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American corporations are seemingly engaged in some kind of mass meltdown, with each day bringing a new story about another company “cooperating fully” with investigators from the Securities and Exchange Commission. Now a Republican administration is calling for a crackdown on business — which raises the question: Is the Reagan era’s deregulatory drive coming home to roost? Legal Times asked a number of corporate governance experts and Washington observers for their thoughts. Joan Claybrook President, Public Citizen Apologists for corporate elitists are desperately promoting the idea that the astonishing corporate crime wave now being uncovered is an inevitable and natural byproduct of the booming economy of the 1990s. The fact is, this crisis of crime in the suites can be traced directly to the corporate takeover of government over the past quarter century, beginning with President Ronald Reagan and reaching its zenith with Newt Gingrich’s Congress. Following impressive gains by citizens in the late 1960s and early 1970s, in terms of environmental, consumer and civil rights safeguards, corporate America launched a focused campaign to denigrate government and promote an agenda that, at its core, sought to remove accountability for corporate leaders. Government regulation was portrayed as inherently evil, as was the judicial system that serves as a check on corporate misbehavior. According to this mythology, free markets could solve all our problems. Never mind that big corporations continue to feed at the public trough — ideology is useful only when it lines pockets. This cynical campaign of deceit, propelled by billions of dollars for political contributions, right-wing think tanks, lobbyists, smear campaigns, TV advertising and fake grassroots organizations, has distorted government’s purpose. We now have the best government money can buy. But finally the public’s justifiable outrage at corporate excesses is sparking needed reforms. William A. Niskanen Chairman, Cato Institute Democrats have recently revived an old charge that Republicans are too beholden to business to support and enforce regulations that serve the broader community. For better or for worse, the historical record is that most of the modern regulatory state was supported and approved by Republican administrations, starting with the Sherman Antitrust Act under the administration of Benjamin Harrison and the Pure Food and Drugs Act under the administration of Theodore Roosevelt. The Nixon administration brought us the Environmental Protection Agency, the Consumer Product Safety Commission, the Occupational Safety and Health Administration, and the Federal Energy Administration. Nixon also initiated the most comprehensive, but fortunately temporary, peacetime wage and price controls. And George H.W. Bush endorsed the costly 1990 amendment to the Clean Air Act and the hopelessly ambiguous Americans with Disabilities Act. In contrast, most of the first steps to phase out the older forms of economic regulation were during the administration of Jimmy Carter. One might hope that existing and proposed regulations would be judged by whether they effectively serve the broader community, not by the party of those who support or oppose these regulations. Rudolph J.R. Peritz Professor, New York Law School Author, “Competition Policy in America: History, Rhetoric, Law” (2001) Few of us remember that it was Jimmy Carter who first promised less federal regulation of business practices. What Ronald Reagan brought to Washington was a radically different logic of deregulation. And it is the Reaganite logic that is coming home to roost. For Carter, the logic was regulatory capture. Deregulation was the solution to corruption of the political process by commercial firms whose resources overpowered and captured regulators. The process promised competition free of excessive corporate power because firms not only lost their holds on agencies but also remained subject to antitrust and other statements of public interest. For Reagan, the logic was the loosening of government constraints on a natural corporate inclination to compete on the merits. The post-regulatory environment was imagined as a different sort of free competition — competition free of government supervision. Whether overstating earnings and manipulating energy markets (WorldCom and Enron) or understating earnings and threatening innovators (Microsoft), such corporate predation reflects a sociopathic ethos of personal gain emboldened by the Reagan legacy of business as a regulation-free zone. But markets do not work well without good information and without faith that success is on the merits. For that, political institutions must set and conspicuously enforce ground rules. Carter understood that. Reagan did not. Current Washington politics seems little more than an echo of the Reagan legacy, spiced with a prudent dash of moral outrage. David M. Becker Partner, Cleary, Gottlieb, Steen & Hamilton General Counsel, Securities and Exchange Commission (2000-02) I don’t think one can fairly blame the current financial scandals on deregulation. There is nothing necessarily inconsistent between deregulation and vigorous law enforcement and disclosure. Even those who believe that market forces should totally supplant substantive regulation generally say that markets need complete information to operate at maximum efficiency and that rules intended to protect the integrity of the market must be obeyed. I do worry, though, about the failure of successive governments to allocate enough resources to investor protection. This isn’t an issue of the degree of intrusiveness of regulation. It’s that you get what you pay for — no more, no less. The most important deterrent to misconduct is increasing the likelihood of detection and punishment. That’s far more important than increasing the severity of punishments. I’d worry a lot less about the enforcers’ firepower than about the number of them. We need more, and more experienced, cops on the street. Lawrence E. Mitchell Professor, George Washington University Law School Author, “Corporate Irresponsibility: America’s Newest Export” (2001) It would be hard to call the president’s speech last week a crackdown on business as much as sound and fury — signifying nothing. At the same time, it’s quite clear that the environment we’re in, which calls for a serious crackdown, is the legacy not only of Reagan-era deregulation but also the Reagan gospel of greed. While there are a number of ways in which corporations have behaved irresponsibly, the concept of managing earnings, which has been the driving force behind most of the scandals of the last six months, comes about as a consequence of market demands for ever increasing profits, earned or not. Of course, the problem is compounded by deregulation, which has deprived us of some of the enforcement tools we used to have. For over 25 years, the Supreme Court has steadily been whittling away the ability of aggrieved stockholders to hold management accountable. In 1995, Congress foolishly passed the securities “reform” act, which made it even harder to sue and hold corporate executives and their accountants accountable. A tax amendment encouraging corporations to compensate their executives in stock also was harmful. And that brothel of corporate law, Delaware, has led the nation in loosening fiduciary standards to the point where I suspect that we’ll find that most of what the Enron board did was perfectly legal. So, yes, deregulation is to blame, but greed is even more to blame. Only when we have restored our capital markets to their original investment function — and away from a get-rich-quick scheme for the already wealthy — can we rid ourselves of the curse that began with the Reagan revolution. Richard W. Painter Professor, University of Illinois College of Law Author of books and law review articles on legal ethics and securities regulation This is not about regulation or deregulation as much as it is about honesty and integrity on the part of persons in positions of power. Government regulation plays an important part in controlling the damage that all-too-human characteristics such as dishonesty, greed and lust for power can do in the private sector. Securities laws are an important part of this regulatory framework, and those who argue that we do not need securities laws, or that securities laws do not need to be rigorously enforced, do not understand the lessons history has taught us. Fraud and deceit have on several occasions threatened the integrity, and even the survival, of our capitalist system, and we owe the strength of that system today to our willingness to control its excesses. At the same time, government regulation can itself become unjustifiably burdensome and excessive. Dishonesty, greed and lust for power exist in government, too, after all. Matters are complicated yet further when we allow persons to act as private attorneys general and sue alleged wrongdoers. As important as private lawsuits are to enforcing the securities laws, some class action litigation unfortunately is driven more by the desire for handsome attorney fees, even if a suit is frivolous, than by a desire to protect investors. Striking the right balance between underregulation and overregulation, as well as striking the right balance in our litigation system, is our challenge for the future. In meeting this challenge, both the SEC and Congress should be cognizant that special interests — be they corporate managers, accountants or plaintiffs’ lawyers — will seek to influence public policy. Independence from these special interests in the making and enforcement of our securities laws will be, above all, the most important part of restoring the trust of investors and the public generally in our economic system. Compiled and edited by Legal Times’ associate opinion editor Evan P. Schultz.

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