Bloomberg: Donaldson Must Rebuild Trust in SEC, Investors Say

Bloomberg: Donaldson Must Rebuild Trust in SEC, Investors Say

February 11, 2003

New York, Feb. 11 (Bloomberg) - William Donaldson, set to win confirmation today as Securities and Exchange Commission chairman, must break from his past as a Wall Street insider and push tougher corporate governance reforms if he is to succeed restoring stock market confidence, investors said.

The Standard & Poor's 500 Index has fallen three out of four days since Donaldson's confirmation hearings last week, as his pledges to rebuild trust and boost SEC morale have failed to dent market pessimism. Investors say the burden is on Donaldson to show he is as advocate of reform and not just a caretaker.

"He's got to show us he's serious about giving investors a stronger voice," said William Patterson, director of the AFL-CIO's office of investment, which oversees $450 billion in pension funds. "We're going to be looking to him to deliver."

Investors are skeptical of Donaldson, saying his record as co- founder of Donaldson, Lufkin & Jenrette investment bank, and chairman of the insurer Aetna Inc. and the New York Stock Exchange shows he favors business over investors. Donaldson tried to assuage the concerns at his hearings last week, calling for more resources to pursue corporate wrongdoers and possibly more oversight of hedge funds and credit rating companies.

'Serious Cop'

"Donaldson needs to send a message that he will be a serious cop," said Richard Moore, treasurer of North Carolina and sole trustee of the state's $62 billion pension fund. "Sarbanes-Oxley is a great roadmap to restoring investor confidence but the devil remains in the details," he said.

Donaldson's first priority, mandated by the Sarbanes-Oxley corporate responsibility law passed last July, will be to name a chairman for the new accounting oversight board. Paul Sarbanes of Maryland, the Senate Banking Committee's ranking Democrat, said the appointment "will be the first clear definition of the SEC and its chairman."

The 71-year-old Donaldson also will be charged with allocating the agency's $841.5 million budget for fiscal year beginning Oct. 1, a 53 percent increase which foresees boosting SEC staff by more than 700 to about 3,875 people.

Donaldson succeeds Harvey Pitt as SEC chairman as the agency conducts more than 600 investigations of alleged corporate malfeasance, following accounting scandals at Enron Corp., WorldCom Inc. and other companies.

Enforcement Staff

"The agency needs a lot more personnel and more experienced personnel to focus on enforcement," said Keith Johnson, general counsel for the Wisconsin Investment Board, which manages $58 billion in pension money. "We are seeing lots of potential enforcement actions that are only eventually gotten around to."

Donaldson must move all the cases now being handled by the enforcement division forward and change perceptions that companies that violate the rules get no more than a slap on the wrist, analysts say.

On corporate governance, Donaldson will have to show that the governance system he built at Aetna is not something he would recommend that other companies emulate today. At Aetna, he helped institute a "poison pill" takeover defense, staggered terms for directors and super-majority voting—all measures that insulate boards from investor demands.

At his hearing last week, Donaldson said those measures were temporary, so he and his team could turn the company around. His actions increased shareholder value at Aetna, he said.

Shareholder Rights

Patterson said the labor federation will push Donaldson to give investors greater powers to nominate candidates for board seats. Currently, he said, investors are limited to filing resolutions, which companies routinely block and often ignore even when supported by a majority of shareholders.

"Until shareholders have the ability to affect the boards of the companies they own, they will never be able to protect themselves from Enron and Tyco situations," he said, referring to Tyco International Ltd.

Donaldson must also give the SEC a greater leadership role in addressing conflicts of interest on Wall Street and elsewhere, investors say. New York State Attorney General Eliot Spitzer spearheaded the investigation into biased research on Wall Street, which was only belatedly joined by the SEC.

Eleven Wall Street firms, including Citigroup Inc. and Credit Suisse, agreed in December to pay $1.4 billion to settle SEC and state investigations of conflicts of interest among stock analysts. The SEC, after it approves the settlement, plans to write rules to erect new barriers between research and banking.

On Thursday, a new rule passed by the SEC required analysts to vouch for the integrity of their stock picks and disclose any payments connected to their recommendations.

The article originally appeared inBloomberg News on February 11, 2003 written by Jack Duffy.