Arthur Levitt Says There will Always Be Abuses
September 10
Excerpt from Arthur Levitt's speech at the Cornell Club, NYC hosted by Hyperion.
(Regarding who sits on a corporate Board of Directors)
...All I have suggested is that we give that person greater responsibility than might otherwise exist. In addition there should be directors that are more independent than in name only they must truly be empowered and motivated to carry out their duties. They've got to be responsible women and men who insist that the group occasionally meets alone and meet independently with the company's auditors who would not hesitate to hire their own council.
They must be directors who both demand more information and demand that processes are put into place that make the acquisition of that information possible. And, most importantly, they must be board members who at the end of the day ask themselves, "If I was an investor and my children's college funds invested in this company is there anything else I'd need to know or must be disclosed."
Now listening to these recommendations one might ask how in the world are we ever going to get good people to serve on boards. Clearly it's going to be more difficult and I think clearly that's the way it should be.
The boards in the past generally were a function of the personality of the individual. We're friendly people we tend to go on boards where we know other people. I don't think anyone in this room if they had been approach by a company such as Enron going back five years ago with the political influence and the glamour and the high pay, that we would not have listened to an invitation to serve on that board. And how many of us would say that we would have raised our hands in challenge once we got there? And that's true just about every board.
Warren Buffet, who I consider to be one of the outstanding business men of all time, has told me a number of times that he's reluctant in a board meeting to challenge the establishment. It's hard to do, but I think we should look in places we haven't looked for board members. They should not just be people we know from other boards, not just people who serve on similar philanthropic endeavors, not just people we grew up with or are friendly with. It could be an academic, it could be individuals who weren't CEOs, but may have been CFOs or COOs. There are plenty of talented people who have significant contributions to make.
Now more than ever, I think there is no role for a director whose only qualification is that they were a great baseball or a great running back. When I learned that OJ Simpson served on the audit committee of a publicly owned company it really was despairing in terms of the kinds of people we were looking for to serve on our board. But good governance is not just a question of a board, it's about programmatic and cultural change affecting just about every aspect of a company from executive compensation to auditor rotation to shareholder rights. A great example of what I'm talking about is encapsulated in report called restoring trust issue last month (August) which details a new corporate-governance structure of MCI previously known as Worldcom. In that document Richard Breeden, who is the court appointed monitor of that company, calls for an overhaul of just about every area of the company's internal controls. The new structure for MCI will shift the balance of power to shareholders and away from management. We will fundamentally transform the culture of this scandal plagued company promising a more enduring change.
Now does this apply to every company? I think not. Some of the recommendations are truly draconian, but a company run by Bernie Ebbers and his crew in the most outrageous scandal performance of any that I can recall to restore itself to public confidence requires the kind of steps that Breeden has suggested.
I don't think for a minute that scores of companies will adopt these changes they don't share MCIs financial problems and court supervision. And I'm well aware that although our times are being characterized with a period of reform, with everyone ... for change, there are still companies that are organizing to stymie it.
I am kind of disappointed of the recent actions of the Nasdaq market place.. The Nasdaq market was a scandal-filled market that my commission brought charges against for price fixing and that market has been restored to a position of public trust and integrity and I was kind of saddened to see them recently announce a Nasdaq CEO council made up of its most senior CEOs made up a lobbying force to lobby against regulation, to lobby against regulation fair disclosure, which was a strongly pro-investor and pro-market regulation widely supported by the business community and widely opposed by the brokerage community whose efforts had discredited analysis has really has been shaken up by regulation fair disclosure.
The agenda of this group would also include lobbying against the expensing of stock options. It sounds to be like the self-proclaimed stock market of the next 100 years is stuck wistfully looking back at the past 100 years. Who would think anyone would be nostalgic for the abuses of the `90s and it's the wrong kind of leadership, I believe, that we should get from corporate America. We need leaders who will work to regain the public trust so we can turn to them to help create stronger markets and a stronger society. The formation of that Nasdaq group undoubtedly fueled cynics to say reform is fleeting. Once the headlines disappear the public has moved onto the next story, big business will once more get its way.
After all the cynics say we've been down this road before-corporate scandal, market meltdown after the crash of 1873, '29 ... just to name a few. I believe that this time things are different. A new Nasdaq lobbying force may be strong and working against the tides of the times. What this group failed to realize is that the demands of the market have changed. Increasingly flashy transactions and aggressive bookkeeping is being replaced with sound accounting. Managing the numbers is being replaced with managing the business, Page clicks and eyeballs as a metric of a company's values is being replaced with profits and with earnings. Rubberstamping management's decisions are being replaced with comprehensive oversight. Doing what you can get away with is being replaced by doing what's right.
All of these changes are happening because investors are putting a premium on integrity, honesty transparency and on good governance. And they're rewarding companies that are offering it. A study that was announced in yesterday's (Sept 9) Wall Street Journal by an outfit called Government Metrics International, which is an independent corporate-governance rating agency found that its top ranked companies for corporate governance and citizenship outperformed their peers in stock- market performance, return on assets, return on investments and return on capital. In fact the companies in the lowest score, fell 28.3 percent in market value on average over the past year.
The challenge for the private sector is to strike that right balance between the burdensome costly regulation and anything goes that will take not more rules and regulations. Although some pragmatic regulation will be needed, instead of taking market factors dedicated to the public responsibility of the private sector, it's going to take investors willing to demand more information and to punish companies and advisors who failed to provide.
It's going to take directors of public companies to take seriously their obligations as shareholder advocates and it will take executives to realize that cutting corners will only trim the potential for long-term growth. Of course, it's going to take entrepreneurs who are ready to provide the type of services rooted in accountability, ethical behavior and transparency that investors now want. I think only then are we going to strike the right balance. Only then will we be comfortable that confidence and trust are restored in our market. While I suspect we are some years away from returning the historic gains of the `90s we will bring back something better and more enduring---a sound market and stronger economy and investors really being empowered to make the best decisions for themselves.
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