- The Washington Times - Friday, July 12, 2002

Sen. John McCain yesterday called for an end to the incentives that have prompted many corporate executives to fudge their books, going beyond proposals from President Bush and Democrats.
The Arizona Republican, sensing that a public worried about the loss of $2.4 trillion in stock wealth this year may support more radical reforms than either party has suggested for fear of offending big contributors, proposed to ban inside stock sales by sitting executives and remove the substantial advantages enjoyed by stock options.
The stock market, rocked by daily revelations of new corporate scandals, has plummeted in recent days despite a plan announced by President Bush Tuesday to stiffen the penalties for corporate fraud and the Senate's debate on a strict Democratic reform measure.
"Stronger sanctions alone will not be enough to deter new incidents of corporate misconduct. Neither will pleas for character building," the senator, a possible challenger to Mr. Bush in the 2004 primaries, said in a National Press Club speech.
His amendment to the Senate bill was quickly quashed on a procedural motion pushed by the leaders of both parties, however.
"Why would we not vote on it?" Mr. McCain said on the Senate floor. "It's because every lobbyist from the high-tech community in this town has said, don't do it, don't do it."
Mr. McCain in his speech stressed that he is a believer in free enterprise and, like Mr. Bush, believes the corporate wrongdoers who are behind the Enron, WorldCom and other scandals are in the minority but even so, their number still could be in the hundreds or thousands.
Half of Americans own stocks, and Mr. McCain said the corporate scandals, despite the steep decline of major stock indexes to 1997 levels they have wrought this summer, have not shaken his belief that Americans should be allowed to invest some of their Social Security funds as well in the financial markets.
But for Americans to regain their lost confidence in those markets, he said, more must be done to change the motives of the executives and auditors of public corporations who stand to gain billions of dollars from corporate malfeasance with only a small chance of going to jail.
"The public's stake in America's companies is far larger and more important to our economy and to the financial well-being of our citizens than it was in years past," he said. "What is at risk in this series of unfolding corporate scandals is the trust that investors, employees and all Americans have in our markets."
The sizable stock and options holdings of top executives have made many into multimillionaires even as their companies and employees suffered from the results of their malfeasance.
Just yesterday, Qwest Communications, a company under a criminal investigation for securities fraud, disclosed that its chief executive, Joseph Nacchio, made $300 million from his holdings before he resigned under the cloud of scandal in June.
Mr. Bush has proposed enabling the Securities and Exchange Commission to disgorge such ill-gotten gains in cases where fraud is proved.
But luminaries from Federal Reserve Chairman Alan Greenspan to billionaire investor Warren Buffett and former SEC Chairman Arthur Levitt have said more is needed to curb the lure of quickly gained riches that prompts executives to bend the rules and cook the books.
They have advocated changes such as those proposed by Mr. McCain as the best way to address what they say is the root cause of corporate scandals, but there have been few takers in Congress.
A pervasive problem is the compelling need executives feel to meet or exceed the earnings expectations of Wall Street analysts each quarter to keep the company's stock rising or prevent a fall that would diminish their stock holdings, they say.
The scams at Enron, WorldCom and numerous other companies unfolded out of desperate or devious attempts by executives to produce positive quarterly earnings reports and at least initially, they were rewarded with soaring stock prices and millions in bonuses.
The fixation of executives with maximizing short-term profits, often at the expense of long-term growth, was heightened during the 1990s by generous grants of stock options.
Options enjoy substantial tax advantages over ordinary income and, unlike salaries, companies are not required to deduct them as an expense in their financial statements.
Stock options also pose lopsided risks for executives, because they can reap huge gains on options but do not lose money when the stock falls below that level the same way shareholders do.
As a result, taking a gamble such as using aggressive accounting tactics to prop up the stock price can pay off richly for executives, while the downside has been limited.
Mr. McCain noted that 12 percent of chief financial officers in a recent survey admitted caving in to the pressure to plump up quarterly earnings.
He proposes to curb the huge grants of stock options that proliferated during the 1990s by requiring companies to deduct them like other expenses. He would also prohibit executives from selling any company stock before they step down.

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