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Report:  More Reforms Needed to Restore Public Trust in Corporate America - 2002-09-17

A commission organized by the Conference Board, an independent business research group, Tuesday says more reforms are needed to prevent further corporate scandals, and restore public trust in corporate America.

The 12-member commission, which includes prominent U.S. business leaders and former senior government officials, was formed to investigate the widespread abuses which led to the scandals that have recently rocked the business world.

In its first report, the commission targets executive compensation for reform. Board members cited the fact that executive pay has, in the last ten years, grown at ten times the rate of regular employees' as evidence of a system "out of control".

Former chairman of the U.S. Central Bank, Paul Volcker, says the abuse of stock options is at the center of the executive compensation problem. Stock options are significant amounts of company stock offered by corporations to their executives as an alternative means of compensation.

"They have been the principle source of the egregious excesses in executive compensation over the past decade, without question," he said. "There ought to be an extremely strong bias in a public company against the use of fixed-price stock options."

The commission also calls for the uniform expensing of stock options, echoing a reform that market analysis firm, Standard and Poor's, made earlier this year the way it assesses company values.

The commission further recommends the advance notice of executive stock sales. Former New Hampshire Senator Warren Rudman says this reform speaks to the overall need for a renewed commitment to "transparency" in the corporate world.

"If you're going to restore the understanding between shareholders and corporations and the American public, they must feel that they are receiving all of the information, good and bad," he said. "I don't think they feel that way today."

Other reforms to executive pay include the use of compensation experts, not management, in determining executive salaries.

The commission will propose reforms in other areas of corporate governance, as well as in accounting practices, in its two future reports.