Is S&P's pedestal cracked? Critics say the esteemed rating agency should have spotted Enron's woes sooner. S&P's president says 'not so' - Finance

Chief Executive, The, April, 2003 by Alan Gersten

In that case, one wonders why investors pay so much attention to the agencies. Ratings have become an increasingly critical part of the global capital markets, giving S&P more power. Some companies, fearing S&P's wrath and possible downgrades, declined to comment about the ratings situation for the record. "S&P is hugely influential on Wall Street," says one corporate spokesperson, who insisted on anonymity.

S&P's defenders believe critics are trying to turn the rating agencies into scapegoats for corporate implosions. "Standard & Poor's analysis is only as good as the information provided to them from a company," says George D. Martin, vice president and treasurer of Anthem, an Indiana health benefits company. "You can't forecast fraud."

But what of the whole conflict of interest issue? The agencies get fees from the companies they rate, critics argue. Though S&P won't disclose how how much Enron paid it for its ratings, it says fees vary from $5,000 to $1.5 million.

O'Neill brushes the criticism aside, insisting the SEC has no problem with this arrangement. He also notes that S&P has lowered numerous ratings of companies that pay fees. And S&P analysts don't get any financial benefit from upgrading or downgrading a company. Further, he adds, no smoking gun" has ever been unearthed about the fees affecting the ratings.

So the whole problem, O'Neill insists, is perception. "I think we ought to be very proactive in assuring that our value proposition in the marketplace is understood--what it is we do, how we do it, what our value is and why investors rely on us," he says.

Ursino argues that the agencies should be "opening the black box" and explaining the ratings process. This, Ursino says, would be one way for them to avoid getting caught in a "circular firing squad."

S&P has, in fact, begun adapting the way it does things. It has accelerated its disclosure process, moved ahead on the governance issue and launched a core earnings initiative, which is an analytical tool to measure corporate profits in a better way, O'Neill says. S&P is also trying to become more transparent about its ratings, rationales and methodologies. "Let's make sure the substance, the process around our ratings, is working," O'Neill says.

Will it be enough? O'Neill obviously hopes S&P and others can reform themselves enough to avoid heavy-handed regulatory moves.

As to his personal career, O'Neill will turn 65 in two years, but he's vague about retiring. "When we get there, we'll see where we are," he says. One could say the same about the future of the ratings business. A

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