Big Investors Want Big Changes

With the Enron accounting scandal now a full-fledged stock market contagion, institutional investors are getting a little concerned. Yesterday, the Council of Institutional Investors — a group of 250 pension funds and investment-related firms — sent a letter to SEC Chairman Harvey Pitt calling for a complete overhaul of auditing and corporate governance systems.

The council, which sent a similar letter to congressional committees investigating the troubled Houston energy trader, appears to be concerned that the current media frenzy surrounding the Enron meltdown may not actually result in any meaningful reforms. “As tragic as the Enron case may be,” notes Council Executive Director Sarah A.B. Teslik, “it is also an opportunity for regulators and legislators to take a close look [at the] painful failure of some safety nets intended to protect investors.” According to the letter, council members lost hundreds of millions of dollars on their Enron investments.

The institutional investors suggested several steps for improving current investor safeguards. Here, in no particular order, are some of the suggestions:

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• Reform auditor independence standards by prohibiting auditors from providing any non-audit services to their audit clients.
• Radically reform the oversight of auditors, making sure that opinions of all interested parties — and not simply Big Five accounting firms — be considered. Says the Council: “The accounting profession’s current system of self-oversight is not working.”
• Require enhanced disclosure of director links to companies.
• Toughen the stock exchanges’ listing standards on board independence and board composition. The Council wants exchanges to require that a sizeable majority of a corporate board (at least two-thirds) and all audit committee members qualify as independent directors.
• Eliminate stock exchanges’ “broker may vote” rule, which allows brokers to vote on so-called routine proposals, including the election of directors and the ratification of auditors.
• Update disclosure requirements for financial and other critical information.
• Do not soften the SEC’s stance on enforcement.

Apparently, the Council does not think highly of Pitt’s suggested reforms. “Simply switching to more current disclosure, as Chairman Pitt has proposed, is not enough,” the Council noted in the letter. It went on to state it is “distressed by Chairman Pitt’s recommendation that the agency take a ‘kinder, gentler’ approach with the accounting profession.” Seeing how the institutional investors in the Council manage nearly $2 trillion in pension assets, their suggestions may actually get listened to on Capital Hill.