More Reform and Less Hot Air

When it comes to cracking down on corporate crime, retribution seems to be the order of the day in Washington. Not long after Treasury Secretary Paul O'Neill spoke of hanging wayward CEOs from the highest tree, President Bush announced the formation of a "financial-crimes SWAT team." Unfortunately, the proposals most likely to pass into law have more bark than bite. Here's a look at some solutions that are more than just tough talk.

1. MORE ORANGE JUMPSUITS

President Bush last week called for doubling the maximum prison term for mail and wire fraud to 10 years. But the problem isn't the length of the sentence handed down for corporate malfeasance; it's winning a criminal conviction in the first place. Financial misdeeds are often difficult to explain to juries, and proving intent is even harder. More money for investigators would help, but the new $100 million that Bush pledged for the Securities and Exchange Commission is not nearly enough for the underfunded agency.

There is similar posturing in Congress but also some substantive proposals. An amendment introduced by Senator Patrick Leahy of Vermont would make it a felony to defraud shareholders--making it easier to prosecute executives--and also provide more protection to whistle-blowers. Another proposed law would make CEOs liable for the accuracy of their firm's financial statements, a measure supported by nearly 90% of those surveyed in a new TIME/CNN poll.

2. GET RID OF PET-ROCK BOARDS

Even with the improvements of recent years, too many corporate boards of directors still serve as little more than puppets of management. Bush only briefly touched on this in his speech, calling for a majority of each board--and for all members of its audit, nominating and compensation committees--to be "truly independent" and to "ask tough questions." But this should be spelled out further. Independent should mean more than someone who doesn't work for the company; it should exclude anyone who has a consulting gig or supplier deal or who has recently left the company--as the New York Stock Exchange recently proposed.

Board members also need to stop spreading themselves thin on five or 10 boards at a time. They should be subject to 10-year term limits and annual elections. The terms should not be staggered, so shareholders can throw out all board members at once if they wish. Companies should be required to give shareholders election materials about rival candidates; as it stands, small investors who want to wage upstart campaigns don't stand a chance.

To avoid getting too cozy with management, directors need to meet regularly by themselves and with auditors without any of the company's top executives present. They should appoint a lead independent director to balance the power of--or even serve as--the chairman, who these days too often happens to be the CEO. (That should not be allowed.) Finally, directors should be paid primarily with long-term grants of stock, rather than collect a check for showing up occasionally. At AutoZone, a $5 billion-a-year parts-supermarket chain, each board member must invest at least $100,000 in company stock within three years of joining.

3. PRICE THE OPTIONS