This is Compliance Week, not Washington Monthly. Unfortunately, starting this summer, compliance executives across the country will need to avoid political traps as well as regulatory ones. Some powerful political players are beavering to transform key 2006 elections into public referenda on whether the Enron-fueled crackdowns on U.S. corporations have gone too far. And, while elected officials like New York Attorney General Eliot Spitzer are the prime targets, the reality is that compliance officials, chief executives, and institutional investors are in danger of being in the line of fire.

Spitzer is Target One for the campaign. At the time this column was penned, the AG—now a candidate for governor—was riding 20 points ahead of incumbent George Pataki in the polls. Pataki has yet to announce whether he plans to try for a fourth term. But some business circles with deep grievances against Spitzer are said to be readying cash for so-called 527 committees to wage a tooth-and-claw campaign to break Spitzer’s momentum.

Here’s their problem, though: If they try to frame the election as a repudiation of corporate regulation, they lose.

In fact, such a strategy could play right into Spitzer’s hands for one simple reason: the public still doesn’t trust CEOs. And if you don’t believe the polls on that, just look at the recent verdicts in trials of Tyco’s Dennis Kozlowski and Worldcom’s Bernie Ebbers. In each case, jurors told the media afterwards that it was the chief executive’s personal testimony that they did not believe—especially given the big bucks each made.

So the counter-Spitzers will have to be creative if they want to both block the New York Attorney General’s ambitions and slow state “watchdogging” across the country. Their most likely tactic: Paint Spitzer as a kind of corporate governance Savonarola, a zealot ready to make prosecutorial bonfires of American business to propel his ambitions. Bashers are already branding him “The Lord High New York Executioner” in the Wall Street Journal’s editorial pages.

But critics have a larger ambition. Spitzer, Massachusetts Secretary of State William Galvin, New York State Comptroller Alan Hevesi, California Treasurer (and gubernatorial candidate) Phil Angelides, and others have made corporate policing hugely glamorous, drawing headlines and broad public support. Ambitious politicians gunning for state office across America now see it as a vote-winner; as the Wall Street Journal put it last month: “Business leaders worry that [Spitzer’s] success will spawn an entire generation of state attorneys general who attempt to make political careers by taking on big business.”

Opponents, then, may be tempted to orchestrate a bitter, all-out campaign to send a simple message to candidates: If you ride the crackdown theme too hard, we will tear you down. Check out, for instance, the American Enterprise Institute’s online “AG Watch” for a small taste of things to come. Or review Peter Wallison’s AEI paper accusing Hevesi of political motivations for forcing WorldCom directors to assume limited personal liability for their failures. Or check out the campaign launched May 26 by the U.S. Chamber of Commerce to rein in “activist attorneys general” whom one speaker labeled “bounty hunters on the prowl.”

That is the kind of blood sport partisan politics has become.

Bully for politics.

But senior corporate executives on the one hand, and institutional investors on the other, need to face the reality that the crossfire could prove more dangerous than it first appears, and is likely to affect their relationships.

Charges against Spitzer and like-minded prosecutors will be like waving a big red flag at the investor community. Investors have cheered Spitzer on—particularly in the face of early sluggish enforcement by the U.S. Securities and Exchange Commission. In fact, if anything, the corporate governance community—including state and city retirement plans—are today even more committed to state securities enforcement than they were in the months after Enron imploded. They fear that Christopher Cox, if confirmed as SEC chairman, has a not-so-hidden White House mandate to suppress federal scrutiny of corporate behavior. So some investors will be watching which CEOs aid and abet the anti-Spitzer movement, seeing it as a litmus test of who wants to move forward, and who wants to return to the bad old days.

Some CEOs, on the other hand, will do riffs off the argument framed by the Wall Street Journal editorial page last month. “Rooting out and punishing bad behavior is an important job, but so is ensuring that honest companies have the freedom to innovate and provide their services free of unfair accusations, harassment or legal intimidation.” For the Journal, Spitzer is the Darth Vader of attacks on boardrooms.

In other words, the blood lust of partisan politics threatens to destroy communication and balance between management and owners, with hardliners like the AEI preaching the false dichotomy that acting in ownership’s interest is somehow anti-business. Extremists on both sides would force all involved to choose their “tribes”—owners or managers—and set us off down the path to tribal warfare.

Even nonpartisan commentators are vulnerable to getting sucked into the maelstrom. Joe Grundfest, the former SEC commissioner and Stanford law professor, wrote a June 14 op-ed in The New York Times cautioning against knee-jerk prosecution, seeming to imply criticism of Spitzer. In fact, Spitzer’s philosophy is that "You don't want to be swinging a meat ax when a scalpel is appropriate. You want to get rid of the individuals who did the wrongdoing and get the company back on an even keel." But expect the Grundfest piece to resonate with the anti-Spitzer campaign.

What can compliance officers do to avoid becoming “collateral damage?”

First, pull out all stops to keep your CEO off what ex-Maine Attorney General Jim Tierney calls “a bitter and bloody field.” This is a no-win battle. Even if your CEO’s favored AG candidate wins in 2006, it could earn the company the hostility of your investors.

Second, communicate with your owners in various forums with a view towards creating viable common ground. You might want to pay special attention to your public fund shareowners to make sure you know how they are, or are not, participating in hot election contests. They may need extra assurance in the next year that your company is staying clear of politics.

Partisanship and extremism may be entertaining to watch in 30-second political ads, but they are no way to run your business.

This column solely reflects the views of its authors, and should not be regarded as legal advice. It is for general information and discussion only, and is not a full analysis of the matters presented.

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