Big business races to reform itself

Federal laws and government arrests are only part of the story of America's effort to leave a wave of corporate scandals behind.

Thursday's high-profile arrest of two former financial officers of WorldCom, in fact, coincides with a rush of self-correction efforts by corporations and private-industry groups.

The private-sector trends are significant:

• Corporate boards have been accelerating a long-term shift toward having more directors who are considered independent of top management.

• Since this spring, companies have been scrambling to improve their financial disclosure to reassure skeptical investors.

• At least 19 companies – including General Electric this week – have already decided to list options on their books as expenses. Options are seen as a temptation to executives to inflate the value of their firm's stock. The accounting change could prod companies to issue fewer options.

• Industry groups are moving to ward off future corporate misdeeds. Thursday the board of the New York Stock Exchange was expected to approve a raft of proposals to restore investor trust and confidence in US firms. Moreover, even as Congress continues to weigh legislation to require that stock options be "expensed," the private Financial Accounting Standards Board plans to consider the matter on its own at a meeting Aug. 7.

The changes likely stem from a variety of motives, many of them boiling down to self-preservation. The prospect of jail time, concern with public wrath, and investor punishment in the stock market all have CEOs' attention. Also, many firms may hope that by acting on their own they can avert a continued tide of laws and regulation.

"There is a very significant amount of automatic self regulation, [given] the extent to which the stock market is punishing a company in which there is even a rumor there is a problem in the books," says Murray Weidenbaum, an economist at Washington University in St. Louis.

Some experts cite the corporate efforts – and the discipline of the stock market – as evidence that the crisis of confidence in business will be largely healed from within.

Others say that new laws have a crucial role to play – including the accounting reforms and tougher sentences for executive fraud that President Bush signed this week. The lesson of the current scandals, they say, is that American capitalism works best with vigilant oversight.

Still, the magnitude of the do-it-yourself moves by business may be close to being unique, historically.

"I can't think of a single incident where there was this amount of housecleaning internally," says Mark Blyth, a political scientist at Johns Hopkins University.

Past scandals have generally prompted action by Congress and government regulators. The collapse of the savings and loan industry in the 1980s resulted in the creation of the Resolution Trust Corp., a government agency to take over their assets and pay off depositors.

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