In a speech to the Council of Institutional Investors, Securities and Exchange Commission Chairman Harvey Pitt introduced a new and creative approach to accounting reforms. He called on these major shareholders to exert their influence in constructive ways to help improve corporate accountability.

"After all, institutional investors are really just large agglomerations of regular folks," explained Chairman Pitt. "People who choose to invest their money in the same mutual fund ... [are] people busy doing their jobs, lacking time to research stocks and bonds in which to invest for their retirement or their children's education. So they give their money and their trust to you."

Institutional investors can prove themselves worthy of that trust, Chairman Pitt said, by playing a bigger role in overcoming the negative forces that led to recent accounting scandals. To help institutional investors in this role, the SEC is encouraging several types of actions:

• Disclosure of voting policies. Individuals who invest in mutual funds cannot vote their own shares, so mutual funds should make it a policy to vote in their clients' best interests. To discourage or expose any potential conflicts of interest, the SEC is proposing rules that would require funds to disclose their voting policies.

• Disclosure of fund portfolio holdings. The SEC is also currently preparing a proposal to require greater and more frequent disclosure of fund portfolio holdings. Although this proposal will involve some difficult and controversial issues, Chairman Pitt said a vote is expected on the proposal by year-end.
• Leaving more decisions about stock options to investors. Because they reward short-term results, stock options can knock the interests of management out of alignment with the interests of shareholders. To help bring the two back into alignment, the SEC is looking beyond the mandatory expensing of stock options, (which does not seem to address the real problem), and Chairman Pitt is leaning toward a solution that would allow shareholders to vote on which of the permissible accounting methods to use.

Chairman Pitt also invited creative suggestions from institutional investors. An unusual approach under consideration by regulators in the UK is a revision of their equivalent of the SEC's Regulation FD (fair disclosure) that would give institutional investors an opportunity to learn more about a company's trade-offs between long and short-term goals. Under this concept, companies would be allowed to invite chosen shareholders to take on the status of corporate "insiders" who would be able to hear confidential information about strategy so they could advise management of their views. To avoid privileged disclosure, the investors would need to forego the right to trade the company's shares until their inside information becomes public knowledge. ("Share and share alike?", The Economist, September 19, 2002.)

-Rosemary Schlank