HARDLY A WEEK goes by without a corporation or a corporate chieftain being humbled. May 24 brought the suing of Dick Grasso, the former chairman of the New York Stock Exchange; the week before brought the punishment of Richard S. Strong, a leader in the mutual fund industry, who accepted a $60 million fine and a lifetime ban from the financial industry to settle allegations that he had lined his pockets at the expense of ordinary investors. These headlines, which come to you courtesy of Eliot L. Spitzer, New York's attorney general and aspiring governor, show that even the most elegantly white-collared bosses are not above the law. But preventing a fresh round of scandals when the next boom happens will require reform of the regulatory machinery. It will depend less on Mr. Spitzer's office than on the Securities and Exchange Commission.
After a period of poor leadership at the start of the corporate scandals, the commission acquired a firm chairman at the beginning of last year in William H. Donaldson. Mr. Donaldson set about forging new rules in several areas: Mutual fund fees, which are often hidden and unfair to investors; "self-regulatory organizations" such as the stock and commodity exchanges, which often behave like non-regulated organizations; and shareholders' ability to choose board directors, so constrained now that company executives can ignore the will of company owners. Mr. Donaldson also wants to assert the SEC's right to regulate hedge funds -- although because these are only allowed to serve wealthy and presumably sophisticated investors, the case for regulatory oversight is weaker.
On two of the four issues -- the cleanup of self-regulatory organizations and the assertion of authority over hedge funds -- Mr. Donaldson appears to be getting what he wants. On a third issue -- reform of mutual funds -- he has faced vigorous industry opposition, particularly to the idea that the boards overseeing funds should have independent chairmen. In theory, if you put your money into a mutual fund managed by T. Rowe Price or Fidelity, an independent board is supposed to ensure that your mutual fund company does not charge exorbitant management fees; this is especially important if your savings are locked into that company via a 401(k) plan or some other tax-preferred vehicle. In practice, however, such boards don't do much. By proposing that their chairmen be independent, and that three-quarters of their directors be independent also, Mr. Donaldson is correctly promoting investor interests. Happily, it looks as though he will stand up to industry lobbying on this point.
The fourth reform effort -- the one empowering shareholders -- may not turn out so well. At present, company managers control the slate of candidates to become board directors, and shareholders just vote on it; there is no practical way for shareholders to put forward their own candidates. Mr. Donaldson has proposed that, if the management puts forward a candidate so bad that 35 percent of shareholders withhold their approval, the following year shareholders must be offered a choice of candidates. This hardly opens the door to hyper-democracy in the boardroom. But the nation's chief executives hate the idea of ceding power to shareholders, and they have lobbied fiercely against the proposal.
Last July, Mr. Donaldson visited The Post and declared his support for "a shift, a correct shift, away from a dominance by corporate executives and back to the board. . . . This has been debated for too long as far as I'm concerned." Ten months later, the debate continues. Mr. Donaldson must do what he knows to be correct.