The Snoozing Watchdogs
States have done better on a whole lot of fronts in recent years. Corporate regulation isn't one of them.
After a decade of disquisition from pundits (this one included) on the wonders of devolution as a positive prescription for moving government--and the power of government--closer to the people, we get Enron.
The question at hand is how such a monstrous fraud could be perpetrated on the company's stockholders and on employees whose retirement portfolios consisted largely of Enron stock. In a perverse sort of way, devolution has to share the blame. While the states have been busy reclaiming their roles as lead players on the environment and on social services, they have quietly been deferring to Washington more and more in the regulation of other corporate behavior. This is, in part, a function of their own preference, but it also reflects the desires of the corporations themselves to get out from underneath the 50 thumbs of state government, and under the theoretically more consistent single thumb of federal regulation.
The business argument has always been straightforward and sensible- sounding: Given the interstate and international nature of most forms of commerce these days, it is inefficient for companies to have to deal with 50 sets of regulations and the varying temperaments of 50 separate regulatory agencies. "Yeah, those feds will be tough on us," the companies like to say for publication, "but at least it will be just a single set of regulations that we'll be dealing with." It is largely in response to these arguments that state oversight has eroded on multiple fronts, from securities regulation to the monitoring of accountants.
The truth is, though, that there's a less savory logic behind corporate enthusiasm for federal oversight. The more that regulation is concentrated at the federal level, the easier it is to concentrate campaign activity and lobbying power in one place.
As the Enron story has unfolded, we've learned quite a bit about the way that very phenomenon led to the company's meltdown. The feds self- righteously declare their outrage, but they had a hand in the mess.
In particular, Congress has given corporations maximum flexibility when it comes to the way they account for crucial expenses. The big accounting companies have played right along, and in fact have actively encouraged such policies.
There were occasions when the Financial Accounting Standards Board-- the privately funded regulatory body for all matters of private sector accounting and accounting practice--actually tried to be tough about practices such as Enron's off-the-books cost-accounting shenanigans. But because FASB derives its power from a federal agency, the Securities and Exchange Commission, Congress has the power to override FASB rules. And that has happened on some key occasions, particularly in regard to stock sale tactics and the use of securities as employee compensation.
Now states are stepping in. Stung by some sharp (although not fatal) hits to their retirement portfolios with the fall of Enron stock, attorneys general and pension overseers from states all over the country want a piece of both Enron and its accounting firm, Arthur Andersen. A consortium of states has asked to be lead plaintiff in security fraud litigation already filed in Texas.
If this sort of coalescing of states to go after a bad business apple sounds distantly familiar, it should. Years ago, when states were much more active players in corporate oversight, much of the regulatory work was done by an informal group of attorneys general that formed to fight dubious nutritional claims on food packages. It was activism on the food-labeling front that won the group its nickname: the Chowhounds.
But the group soon branched out into a whole range of other issues, from car sales to funeral home services. Any interstate business operating on a less than ethical--not to mention illegal--basis was fair game. The Chowhounds won several important victories. But in the past few years, as business has successfully made the argument for federal rather than state oversight, the Chowhounds have gradually been defanged.
And so it might be time to talk about a second wave of devolution, this one on the business regulatory front, featuring a push to reinvigorate state regulatory power over commerce and finance. A group of 50 watchdogs is much more apt to smell trouble than just one.
It is unlikely, even in the aftermath of Enron, that the federal government will happily accept states as full partners in any effort to regulate the financial practices of multinational companies. Nor is the Financial Accounting Standards Board ever going to be broken up into 50 state boards.
But states have every right to protect their citizens--and, not incidentally, their own employees and employee pension funds--from the sort of damage inflicted by Enron. It's time for the Chowhounds and federal regulators to talk seriously about putting some bite back into state regulation or, at the very least, oversight of the nation's biggest corporations--no matter how big or well connected to Washington the CEOs happen to be. Short of that, it's just a matter of time before we get Enron II.