Independent directors 'key' to reform

The comptroller of New York State and sole trustee of its $110 billion (€92.5 billion) pension fund yesterday told a Dublin audience that independent directors were the key issue in combating corporate fraud.

Mr Alan Hevesi said the collapse of Worldcom and the resultant effect on investor confidence, had decreased the value of the New York State pension fund by $9 billion.

This money had to be made up through increased contributions from taxpayers.

A study found that corporate scandals caused about 60 per cent of the 28 per cent decline in market value that occurred between March 19th, 2002, and July 19th, 2002, in the US.

Mr Hevesi was in Dublin as part of a visit to the UK and the Republic to speak about the National Coalition for Corporate Reform initiative in the US. He addressed an audience at the Trinity College School of Economics, Business and Social Studies, which included bankers, pension fund managers and investment managers.

The UN Commissioner for Human Rights and former president Ms Mary Robinson was also in attendance.

Mr Hevesi said he would encourage shareholders in the Republic to become activists and to seek any reforms they felt were required.

The US coalition has brought together officials from a number of US states, along with some of the major trade unions, and it is hoping to achieve reform of corporate governance while the issue is still controversial.

Mr Hevesi said it was not until the Worldcom scandal that the wave of corporate scandals in the US hit "critical mass" and became an issue for the general public.

He said there was a "mindset problem" involved in seeking corporate reform, as many of the people in the "shareholder community" came from a corporate background. He, on the other hand, came from a public policy background.

He said the US Sarbanes-Oxley (Public Company Accounting and Investor Protection) Act was encountering "huge resistance".

The coalition was pressing the Securities & Exchange Commission (SEC) to agree to the nomination of independent directors by major shareholders, but the SEC was responding with proposals that involved too many conditions.

Another major plank for the coalition in its fight against corruption was its determination to sue those who benefited from corruption.

He said the coalition was lobbying for a change in the law to allow it also sue those who "aided and abetted" corporate fraud.

"Enron paid Arthur Anderson $25 million for auditing and $26 million to beat the audit. They called the latter consulting."

New York is the lead plaintiff in the suit against Worldcom, which involved $11 billion in inaccurate filings.

In the suit against Enron, the case is at the stage where the plaintiffs are estimating the value of the main executives who defrauded the company and left tens of thousands of workers and former workers without jobs or pensions.

Mr Hevesi said the US Federal Government had been "very slow" to prosecute those who were behind the massive frauds.

A speaker from the audience said he was a trustee of quite a few Irish pension funds.

"I do despair. Barely a day goes past without seeing someone walking away with money, yet you rarely see the investment managers doing anything," he said.

Speaking to The Irish Times, Mr Hevesi, a Democrat, said he believed the upturn in the US economy is a "sugar rush" and will not be sustained.

The upturn was based on debt and would probably continue up to the presidential election but, "when it comes to the time to pay the money back, it will have a negative effect on the economy", he said.