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SHOW: MARKET CALL 09:30 AM Eastern Standard
February 6, 2003 Thursday
Transcript # 020614cb.l05
HEADLINE: Tough Call: Who Best to Keep an
Eye on Companies?, CNNfn
GUESTS:Moshe Adler, Charles Elson
BYLINE: Rhonda Schaffler
BODY: RHONDA SCHAFFLER, CNNfn ANCHOR, MARKET CALL:
Since Tyco and Enron and WorldCom, auditors and corporate board members have
faced increased scrutiny and higher expectations, they are after all the people
who watch the people running the company, at least that's the theory of it.
So who is best to give that regulatory role? Shareholders
are one suggestion, they have a vested interest in the long term health of a
company. Another group concerned with the company's health, employees and that
particular group has not been tapped. Should employees play a bigger role in
keeping their companies in line?
Joining me to make
that "Tough Call" is Moshe Adler, senior economist at the
Fiscal Policy Institute, and Charles Elson, professor of corporate governance at
the University of Delaware.
Gentlemen, it's good to
you have you both here, appreciate it.
MOSHE ADLER, FISCAL POLICY INSTITUTE: Thank you.
SCHAFFLER: Moshe, let me start with you. Do we have any sort of
context we can put this debate in, not done in the U.S., but we've seen this
done elsewhere, does it work?
ADLER: We have
seen it in Germany, but I want to correct something in your introduction. I
mean, the shareholders have always had a role in controlling their companies.
The reason that we have audit committees are that companies are mandated to file
financial reports is precisely because shareholders do have a role and they want
to see the numbers.
What has happened is that we find
out that their auditors were supposed to monitor the - managers were supposed to
work on behalf of shareholders, have been basically siding with management or
being actually bought off, and that this auditors who were supposed to control
management on behalf of whom, on behalf of shareholders, this is their company.
These auditors have failed, so now we have a proposal on the tables that
government will have auditors of the auditors, this is what this is called an
accounting oversight board. And the question is, will this work?
Well, there is this great economist, Nobel Prize Winner, George Stiller
(ph), who wrote this great theory called the Theory of Regulation, in which he
explains the government regulation will almost invariably fail simply because
the regulators end up being captured by the very body that they are suppose to
regulate, and the theory's greatest simplicity itself, what happened is that
these regulators are supposed to regulate on behalf of all these millions of
ADLER: Each one of the shareholders has a minuscule interest in
what these regulators are doing because everybody is busy with work during the
daytime and the night time they have huge portfolios and each one company in
this portfolio weighs nothing at all, so nobody is watching these regulators.
The question becomes why would the regulators do a good job, why will the
regulators be in uniform - what happened to auditors?
SCHAFFLER: Let's bring in Charles now as we continue the discussion on
this idea of employees getting more involved in an oversight role. What do you
CHARLES ELSON, UNIVERSITY OF DELAWARE: Well, I
think it's problematic. The audit committee is designed to monitor, be an
independent monitor of the company's financials for the shareholders. And the
difficulty with employee involvement in it is number one, employees are part of
the process that's being externally monitored, and you're sort of a compromise
there if you put someone in both roles.
The real key is
if you really want to solve at least in my view, this financial shenanigans, you
want employees that their problems come forward to the audit committee, and the
way you solve that is an audit committee of really independent directors and
really independent auditors, because if they come forward, that is really the
key. By putting them on the committee, I don't think solves that problem.
SCHAFFLER: Although, that would make some employees a
whistleblower and sometimes those roles can be problematic if you do that to a
company that is giving you a paycheck every two weeks.
ELSON: Well, again, in the long term, the whistle-blowing is a good
thing for the company if you bring out fraud. The key is you have to allow them
to come forward and they won't unless they're independent.
ADLER: I must interject. We had enough of disinterested parties,
the problem is the disinterested parties become interested. First of all, we
were supposed to have independent boards of directors, everybody knows that
boards of directors are in the pockets of management. Then we were supposed to
be independent auditors who will be independent of the board of directors and of
management and they will supervise what is shenanigans on behalf of
stockholders, didn't work.
Let's harness self-interest
for once. Who is the party that has self- interest in the long term survival of
the company? It turns out there is only one, it is not the management because
the management can make fast money and run, it's not the board of directors
because they are disinterested. It is not the regulators, it's not their
company, it is not shareholders because each one has too little a share of any
There is only one person that will truly
suffer if the company suffers long term, this person is called the worker. When
a company falls, because it's in bankruptcy because of some shenanigans, it is
the employee that lose his or her job. They must be brought in.
And I must tell you this, in Germany by law, any company with 2,000
employees or more must by law have half of the board of directors minus one,
that is a tie breaker is always the chairman of the board who can break the tie
who is by law not an employee. But half the directors are always employees. And
Germany is doing great.
SCHAFFLER: I want to bring
Charles back in. It seems that - it sounds like such a great plan, corporate
governance we're going to fix everything, but the actual trying to figure out
how to fix it gets more complicated as we talk about it.
ELSON: This is true, but you know, the main thing is, the problem was,
audit committees and boards, you're absolutely right, were not independent. And
I think the reforms that you've seen coming out have been very important, the
stock exchange reform, Sarbanes-Oxley, which say that you can't have any
financial connection to the company or management, other than equity management,
that's the key.
ADLER: (INAUDIBLE). As a matter
of fact, the SEC cognizant of the fact that German companies must have employees
on the board of directors have given an exemption to foreign companies, even
they, even the SEC actually recognizes the fruitful role of employees and they
have granted an exemption, we cannot have this reform after reform after reform.
Remember the '80s poison pills? The reason we have options is a reform of what
we had in the '80s .
ELSON: I think in the German model
- the German model really hasn't been all that successful from a governance
standpoint, at least from the American investor standpoint, I don't think that's
the greatest model for us going forward.
SCHAFFLER: Moshe Adler, Charles Elson, I want to thank you for being here as
we debate what continues to be a very tough issue here. Thank you so much.
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