SEC Chairman Attacks Corporate Earnings Obsession

by Glen Shapiro, LawAndTax-News.com, New York

28 March 2003

In one of his first speeches as newly appointed chairman of the Securities and Exchange Commission William Donaldson said that in looking at last year's corporate scandals too many companies had slavishly played "the earnings projection game". Mr Donaldson took the SEC helm last month, several months after his predecessor Harvey Pitt resigned under fire after a series of high-profile political missteps.

That "created an atmosphere in which `hitting the numbers' became the objective, rather than sound, long-term strength and performance," Donaldson told a meeting of the National Association for Business Economics, a group that includes economists working for companies as well as government and university economists.

The practice of issuing targets for company results has become a harmful obsession that should get a critical look, said Mr Donaldson, and he identified companies' desires to meet Wall Street's expectations for their earnings as the motivation behind artificially inflated earnings in recent accounting scandals.

He urged company boards to rein in pay packages and perks for top executives, and to reduce their reliance on management and compensation consultants when setting executive salaries. CEOs have "steadily increased in power and influence" during the past decade, Mr Donaldson said. "In some cases, the CEO had become more of a monarch than a manager." In Monday's speech, Donaldson said that investor anger is exacerbated "by the perception and in many cases unfortunately the reality that those at the top have not shared in their loss but have continued to enjoy massive salaries, bonuses and perks unrelated to performance."

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