Sacramento News & Review
Corporate scandals may have created a once-in-a-lifetime opportunity for reform. But can consumer advocates break the influence that business interests have long-exerted on the Capitol?
Senator Jackie Speier hoped the time was finally right to rein in the corporations that use people’s personal information for marketing purposes. For three years, she’d been trying to get an aggressive consumer privacy bill through the Legislature, at each step facing overwhelming resistance from an army of business sector lobbyists.
Speier and the consumer groups who supported her Senate Bill 773 knew that the public’s faith in corporations was at a historic low point, and that worked to their political advantage. But they also knew that money influences politics, and that personalities and power still control the legislative agenda.
So on August 21 at the Assembly Banking and Finance Committee–the bill’s first major hurdle since being defeated on the final day of last year’s session–Speier needed to find a vote from one of the two traditionally pro-business Democrats on the panel: Ed Chavez or Lou Correa. She certainly couldn’t count on the Republicans or Democratic Chairman Lou Papan, whose well-publicized dislike for Speier set the tone for the hearing.
During his opening remarks, Papan belittled the bill’s importance and chastised consumer advocates for casting the conflict as one of corporate influence versus public interest. “No one was bought out by any specific industry or special interest,” barked the irascible, termed-out Democrat. “Such allegations are degrading to the process and have no business in this chamber.”
Papan’s harsh approach would draw rebuffs from both Assembly Speaker Herb Wesson and Senate President John Burton, who theatrically stormed into the hearing at one point to order Papan outside for a private conversation. But the hearing was still Papan’s to run, and it proved to be long and chaotic, alternating between high drama and mind-numbing minutiae.
The critical moment came when Republican Phil Wyman proposed a business-backed amendment to exempt corporate affiliates from the bill’s information-sharing strictures. Given the size and reach of many modern corporations, Speier protested that this hostile amendment would “gut the bill.”
But all three swing Democrats–Chavez, Correa and Papan–voted with the Republicans to amend the bill. The corporate lobby was all smiles, while the consumer lobbyists looked dejected. “Round one definitely went to the banking industry,” said Steve Blackledge of the California Public Interest Research Group (CalPIRG).
Testimony and debate would continue uneventfully for another couple of hours with a parade of mostly business sector witnesses, and in the end, the committee approved the amended bill with support from Chavez and Correa, all Republicans in opposition and Papan abstaining.
Once again, as has happened so many times in the past, a tough corporate governance bill had been gutted, at the urging of Republicans, with the help of some centrist Democrats and campaign contributions of major corporations.
But 2002 isn’t like past years. And the final chapter of SB 773 hadn’t been written yet.
It began last year with Enron, but it would only snowball from there. Company names themselves became synonymous with self-serving lies and greed: Arthur Andersen, WorldCom, Halliburton, Global Crossing, Dynegy, Qwest, AOL Time Warner, ImClone (for which even wholesome Martha Stewart is being investigated for insider trading).
Public distrust in corporate America grew stronger and more far-reaching with every new revelation of criminal business executives, ineffective regulators, devastated employees and investors, and collaborating accountants, bankers and politicians–an entire economic system that seemed to serve the profits of the few rather than the interests of the masses.
The polls charted a public mood that demanded major reforms, so the political system in Washington, D.C., moved with uncommon bipartisan speed to turn a dormant corporate crackdown bill into law, while federal regulators paraded handcuffed corporate crooks past the media’s cameras like common street criminals.
Nowhere was the populist scorn more palpable than in California, where the bursting of the stock market’s over-hyped bubble helped create a $24 billion state budget deficit, and where residents still had fresh memories of being victimized by Enron and others who used our deregulated markets to over-inflate energy prices and cause blackouts.
And if Californians forgot for a moment how unhappy they were with corporate interests, there was the Oracle scandal that tainted Governor Gray Davis with questions of whether a campaign donation speeded through a bad state contract. Then came revelations that Republican gubernatorial nominee Bill Simon had a history of questionable business practices, something Davis has splayed across television sets on a daily basis.
By late-summer, public interest activists in Sacramento were giddy about what several referred to as a “once-in-a-lifetime opportunity” to break the business sector’s tight grip on the political system, an influence traditionally exercised through campaign contributions and aggressive lobbying. As Foundation for Taxpayer and Consumer Rights Executive Director Jamie Court said in early August, “This is the moment to take on corporate power.”
It was a moment that arrived gradually, particularly for the 17-member Assembly Moderate Democrat Caucus (formerly the Business Democrat Caucus), which has regularly stood with Republicans in stopping past efforts toward major corporate reform.
Yet in a year that began with the unfolding Enron/Arthur Andersen scandal, the political dynamics were changing. As chairman of the Assembly Business and Professions Committee, Lou Correa reacted to the scandal by leading an effort to craft a package of accounting reform bills.
The most aggressive of the dozen accounting bills offered in Enron‘s wake this year was Correa’s Assembly Bill 1995, which would have banned accountants from simultaneously doing financial consulting work for corporations whose books they audit.
While the bill addressed the consumer and investor confidence issues raised by the Enron/Arthur Andersen debacle, it was a blow to the politically powerful accounting industry. Led by legislator-turned-lobbyist Richard Robinson, whose clients include the Big 5 accounting firms, hundreds of accountants stormed the Capitol to lobby against the bill in late June.
“They just came in and lobbied the hell out of that bill. We were just out-muscled,” said Dan Jacobson, a lobbyist for CALPIRG, which tried to push the bill against what he describes as a well-financed and aggressive misinformation campaign. Jacobson added: “Our political game is still run on money and the business groups give more money than anyone else does.”
When the votes for AB 1995 were finally tallied on the Assembly floor, all the Republicans opposed it and 23 Democrats voted for it. Yet it was the 25 Democrats who chose to abstain from voting–19 of which were needed to approve the bill–who really defeated the bill.
Under the California dome, this non-voting is known as “taking a walk,” a practice that invariably becomes more common on controversial measures during election years, because of fears of both political attack ads and lost campaign contributions. Other corporate reform bills–such as Hannah-Beth Jackson’s Assembly Bill 2070, which sought to expose corporate scofflaws before they get state contracts, and Senator Joe Dunn’s expansion of anti-trust laws, Senate Bill 1814–suffered similar fates in late June.
“There is popular will, but it’s tough to turn that into political clout,” CALPIRG’s Jacobson said, citing the oft-cited lag time of one year before public outrage is actually translated into signed legislation. “It takes more than popular will to get a bill through.”
Yet the popular will to get tough on corporations became stronger in the days that followed the defeat of these bills, as each day’s headlines brought new business scandals. In July alone, new Securities and Exchange Commission investigations into business improprieties were launched against AOL Time Warner, Bristol-Myers Squibb, Duke Energy, Merck, Mirant and Nicor LLP, and by the end of the month, President George Bush would quickly sign into law the Sarbanes-Oxley Act, which created federal oversight of accountants and criminal penalties for corporate wrongdoers.
It was against this backdrop of corporate credibility problems that business interests in Sacramento united for their most aggressive and high-profile lobbying campaign of the year. Their target was Assembly Bill 1493, Democratic Assemblywoman Fran Pavley’s effort to address the threat of global warming by creating long-term goals for reducing certain automobile emissions in California.
And the man who would lead the charge on behalf of corporate business interests was Sacramento mayor-turned-legislator-turned-business lobbyist Phil Isenberg, a Democrat who had established himself as a progressive man of intelligence and integrity during his 21 years in public service.
Business interests often try to choose spokespersons with populist credibility to voice their messages and those with political connections to push their interests. Isenberg had both. But it still shocked many consumer and environmental advocates when Isenberg, representing the Alliance of Automobile Manufacturers, emerged as the main spokesperson for the Coalition Against AB 1493.
“Phil’s role leading the fight against the global warming bill was pretty surprising,” said Lenny Goldberg, a veteran lobbyist for consumer interests.
The two men have a good relationship, so while Goldberg said that this and other positions that Isenberg has taken in lobbying for business interests don’t seem consistent with what he stood for as “a very principled, respected, public-interest legislator,” he stopped well short of condemning Isenberg, noting, “I wouldn’t judge his motives.”
Others in the consumer and environmental camps aren’t so kind or respectful. Jamie Court of the Foundation for Taxpayer and Consumer Rights likens Isenberg to Darth Vader, someone who used to be good but who now uses his power and connections for ill purposes.
California Nurses Association lobbyist Sara Nichols said Isenberg has used his good reputation to push positions he would never have advocated as a legislator: “He’s ubiquitous at the Capitol, and he wears a white hat all the time, playing off his white hat image.”
Isenberg dismisses such criticism by saying, “One thing I learned a long time ago in politics is when they agree with your position, you are noble and good, and when they don’t agree with your position, you are vile and evil.” As to whether he’s now cashing in on his good name, Isenberg said, “I’m not going to engage in that kind of debate.”
Yet those who fought Isenberg on the global warming bill say his arguments against the bill amounted to a well-funded misinformation campaign unworthy of someone still considered a civic hero by some in Sacramento, a city where the California State University campus proudly displays the Phil Isenberg Mayoral Papers.
“I think it reached new depths of deception and disingenuousness. They campaigned against a bill that didn’t exist,” said Sierra Club lobbyist Bill Magavern. “They whipped a lot of unsuspecting consumers into a frenzy by telling lies. So shame on Isenberg.”
With Isenberg arguing that the bill “sets the stage for huge increases in the costs of owning and driving vehicles in California,” and an aggressive political campaign by business interests labeling the bill the “SUV tax bill” and the “gas tax bill,” legislative phones were jammed with angry calls from SUV-driving constituents.
Yet the bill didn’t do what Isenberg said it would. While it did require the California Air Resources Board to develop a plan for reducing greenhouse gas emissions by 2009, Magavern notes that the board has no authority to levy taxes, a power limited to the Legislature. Eventually, the bill was even amended to specifically exempt such taxes, but opponents still refer to it as the “SUV tax bill” as they fight it with lawsuits.
Isenberg defends his tax arguments by saying the bill was so vague as to be open to wide interpretations, “so I don’t believe that it was an unfair comment.” In fact, even though proponents say the amendments preventing the air board from levying taxes were redundant, Isenberg said they are important and “the bill didn’t exclude these options until after the public fuss started.”
It wasn’t the first time that Isenberg has been accused of pushing the bounds of ethical and honest political debate at the behest of his corporate employers. In fact, his critics can even identify the very date on which they say Isenberg sold out: January 5, 1998.
Isenberg had been out of the Legislature for about six months when he was appointed to The Blue Ribbon Advisory Panel on Kaiser Permanente Arbitration. The three-member task force was created in the wake of a California Supreme Court ruling that said flaws and delays in Kaiser‘s patient arbitration system were partly to blame for the death of Wilfredo Engalla, who died of cancer while awaiting a hearing on claims that Kaiser had misdiagnosed his condition.
The case triggered a public relations nightmare for Kaiser and binding arbitration bills in the Legislature. Isenberg interviewed a variety of people for the report, including Engalla attorney David Rand, and the report’s reform recommendations were seen as having some good and bad points by interested parties, including Rand, Court and Nichols.
Yet Court and Nichols harshly condemn as unsavory what happened next. On the same day that the report was released–January 5, 1998–Isenberg registered as a lobbyist with the state and began advocating for Kaiser and other HMOs.
Isenberg doesn’t agree that the transformation tarnished his image as an impartial arbitrator, noting that, “I was compensated [by Kaiser for serving on the task force] and asked by Kaiser to continue in the mediation role.”
Since then, Isenberg has found that lobbying for corporate interests is far more lucrative than being mayor of Sacramento (1975-1982), a member of the California Assembly (1982-1996) or teaching political science classes at Sac State or UC Berkeley (occasionally since 1996).
Isenberg and his firm’s other lobbyist, Maureen O’Haren, raked in more than $1.6 million in lobbying payments in the first five quarters of this two-year legislative session, according to the California Secretary of State’s Office. In addition to Kaiser and the auto manufacturers, their clients included HMOs, hospitals, Pacific Gas & Electric and California Indian tribes.
Yet Isenberg’s efforts and those of other business interests, from the California Chamber of Commerce to the California Manufacturers and Technology Association, weren’t enough to derail Pavley’s global warming bill, which the Legislature approved with the bare minimum number of votes at the beginning of July, and which was signed by Governor Davis in high-profile ceremonies three weeks later.
“When you have people like Phil Isenberg as the mouthpiece of special interests, it makes our job that much harder,” Magavern said. “But it is encouraging that this bill passed. It shows that if you allow the public voice to be heard, it can trump special interests.”
Fresh off of the business community’s defeat on the Pavley bill and with less than a month left in the legislative session, Fred Main of the California Chamber of Commerce expressed a cautious optimism in early August that popular anger at corporations wouldn’t get translated into much public policy in California this year.
Every year, “there’s a bill that squeaks through” over Chamber opposition, Main said, and he hoped the Pavley bill would be it for the season. “The fact that Congress passed a bill with some teeth may take a lot of the steam out of the corporate governance concerns here in Sacramento,” he said hopefully.
Yet he said the situation was still so precarious that the Chamber’s six full-time lobbyists were all working overtime to make sure that none of the “job killer bills” targeted by the Chamber–such as Senator Martha Escutia’s efforts to encourage more corporate whistle blowing or Speier’s consumer privacy bill–snuck through.
“It means long hours and lots of paranoia,” Main said. “It’s a 24-hour activity over the next month.”
Chamber and other business lobbyists had enjoyed some successes since the Pavley bill, taking advantage of a Legislature that was in disarray because of the partisan deadlock over the state budget, which caused the Senate to be adjourned and the Assembly barely active during the entire month of July.
When legislators of both houses returned to full-time business on August 5, there was a crushing workload and lack of cooperation between the parties. Such a climate would bode ill for Jackson’s SB 2070, which would require businesses seeking state contracts to disclose past citations for violating labor and environmental laws and major civil judgments against them.
This “anti-scofflaw bill” had been defeated in the Senate Government Organization Committee in late June on a 3-5 vote, thanks to moderate Democrats taking a walk on the vote. It was scheduled for reconsideration–most bills are given two chances–by the committee on August 6. Only Waste Management Inc. had actively opposed the bill in June. As Magavern said, “Corporations are trying to kill it quietly because they don’t want to be publicly associated with scofflaws.”
Yet things had changed since June, and when the committee convened to reconsider the measure, the small committee room was packed with the full array of business interest lobbyists.
When Senator Don Perata, a Democrat who had abstained from the first vote, took his seat before the hearing began, he was descended upon by business sector lobbyists: Kent Stoddard and Gene Erbin with Waste Management, Julianne Broyles with the California Chamber of Commerce, David Ackerman for Associated General Contractors of California and Willie Washington of California Manufacturers & Technology Association.
“We’re still opposed to this bill,” Erbin said, speaking for the group, to which Perata joked, “You guys are opposed to everything.”
Their main argument against the bill was a Chamber standard: regulations on business hurt the economy. “It chills small business interest in pursuing state contracts,” Broyles had said, but it was an argument that she and her colleagues would never formally present to the committee.
With Democratic Chairman Ed Vincent still recovering from heart surgery, the hearing was chaired by Republican vice-chair Ross Johnson, who called for a vote on hearing the reconsideration, even though it was on the agenda and Jackson and her witnesses had already seated themselves at the table, preparing to present the bill.
Reconsideration hearings are generally a bipartisan courtesy offered to all legislators, but in this case, the Republicans refused to vote for even holding the hearing, and Democrats Jack O’Connell and Mike Machado–both who had abstained during the June vote–got up and walked out of the hearing after the previous agenda item. With Vincent absent, both Democrats’ votes were needed to hold the hearing.
Jackson’s bill and one by Democrat Juan Vargas that also needed a reconsideration vote were all that was left on the agenda, so Johnson announced he would hold the vote open for a little while longer while staff located the members. Fifteen minutes after the initial vote was called, Johnson declared, “I’m afraid reconsideration is not granted and we are adjourned.” The bill was dead, and the lobbyists were all smiles. There were even a couple high-fives and Ackerman was offered a “congratulations, good job.”
A few minutes later, Machado returned from a simultaneous Agriculture and Water Resources Committee hearing, looking frantic and being told by a staffer that he should probably talk to Jackson.
“Everything is just stacked up at the end of the year. It was a procedural accident,” Machado Chief-of-Staff Jody Fujii said later, denying that Machado “took a walk.” She also said reconsideration motions are usually automatically granted and she was surprised no Republicans voted for it. O’Connell couldn’t be reached for comment.
Jackson’s Chief-of-Staff Janice Rocco said they were caught off-guard by the lobbying opposition at the hearing, which she blamed for the bill’s defeat. “When you have such an organized effort opposing you, it is difficult without the same support on the other side.”
Whether it was lobbyists’ influence, Republicans playing politics, Democrats taking a walk, or just end-of-session madness exacerbated by the budget battle, the public will to crack down on corporate misbehavior was again denied.
By the end of that week, those who sought to get some corporate governance bills approved in this session would enjoy more support. On August 9, Governor Gray Davis privately told legislators he wanted to sign some corporate accountability bills this year. Political observers speculated that he was both trying to take advantage of the public mood and hoping to put a final nail in the coffin of Simon, his business scandal-tarnished opponent.
Davis spokesman Steve Maviglio on August 15 confirmed to SN&R that the governor had indicated to legislators that he was “likely to sign” a package of four accounting reform bills, most of which had roots in the Correa hearings that had spawned the ill-fated AB 1995. Within days, the bills were sent to the governor.
They would create a public-member majority on the Board of Accountancy, require longer retention of audit documents, prohibit auditors from going to work for clients within one year, and clean up some Department of Corporations regulations.
The accounting bills are seen by consumer advocates as good, if not terribly controversial or tough on corporations. David Pacheco, who staffs the Assembly Business and Professions Committee, even confirmed that the accounting industry had dropped their opposition to the bills.
“It was a miracle compared to just a few months ago,” Pacheco said. “The climate has shifted dramatically in the last few weeks.”
Also that week, Speier’s long-dormant consumer privacy bill sprang back to life with key new supporters. Maviglio said the governor was waiting to see what the bill now did because “we were specifically excluded from the talks on this issue over the last week.”
In a sign of just how far that climate had shifted, Maviglio also said the governor was likely to sign Escutia’s bill. Creating new protections for corporate whistleblowers and actually making it a crime for corporate officers not to report knowledge of accounting irregularities, the bill was widely considered the toughest corporate governance bill of the session.
“In this climate,” Maviglio said, “I think that’s why you’re seeing the support for something like this.”
Senator Martha Escutia was one of the first legislators to respond to the business scandals with a tough bill to crack down on corporate wrongdoers, introducing Senate Bill 1452 on February 15 as the Enron/Arthur Andersen debacle was still unfolding.
This “whistleblower protection act” would better protect those reporting wrongdoing on the one hand, while creating civil penalties of up to $100,000 per violation for corporate officers who fail to report to the Attorney General’s Office knowledge that a company was cooking its books. The idea is to both discourage and expose corporations that were acting against the public interest.
SB 1452 bounced around Senate committees for months, finally winning approval on June 20 and headed over to the Assembly, where it languished amid the partisan budget battles. Eventually, on August 8, Republicans killed the bill along with many others by refusing to grant routine rule waivers.
But with the public supportive of corporate crackdowns like hers, and with the active support of consumer groups and even the governor’s office, this liberal Democrat from Southern California wasn’t going to give up. So she hijacked a dormant bill–Senate Bill 783 by Republican Jim Brulte, which sought to create new forensic crime laboratories–replacing its goals with hers.
This “hijacking” of bills, also known as “gut and amend,” allows new legislation to be introduced well after the June deadline for doing so, even in the final days of the session. It is generally done to bills that have already cleared one house. For example, both SB 1452 and SB 783 had been approved by the Senate, but Assembly leaders opposed SB 783, and Republicans refused to grant procedural rule waivers needed to move SB 1452. So, voila, SB 1452 became SB 783 and was on the move.
The new SB 783 was announced on the afternoon of August 15 by an actively supportive Foundation for Taxpayer and Consumer Rights (FTCR), and it was scheduled to be heard by the Assembly Judiciary Committee at 8 the next morning.
Escutia and her supporters began forcefully making their case promptly at 8 a.m., when Chairwoman Ellen Corbett and a few staffers were the only ones on the daises and the audience was just filling in. There would be no opportunities for business lobbyists to privately converse with legislators unless they could catch them in the hall.
“Honesty is a good thing to have in the marketplace,” Escutia said, as an August 5 Los Angeles Times headline blown-up on a board behind her blared, “Dynegy Asked Ex-Executive to Cook Books, Suit Says.”
More committee members filed into the room and the audience began to grow as FTCR lobbyist Doug Heller ticked off several business scandals and said, “In each of these collapses, there were employees who knew what was going on but didn’t come forward.”
After Escutia’s three supportive witnesses had gotten their allotted minute each to testify, and with almost the entire committee now seated, the bill’s two main opponents were asked to take the stand: the Chamber’s Cher Gonzalez and Cassie Gibson, representing the Western States Petroleum Association.
Immediately, these business interests took a conciliatory posture, saying they would drop their opposition to the bill if its requirements to report corporate deceptions were replaced with voluntary programs to “encourage people to report bad conduct.” Escutia later dismissed the proposal as “no regulation at all.”
Gonzalez and Gibson each professed that the business community was as concerned as anyone about the scandals, but they said the Sarbanes-Oxley Act addressed the issue as aggressively as possible. They argued that Escutia’s bill goes against legal tradition by requiring people to report crimes they didn’t commit, potentially causing them to betray and ruin their employers based on mere suspicion.
“We don’t require citizens to be the eyes and ears of the government. This isn’t McCarthyism,” Gonzalez offered, eliciting a few audience groans, while Gibson appealed to the self-interest of term-limited legislators: “We don’t want to put employees in that role. Many of you will be in that role at other times in your life.”
Republican Assemblyman Robert Pacheco facilitated the attack with leading questions of the witnesses, encouraging Escutia to amend the bill as they asked, but she held firm, arguing that executives with knowledge of crimes should come forward, and that fear of whistleblowers would improve the behavior of corporations. “My bill is designed to prevent corporate fraud from ever happening in the first place,” she said.
After about 45 minutes of debate, SB 783 was moved out of committee on a party line, 9-0 vote. After the Judiciary Committee hearing Heller proclaimed that, “We are in the process of establishing the strongest pre-emptive reform in the nation.”
“I think this was a big hurdle, but we’ll see what happens on the Assembly floor,” said Escutia, expressing hope that the time is right for aggressive corporate reforms. “It is all over the newspapers and it has sensitized legislators to the issue.”
Corporate blood was now in the water, and the legislators attacked. On August 21, legislators–including “Assembly Business Democrat Caucus” founder Dennis Cardoza, who is running for Congress–held a press conference announcing that four bills had been gutted and amended into new corporate reform measures, ranging from creating a business-financed restitution fund for victims of corporate fraud to cracking down on companies that incorporate offshore to avoid California taxes.
With just over a week left in the legislative session, Speier’s privacy bill headed to the Assembly Judiciary Committee, the last significant stop before a final showdown on the Assembly floor. Chairwoman Ellen Corbett also serves on the Banking and Finance Committee, and at the end of that chaotic hearing two days earlier, she had pledged to undo the damage that had been done to the bill.
It was the same bill, being discussed in the same room, by the same opponents and proponents, making the same arguments–but everything was different now. Termed-out Republican Rod Pacheco had already voiced support for the measure, so support from moderate Democrats John Dutra and Juan Vargas wasn’t even needed.
After an hour of civilized debates, which Corbett divided evenly between supporters and opponents, Assemblywoman Hannah-Beth Jackson made the motion to remove the hostile amendment and strengthen the bill.
“People used to have very high regard for their banks, their insurance companies and other financial institutions,” Jackson said, but not anymore, not since the wave of corporate scandals and the trend toward more aggressive business sector interferences in people’s lives.
As she spoke, the Governor’s Press Office was sending out a press release entitled “Governor Davis Calls For Tough Corporate Accountability Reforms,” announcing that he had signed the package of accounting reform bills, created a new task force to crack down on corporate crimes, called for steep increases in fines and prison time for corporate criminals, and was supporting many reform measures in the Legislature.
The tide had turned. On the afternoon of August 27, just before SN&R press time, Escutia’s bill came before the full Assembly