The Power of the Purse. (News & Numbers).

To prevent the breakdowns in corporate ethics and accountability that rocked the financial markets and the economy in 2002, "the age of investor complacency must be replaced by a new era of investor democracy," according to a new report by California State Treasurer Phil Angelides. In "The Power of the Purse: How Investors Can Restore Integrity to Our Financial Markets," Angelides calls on individual and institutional investors--most notably, public pension funds--to use their collective market clout to bring about corporate reforms.

The accounting scandals at Enron, WorldCom, and other high-flying American corporations wiped out retirement savings, undermined investor confidence, and hurt responsible companies. To put corporate malfeasance in perspective, Angelides compares it to another form of malfeasance--bank robbery. From 1996 to 2001, bank robberies in the United States cost financial institutions $208 million. This pales in comparison to the $850 million that California's teacher and public employees pension systems lost as a result of WorldCom's accounting fraud.

"Restoring integrity and accountability to our financial system and instilling a new ethos of corporate responsibility are matters of critical importance to our sustained economic well being," Angelides writes. "Our economic strength of today and tomorrow is dependent on the willingness of individual and institutional investors to take prudent risks by investing in markets that they believe are operated with openness and integrity and in companies managed responsibly and honestly."

While the report acknowledges the importance of the federal regulatory and enforcement system and lauds the corporate reform legislation passed last summer, the emphasis is clearly on investor activism. Angelides outlines six guiding principles for how investors can use their market force to promote corporate responsibility and restore accountability and integrity to the ...