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Manager’s Journal

By William J. Holstein and Edward M. Kopko

Spitzer’s Climate of Fear

Spitzer’s Climate of Fear CartoonIN THE U.S. SYSTEM of checks and balances, it is entirely appropriate that a state attorney general be on the lookout for crimes or abusive practices. But what we have witnessed from New York Attorney General Eliot Spitzer fails the test of reasonableness. When an ambitious political figure, eager to become governor, essentially assassinates CEOs in public, isn’t that an abuse of power? Isn’t it wrong to allow a state attorney general to use diktat to create a more hostile regulatory climate that affects businesses across the country?

          Our research among CEOs suggests overwhelmingly that they feel the answer to those questions is “yes.”

          Of course, if what Mr. Spitzer describes as a pattern of rigging bigs is true, former Marsh & McLennan CEO Jeffrey Greenberg can be faulted for insensitivity to a changing environment. He should have known that the pattern of allegedly falsified bidding, however long it had been established, was not in keeping with the standards of governance established in the post-Enron era. 

          But as everyone involved in business realized, there are many practices that fall into the gray zone. Markets are complex and laws cannot possibly govern every aspect. AIG had sought opinions from state insurance officials about what the industry was doing. No answers were forthcoming.

          The proper role of government would have been to pursue remedies, perhaps legislatively. As a part of what we recognize as “due process,” a period of time, perhaps a year, could have been established for reforms to take place.

          But to hit with a full barrage of criminal and civil charges was wrong. Mr. Spitzer essentially demanded Mr. Greenberg’s scalp. A spineless board caved. A CEO was gone in 11 days. Rather than engaging in careful formulation of policy, Mr. Spitzer seems to be building his political career by collecting trophies.

          Mr. Spitzer has created a climate of fear because he charges into industry after industry and criminalized long-standing practices. Some 80% of the 339 readers who responded to our monthly e-mail poll said the U.S regulatory climate is hurting their competitiveness and several cited Spitzer. “The interpretation of what is legal changes without notice,” Ed Mullaney, president of the Rocky Mountain Machine Shop in Salt Lake City told us. “We find out after Spitzer of the SEC files charges against a company or individuals. It is tough to operate and make decisions with a legal system that changes like the weather.”

          There are other issues. What will become of $3 billion that Mr. Spitzer has collected from various industries? Mr. Spitzer says he is going to refund the money to investors and others who were cheated. But his press aides can’t explain how or when that will happen. Even CEOs who agree with Mr. Spitzer’s goals don’t like the appearances. “The practice of settling the investigations for cash with no formal charges, no admission of guilt and no meaningful restitution to the alleged victims makes him part of the corruption rather than a solution to it,” a CEO from the Midwest told us. Like the majority of CEOs we’ve spoken with, this one asked that his identity be protected.

          The last point of concern is about jobs. Healthy businesses create jobs, but companies in crisis don’t. Marsh felt obliged to cut 3,000 jobs after Mr. Spitzer filed charges. Didn’t Spitzer know that if he destroyed a company’s revenue model overnight, people would lose jobs?

          As a state, New York is shooting itself in its economic heart. According to the Tax Foundation, New York’s tax system ranks 49th in the nation in its business-friendliness. CEOs contemplating where to locate economic activity would have to be out of their minds to choose New York in view of Mr. Spitzer’s activities. And investment decisions by CEOs are obviously an important source of income and jobs.

          If a re-elected President Bush wants to send a signal to the business world, or if the emotionally conflicted Securities and Exchange Commission Chairman Bill Donaldson wants to finally demonstrate where his heart is, or if Gov. George Pataki wants to repair his state’s reputation, they should start by recreating an environment of common-sense regulation that reflects the complexity of business. And Mr. Spitzer must return to his role – as an alert, sensible state attorney general – not as a combined judge and jury who understands the world only in black and white.

          Mr. Holstein is editor in chief of Chief Executive magazine and Mr. Kopko is CEO of the Chief Executive Group. This is adapted from an editorial in the December issue of the magazine.