Although the Martha Stewart trial garnered a great deal of attention in early 2004, the issue of corporate malfeasance and accounting problems has been largely out of the spotlight since the Sarbanes-Oxley Act, which mandated significant corporate governance reforms, was passed in 2002. Maybe this is why a recent poll of institutional investors, conducted by Broadgate Consultants, Inc.*, found that 36% of these investors feel that the push for the reforms has actually gone too far and risks undermining the credibility of its supporters.
This somewhat amazing finding reflects what appears to be a major blind spot for many institutional investors and government regulators; many in this group seem to assume that the public's reduced focus on corporate accounting issues means that the average investor is no longer concerned about these abuses. However, that clearly is not the case: According to the UBS/Gallup Index of Investor Optimism**, U.S. investors think corporate accounting issues are having about the same negative effect on the current investment climate as the outsourcing of jobs and the situation in Iraq, and an even greater negative effect than the federal budget deficit.
Accounting Issues Hurting the Investment Climate "a Lot"
In June, Gallup asked investors how significant an effect they think each of nine issues is having on the U.S. investment climate. Similar percentages of investors say that "the issue of questionable accounting practices in business" (51%), "the outsourcing of jobs to foreign countries"(51%), and "the current situation in Iraq" (47%) are hurting the investment climate "a lot." The only issue deemed damaging by more investors is "the price of energy, including gas and oil" (62%). Forty-three percent see the federal budget deficit hurting the climate to this degree. Importantly, these responses remain consistent across investor income groups.
Hurting "a Lot" for a Long Time
Investor concern about questionable accounting practices in business has remained high since Gallup first started measuring it in March 2002, after the Enron collapse. In June 2004, just as many investors (51%) say questionable accounting issues are hurting the investment climate a lot as said so in March 2002 (52%). This trend peaked in July 2002, when 80% of investors said that accounting issues were hurting the investment climate a lot.
Bottom Line
Although the issue of corporate accounting and governance abuse has a lower public profile in 2004 than it did in 2002, I think that Wall Street and its regulators would ignore it at their peril. Investor concerns about what is happening in corporate America and on Wall Street have not been allayed. Instead, they have been submerged among the many other concerns currently facing the American investor.
Congress and federal regulators have taken some significant actions to address questionable accounting practices. Although these actions appear to have helped improve investor perceptions on the margin, they have not solved the fundamental problem of investor concern about potential corporate abuse. When only about half of institutional investors say Sarbanes-Oxley has been effective in promoting corporate governance and protecting investors, who can blame the average investor for remaining worried? What is the average mutual fund investor supposed to think when about three in four institutional investors believe the board structures of mutual funds are in need of reform*?
Of course, serious reform is unlikely as long as the public focus is away from these issues. However, if there is another corporate abuse "explosion" in the next few months, corporate accounting and governance could become an election year issue -- and I don't think that would be good for anyone.
*Survey of 120 buy-side portfolio managers and research professionals, conducted by Broadgate Consultants, Inc.
**Results for the total dataset are based on telephone interviews with 802 investors, aged 18 and older, conducted June 1-16, 2004. For results based on the total sample of investors, one can say with 95% confidence that the margin of sampling error is ±4 percentage points.