Spitzer Faults Business On Ethics

His comments came during an address to the Syracuse, N.Y.-based Independent Insurance Agents Association of New York, during its annual business meeting held this week in Garden City, N.Y.

Mr. Spitzer said chief executive officers had allowed corporate corruption to grow, and admonished the rest of the business community for not doing its part to prevent it from happening.

Mr. Spitzer brought charges against several investment houses and analysts in New York state for misleading investors about stock issues to protect the fees the financial houses were getting for the offerings. In early April, 11 investment houses agreed to pay $1.4 billion in fines concerning misleading stock research.

"There is a crisis in accountability," said Mr. Spitzer, not limiting the problem to just private companies. He noted that not-for-profit entities as well as public organizations and corporations are also coming under scrutiny. He mentioned Hale House, a children's shelter in Harlem, as an example of a not-for-profit organization where law enforcement discovered management "had their fingers in the till."

The business community's ethical problems began in the 1990′s, he said, when CEO's were placed on a pedestal and admired for their work. But behind the scenes, some of these idolized executives began to fail "to live up to the standards we all understand" and in turn allowed the lack of standards to filter down through the ranks.

Small, "off-balance-sheet" accounts were tolerated by the CEOs, and the corruption grew from there within the corporation.

He also blamed the outsized compensation packages CEOs receive as a contributor to the problem. He said figures from the Conference Board showed that in 1980, the ratio of CEO to worker salary differential was 42 to 1. By 2001, he said that figure rose to 411 to 1.

"There really is a problem with CEO compensation," he said.

However, he did not limit his critique to company heads. He said boards of directors and audit committees shared blame for not properly overseeing the corporation.

"Boards went to sleep," he said.

He did not feel that adding independent directors to the board was the answer, noting that many lacked the expertise to understand what is happening within the corporation.

"What we want to see is a dynamic conversation between the CEO and board and have the board participate in where the company is going," Mr. Spitzer observed.

He admonished auditors for forgetting who their real clients are: the shareholders. Mr. Spitzer said auditors needed to wake up to their responsibility, and hoped recent legislation and the legal problems other firms such as Arthur-Anderson encountered would "awaken them from the past."

Attorneys also came in for some criticism. "Lawyers are almost as much to blame as auditors" for scandals that have taken place, he stated, saying that they have papered over many problems. He added that they need to "re-work the profession" to prevent this from happening in the future.

The analysts connected with investment bankers, who were targeted by the Attorney Generals office, he said, had become subservient to corporations. The enormous fees they received made them corrupt, he said, adding that "risk and error had nothing to do with the fraud we unmasked."

Mr. Spitzer said self-regulation had failed, but admitted he did not have an answer for what would work.

The Attorney General received a loud round of applause when he added that the investment houses had better understand the message they received or "things will get worse for them. They will not see the fines they got this time, but criminal indictments next time."

Institutional investors also drew his criticism for being too passive. Mr. Spitzer said the stockholders needed to challenge management and exercise their voices.

"Take the effort to exercise your voice," Mr. Spitzer advised. "It is the only way to make improvements. If you don't, it will allow the continued failure of management."