Lee Drutman is the communications director of Citizen Works and the co-author of the book The People’s Business: Controlling Corporations and Restoring Democracy.
In Washington this past week, leaders of Delta Air Lines and Northwest Airlines told a Senate panel that they didn’t have the money to cover the pensions of 150,000 workers and retirees, and that they’d probably go bankrupt on account of it. If so, they would join their troubled competitors, U.S. Airways and United Airlines, who also broke their pension promises to thousands of employees and then turned to the government to cover at least part of the difference. (At $10 billion, United’s pension default is almost as big as WorldCom’s record-setting accounting fraud—though for whatever reason it has hardly produced the same uproar.)
These latest pension failures come closely on the heels of the resignation of William Donaldson as the chairman of the Securities and Exchange and the speedy nomination of free-market ideologue and corporate sycophant extraordinaire Rep. Christopher Cox, R-Calif., to be the agency’s new head. Though the two events are certainly unconnected on the surface, both bode poorly for the ability of hard-working Americans to enjoy an adequate retirement.
The fact that more and more companies are unable to provide promised pension benefits is troubling for obvious reasons. According to the Pension Benefit Guaranty Corporation, the taxpayer-funded agency responsible for providing partial insurance on corporate pensions, pension plans for 15 million employees at 1,108 major companies were underfunded by $353.7 billion last year, up a whopping 27 percent from the year before. That’s a lot of workers who are unlikely to get their promised retirement benefits.
The bigger and even more significant trend, however, is not the companies who are unable to provide. It is the companies who are simply unwilling. Over the last two decades, there has been a steady erosion of guaranteed pension benefits and a steady rise of corporations instead giving employees a 401(k) account, a few bucks to invest, and a hearty piece of advice: “Good luck. Go strike it rich.”
Problem is, it’s not so easy to strike it rich. Most people know very little about investing, and the recent wave of financial scandals has shown, it’s quite easy to get taken for a wild ride. Corporate financial reporting remains stubbornly obfuscatory, and the investment banks and mutual funds that are supposed to help individual investors get rich are riddled with conflicts of interest and, on the whole, seem far more concerned about making money off small investors than helping them to make money on their own.
This is where the Securities and Exchange Commission is supposed to come in. Unfortunately, in the years leading up to Enron and the cascade of accounting, investment banking and mutual fund scandals that followed, the SEC was consistently underfunded and undermined by a Republican Congress caught in the deregulatory fervor of self-regulating markets. As a result, the agency was unequipped to prevent or even really monitor the greedy corporate self-dealing that grew rampant go-go 1990s.
In the almost three years since the Sarbanes-Oxley accounting reform legislation was passed in a rare fit of Congress actually doing something productive, the SEC has been gradually revitalized. Under Donaldson, who took over early in 2003, the agency has doubled its budget, hired lots of new blood (though it is now on a hiring freeze that does not bode well), and begun to start to matter (even if New York Attorney General Eliot Spitzer still matters more).
In doing so, however, it has ruffled the feathers of business groups like the influential Business Roundtable and the powerful U.S. of Chamber of Commerce (which spent $193 million on lobbying between 1998 and 2004, almost $70 million more than the next biggest spender on Washington lobbying, Altria—formerly Phillip Morris). These groups have gone after Donaldson somewhat relentlessly (with the Chamber even suing over a rule to make mutual fund boards more independent), and may have had something to do with his resignation. Certainly, they have frustrated some important pieces of his agenda, including an unnecessarily controversial proposal to give shareholders some minimal say in nominating candidates to the board of directors. (Under the current system, management controls the process, and director elections are almost all done Soviet-style: one and only one slate of candidates. As a result, it’s very difficult for shareholders to hold directors accountable.) Donaldson also unsuccessfully pushed to require companies to clearly and straightforwardly disclose executive compensation packages, instead of engaging in an elaborate hide-and-go-seek game with investors, as most companies do.
Cox, however, comes pre-approved by the Chamber of Commerce, which gives him an 87 percent lifetime rating. David Hirschmann, senior vice-president of the chamber, pronounced that Cox would “bring the kind of philosophy that's needed to move the SEC forward at this time.”
But looking at Cox’s legislative record, the main philosophy that emerges is one of doing favors for business, happily taking their campaign contributions, and then proclaiming that the free market works. (According to the Center for Responsive Politics, 97 percent of Cox’s 2004 re-election campaign was funded by corporate political action committees or executives of companies and their family members. Since first being elected to Congress in 1988, he has received more than $254,000 from the securities industry). Though there were surely many causes of the recent wave of corporate scandals, two of the most often cited are the 1995 Private Securities Litigation Reform Act (PSLRA)—which made it harder for defrauded investors to hold companies accountable for securities fraud and essentially absolved accountants, lawyers and bankers of responsibility for fraud—and the explosion of unexpensed stock options, which allowed companies to distort their financial statements and made it easier to give executives massive compensation packages with perverse incentives to get the stock as high as possible and then sell out before it collapsed. Cox was a primary author of the PSLRA in 1995 and has been a key player in the shameless battle to preserve the stock options loophole. In short, Cox is no friend of the small investor.
We know from the recent scandals that, left to their own devices, much of corporate America and much of the investment industry is quite comfortable playing tricks on small investors. We also know now that more Americans are now more dependent on the investment industry for their retirement security than ever before. Certainly, the SEC cannot guarantee that the stock market will go up or down. For better or worse, there is a good deal of volatility in this arrangement that is far beyond anybody’s control. What the SEC can do, however, is make sure that investors are protected from the kind of corporate scams, frauds and inside-dealing that seems to proliferate when left unregulated. An SEC Chairman who ignores this regulatory responsibility, either out of ideological certitude or mere corporate toadyism, will do so at the peril of the retirements of millions of Americans, as well as the stability of the economy as a whole.