefits outweigh their costs—and with portions of Sarbanes-Oxley, it seems clear that the costs outstrip the benefits.

No set of regulations, of course, is going to prevent some businesses from behaving badly In spite of these myriad regulations and requirements, corporate scandals continue to make headlines. Hewlett Packard’s chairman, Patricia C. Dunn, had to resign after revelations of the company spying on their employees and board members. Reports recently surfaced about UnitedHealth Group’s slipshod method of issuing executives stock options and a board replete with conflicts of interest. In October, Oracle agreed to pay a $98.5 million fine for charging the U.S. government inflated prices for software and service for eight years—reminding the public that taxpayers often are among the victims of corporate scandals.

None of these recent scandals has sufficiently impressed the public’s consciousness to prompt meaningful Congressional action. The Dow’s record highs and the economy’s steady growth quell the impulse for Congress to push new reforms. Yet that could change at any moment.

Businesses can help themselves by examining their own practices to ensure that they meet high ethical standards. If they don’t and Congress moves toward to new regulations, it could be our economy that pays the price.