The War on CEOs

by | Jul 15, 2002

Just as the War on Terrorism dissipates into total inaction — the latest word is that we will not invade Iraq — our leaders have launched a new war to replace it: the War on CEOs. In reaction to a few cases in which corporate CEOs allegedly violated existing laws against fraud, the Senate has […]

Just as the War on Terrorism dissipates into total inaction — the latest word is that we will not invade Iraq — our leaders have launched a new war to replace it: the War on CEOs.

In reaction to a few cases in which corporate CEOs allegedly violated existing laws against fraud, the Senate has passed a comprehensive set of new regulations designed to punish the leaders of all of the nation’s corporations. This is not a campaign against fraud, but a campaign against businessmen — and it will have the same result as any other crusade against a nation’s producers.

Here is what I predict will happen if this War on CEOs is enacted by Congress and signed by a president eager to appease the corporation-bashers.

— The harsher the “reforms,” the more the market will falter. Every commentator is asking whether the new measures in Congress are “harsh enough to restore investors’ confidence.” They have it backward. It is harsher regulation that now poses the greatest impediment to the economy.

An ominous precedent was set by the savings and loan fiasco presided over by President Bush’s father. That crisis also began with the bankruptcy of a few corporations run by corrupt managers. Then, as now, Congress whipped itself into a frenzy of resentment at businessmen in general. They enacted a giant government apparatus to “bail out” the savings and loans. This was done by finding every savings and loan that was in financial trouble and forcing it to sell its assets into a declining market. These unnecessary losses triggered a further wave of bankruptcies that magnified the financial crisis and dragged it out for years.

This administration shows an uncanny knack for not learning from history, so expect the same pattern to repeat itself. A vast new army of Securities and Exchange Commission (SEC) regulators, engorged with $300 million in new funds from Congress, will engage in a witch hunt for any accounting irregularity at any business, as judged by increasingly subjective standards. Each new investigation will crash the stock of any company that falls under suspicion, keeping the market in turmoil for years.

— Corporate financial statements will become less accurate, not more. Accurate accounting requires personal judgment. Which expenses qualify as long-term capital investments, and which are normal operating expenses? What is the long-term value of assets whose market price fluctuates from day to day? What is a realistic projection of future revenues? No one will want to make these judgments when a 10-year prison sentence awaits those whose judgment contradicts that of the SEC.

In the future, the purpose of financial reports will not be to impart information or to reflect the best judgment of corporate management. Their purpose will be to shield corporate officers from liability by imparting less information and making no judgment calls.

— Corporations will get less capable CEOs, not better CEOs. Why not retire early, at a safe level of upper-middle management, rather than risk spending the next decade of your life in court or in prison because someone at the SEC didn’t agree with your accountants? Until the current frenzy subsides — and well after that — expect to see a brain drain from upper management, with fewer talented people willing to take a corporation’s top spot.

— CEO salaries will rise. The same people pushing the current “reforms” complain bitterly about corporate leaders’ high salaries. (In fact, the recent scandals have merely reaffirmed how much an honest, competent CEO is worth.) The new regulations require that a CEO personally certify the accuracy of all of the company’s financial reports — reports so complex that it is impossible for one man to verify every fact they contain. In effect, CEOs will now bear criminal responsibility for the fraud committed by any employee in the accounting department. Expect them to demand higher pay in return for this enormous added risk.

— More corporations will move overseas. The corporation-bashers also complain that companies are moving their headquarters overseas to avoid U.S. taxes, regulations and lawsuits. But by intensifying the load of regulations and the cost and frequency of lawsuits, and by threatening draconian criminal penalties, Congress is merely increasing the incentive to move to a country that is not making war on corporations.

The basic principle behind all of these predictions is that you cannot strengthen America’s corporations by making war on the people who run them. Let us have no illusions about what will happen when we subject the nation’s honest producers to a regulatory reign of terror.

Robert Tracinski was a senior writer for the Ayn Rand Institute from 2000 to 2004. The Institute promotes the philosophy of Ayn Rand, author of Atlas Shrugged and The Fountainhead. Mr. Tracinski is editor and publisher of The Intellectual Activist and TIADaily, which offer daily news and analysis from a pro-reason, pro-individualist perspective. To receive a free 30-day trial of the TIA Daily and a FREE pdf issue of the Intellectual Activist please go to TIADaily.com and enter your email address.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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