WASHINGTON (Dow Jones)-- Greater market discipline following the collapse of Enron Corp. (ENRNQ) has already led to better corporate governance and while further reforms are needed, much more regulation isn't the answer, Federal Reserve Chairman Alan Greenspan said Tuesday.
"Corporate governance has doubtless already measurably improved as a result of this greater market discipline in the wake of recent events," Greenspan said in prepared remarks to the New York University Stern School of Business.
In his first formal speech on the issue since Enron went under in December, Greenspan said a change in corporate behavior "may already be in train."
The sharp decline in stock and bond prices since the Enron debacle "has chastened many of the uncritical practitioners of questionable accounting," he said.
Corporate reputation is reemerging as a "significant economic value" and markets are starting to put a price-earnings premium on reporting earnings that "appear free of spin," he added.
Yield spreads on corporate bonds are increasingly reflecting perceptions of the reliability of firms' financial statements, Greenspan said.
He acknowledged that further corporate governance reforms are needed, but cautioned against a substantial increase in regulation to address the inadequacies of the current framework.
"We have to be careful, however, not to look to a significant expansion of regulation as the solution to current problems, especially as price-earnings ratios increasingly reflect the market's perception of the quality of accounting," Greenspan said.
"Regulation has, over the years, proven only partially successful in dissuading individuals from playing with the rules of accounting," he added.
Greenspan said he hoped any legislative and regulatory initiatives further realign current practices "with the de jure governance model that served us well in generations past." The current CEO-dominant paradigm will likely continue to be viewed as the most "viable" form of corporate governance, he added.
Greenspan repeated his call for increasing incentives to chief executive officers to encourage them to operate more in the interest of shareholders, rather than investment returns.
Further, more clearly defining the duties of CEOs with respect to accounting and disclosure as President George W. Bush has suggested "appears appropriate," he added.
Greenspan reiterated his criticism of the accounting practices firms use for stock options, saying firms' failure to expense options has inflated corporations' earnings and stock prices.
"The failure to include the value of most stock-option grants as employee compensation and, hence, to subtract them from pretax profits, has increased reported earnings and presumably stock prices," he said.
"Regrettably, the current accounting for options has created some perverse effects on the quality of corporate disclosures" that further complicates how earnings are evaluated and diminishes the effectiveness of published income statements, he added.
Fed staff estimate that the substitution of unexpensed option grants for cash compensation added about 2.5 percentage points to reported annual growth in earnings of large corporations between 1995 and 2000, Greenspan said.
"Many argue that this distortion to reported earnings growth contributed to a misallocation of capital investment, especially in high-tech firms," he added.
Greenspan suggested that regulators and lawmakers have their work cut out for them in the post-Enron era and said he expects they will be grappling with how to devise the best mix of regulatory and market-based incentives for some time to come.
"Even after we get beyond the Enron debacle, crafting and updating such rules will continue to be a challenge," he said.
Greenspan's remarks on corporate governance were largely consistent with those he made to Congress in late February during the question-and-answer session following his twice-yearly economic report.
At that time, Greenspan said Enron's demise doesn't pose a great threat to the overall U.S. economy and may help it in the long run by highlighting cracks in the current system of corporate oversight. In that late February appearance, Greenspan also had advocated no increase in overall regulation of corporations, saying the country must simply find a way to make sure the interests of top executives match those of their shareholders.