May 11, 2003	Sunday	Rabi-ul-Awwal 8, 1424

CHICAGO, May 10: Chicago Federal Reserve Bank President Michael Moskow on Friday warned against excessive regulation of US corporate governance in the drive for reform, saying the system does not need a radical overhaul.

Indeed, some of the new rules introduced after a wave of accounting scandals in the past 18 months are already having some “unintended consequences”, one of the regulators, SEC Commissioner Cynthia Glassman said.

Both were speaking at the Chicago Fed annual banking conference, where policymakers, economists and bankers from the US and Europe gathered to discuss corporate governance.

Several speakers came out in favor of incremental rather than wholesale reform.

Moskow said some changes in executive pay and company taxes would help improve a sense of fairness in markets, but said sweeping changes weren’t needed.

I do not believe that our system of corporate governance needs a massive overhaul, and any changes that we make must be consistent with a fundamental reliance on the market as the arbiter of a firm’s performance, Moskow told a panel discussion.

“... the market will occasionally make mistakes, but the danger in replacing the market with regulations is that (they) typically make even more mistakes than the market,” he said.

Glassman said new rules and threats of vigorous enforcement were having a variety of “unintended consequences.”

The 2002 Sarbanes-Oxley Act included a slew of new regulations designed to fight financial reporting and Enron-style accounting shenanigans.

One “unintended consequence” cited by Glassman was that some mutual funds have scaled back on forward-looking statements. This would provide less transparency for investors, not more, she said.

Some companies, including small banks, were avoiding going public or were reverting to private ownership to sidestep tougher governance standards now applied to public companies, she added.

We need to step back and see how the reforms are working, Glassman told the panel.

Others cautioned about a doubling-up of official and corporate efforts in some areas of reform.

White House economic adviser Randall Kroszner told the conference financial services firms need to watch for overlaps between the regulators and private sector organizations.

The efforts of government legislators and regulators might in some instances duplicate private sector efforts to promote strong corporate governances, Kroszner said.

Among proposals that Moskow favored were eliminating double taxation of dividends, advocated by US President George W. Bush, and changes in executive stock option plans to index options to market performance.

Moskow said these changes would help ease the uncertainty that has been hanging over financial markets, and thus eventually spur better economic growth.

The US economy and financial markets have been staggering under a series of corporate scandals that have shaken the faith of investors and made companies super-cautious about taking on risky investments for fear of a market backlash. —Reuters