Several years ago, Federal Reserve Chairman Alan Greenspan characterized the latter stages of the great bull market of the 1990s as "irrational exuberance." It now appears that the irrational exuberance was being sustained in some instances by improper accounting. Put differently, one way of satisfying the insatiable appetite for ever increasing corporate profits — as well as for rich compensation packages — was to cook the books.
Many, although not all, of the recent alleged abuses have occurred in what have been the hot sectors of our economy. Electric deregulation, the development of the Internet, new medical treatments, and the spread of broadband are all thought to hold America's greatest prospects for growth. Unfortunately, for some of the companies in those areas, the growth in accounting creativity outstripped the growth in business fundamentals.
For my first four years in the Senate, I was privileged to serve as the Chairman of the Permanent Subcommittee on Investigations. During that time, I held more investigations on fraud and abuse in the securities markets than on any other subject, despite the fact that we were in the midst of a roaring bull market. Indeed, the roaring bull market made those investigations seem all the more necessary. More recently, Senator Carl Levin (D-MI) and I have teamed up in an investigation of Enron Corporation; in fact, we just released our report on the failures of the Enron board of directors to exercise its fiduciary responsibilities. Too many of Enron directors acted more like rubber stamps than as watchdogs.
American capitalism relies heavily on the fiduciary duty concept to protect those who entrust their money to large and often distant corporations. Accountants have a duty to investors to ensure the accuracy of financial statements. Directors have a duty to make certain that managers act in the best interest of the corporation. And stockbrokers have a duty to give advice that will best serve their client's needs. I believe this structure is conceptually sound. But I also believe that we have allowed these trust relationships to be seriously eroded by conflicts of interest.
Conflicts of interest are rotting the pillars supporting an essential element of capitalism — the ability of investors to rely on those to whom they entrust their money. Excising the rot requires two steps. First, we must redefine the roles of the accountant, broker, and board member so that their undiluted obligation is to the investor. Second, we must enforce these obligations with tough sanctions, such as the new penalties approved in a Senate bill, that will deter those who would breach them.
While the President, Congress, the Securities and Exchange Commission, state regulators, the stock exchanges, and perhaps even our educational institutions can help to solve our current problems, nowhere is the obligation to act greater than on Wall Street and in corporate boardrooms. The American people are justifiably outraged by the breakdown in corporate ethics. This is not thievery by those lacking the resources to buy food and medicine. This is thievery by those with the resources to buy Picassos and Porsches. As a people, we do not begrudge others who earn their success, but we will not tolerate those whose success rests on breaching legal and ethical obligations.
Confidence in our capital markets depends upon accurate and fair financial statements. Recent corporate misdeeds have caused great harm, costing our economy and shareholders billions of dollars. The impact on investor-employees who have lost both their jobs and their retirement savings has been especially cruel. And those responsible have forgotten that capitalism can only survive if people believe they can trust strangers with their money. Honesty and fair dealings are the lifeblood of our economic system.
But as we reform the system and punish wrongdoers, it would also be unfair to paint with too broad a brush. We should take care not to condemn the many who honor their obligations to employees and shareholders. Indeed, it is partly for their benefit, as well as for the benefit of all other Americans, that we must restore confidence in our corporate sector.