Arthur Levitt Says There will Always Be Abuses
Audience Q&A:
What do you think of Grasso's pay package?
Dick Grasso has been an extraordinary affective chairman of that institution. Continuing its reputation of an icon of American capitalism throughout the world. Having run an exchange, I know full well that the typical director of the exchange doesn't have the slightest idea of what is going on at that institution. It's too technical and the processes are too arcane. And they tend to go along with management almost more than any other board I've ever seen.
Through the years, a pattern and a culture develop and its permissive and its been seduced. And as good as Grasso is, he made some significant mistakes. It's unthinkable in my judgment to have the major self-regulatory body in the world to have governance standards that are weaker than the standards that they impose on the companies listed there. And to have compensation committee populated by people who are regulated by the institution is such a blatant conflict of interest that it defies believe. The magnitude of grasso's compensation in my judgment is far less significant than the fact that it was not disclosed.
And that makes things so much worse. If you get out there and tell it like it is, people tend to accept it. But grasso faces a huge perceptual problem. His enemies on the floor are calling for his resignation. The board looks kind of inept in the way they have defended practices that should be criticized. And the effort of the exchange to address this was to appoint the committee of the board and give them six months to make recommendations of how they should make recommendations as to how their governance should change, I think that was dumb. Whatever the committee of the board does will be suspect because it's the board evaluating themselves I think they should go outside the board, They should choose and individual or a group to evaluated the issue of board governance and the question of how salaries are arrived at. And give them 30 days to report back and make a commitment to follow those recommendations in advance. They haven't done that and they are in a very difficult situation. I don't know how it will play out. It's not the job of the SEC nor do they have the ability to determine what grasso's compensation is or should be, but they do have the ability to split off the regulatory arm of the stock exchange from its marketing arm and I think that's something they may consider.
What do you think about Greenspan and his ability to manage the economy?
Well Alan Greenspan is a terrific guy and more terrific because I've had a longstanding golf rivalry.
Alan Greenspan is probably the best politican in Washington in understanding the tides of power and how to deal with them and it makes him a very effective chairman of the board. Any Federal Reserve chairman or regulator tends to look smarter than they are or dumber than they are depending on the markets that they're. During the `90s Greenspan looked like he could do no wrong.
He is clearly smart. He clearly calls the shots as he sees them, he's doing the best job he possibly can, he works long hours, he's terribly responsible and responsive, his ego is under control, he has a wonderful sense of humor, and I think he will be recorded in history as a great patriot, Has he made mistakes? You bet!
Roadmap to cultural change?
Some would argue has been a function of the heavy hand of Sarbanes Oxley, the SEC and the New York Stock Exchange. In thinking about this I don't really agree, I think the roadmap to cultural change has been provided by humiliation and embarrassment more than by regulation, The drumbeat of the media, the prospects of being held up as the poster boy and girl of bad behavior such as the directors of WorldCom, Enron, Adelphia and now the mutual funds that in my mind have committed infractions far worse than anything we've heard.
And you've heard just the beginning of what we believe is a terrible national economic scandal, I think that humiliation and embarrassment has changed that culture, I see it in the boardrooms of both public companies and nonprofits that I'm involved with. Whether that endures is a function of laws, in part regulations, in part attention of the media. I'm satisfied that boardroom changes will endure until the next bull market because a bull market historically has produced the kind of euphoria that clouds people's judgment and creates a feeling of omnipotence and invulnerability that all of us have become part of.
But the change the metrics of change depend so largely on the role of the audit committee and their competence to change the balance between the interest of shareholders and management that strong audit committees that were called for by the blue-ribbon audit committee reorganization of two and a half years ago will provide the ... for change and is already doing that. If you look at the composition of boards and the newly appointed directors of boards, I think you can see that we are looking in other directions for other kinds of people. Not many people are anxious to serve on audit committees their responsibilities are much greater. The hammer that lies behind that is going to be sec actions against public companies and in deed of some private companies for egregious behavior, this is something new. This is not a time in my judgment to be a corporate miscreant because juries and judges, regulators and legislators are looking for scalps to put on the wall to provide them for cover in terms of their own failings.
Where are our securities markets going in terms of technology in terms of the various kinds of markets available today, electronic markets, dealer markets represented by Nasdaq, auction markets represented by the many stock markets in our country. Who's going to win? What will our markets look like? Will they be internalized with brokerage firms controlling the flow of orders to their own market makers?
There probably is not an issue facing the sec that is more complex or more significant than market structure.
And the effort the create a single national market system mandated by congress in the `70s has been frustrated by political pressures and the competition of these various markets.
I believe that we're moving toward globalized electronic markets, markets that will be linked electronically. I think the movement to decimals was a step in that direction. I think if you look at the NYSE today and look at the number of orders that are executed automatically rather than by brokers on the floor or specialists at their posts has changed the direction of the markets entirely.
When you consider the fact that Nasdaq executes less than 26% of the volume trading there in their own market place, that most of Nasdaq shares are executed by electronic markets you have to know that dramatic change is taking place. I've changed my mind over the years as to who's going to win this battle if there is a winner or a loser. I think there will be consolidation in electronic markets. I think that the NYSE will continue to be increasingly automated. I think there will continue to be a role for the specialists but in my judgment a diminished role as international markets offer greater and greater competition, Now there are lots of sidebars here, will foreign markets be able to put their terminals here in the united states so that us investors can trade foreign shares at lower costs and faster executions than having to deal with a broker who has to go to their correspondents. That's a tough problem because foreign markets don't have the same kind disclosure and registration requirements that us markets have and would place us companies at a disadvantage. That's going to be a very tough hurdle to get over.
How do we measure performance of companies, what kinds of metrics would be used?
Who's our host today? Hyperion. I think what's happened in our markets has given rise to companies like Hyperion and others to create various standards and measurement. Clearly management is receiving more information today than ever before and it's the job of our host today to make that comprehensible rather than a blizzard for numbers that have marginal relevance.
Does any public company have a totally independent chief financial officer?
I think that to the extent that any CFO is paid, compensated and rewarded by a company he cannot be considered truly independent. However the requirements of Sarbanes Oxley and the requirements of recent SEC rules and regs call for the company to be able to call to the attention the board of directors any time there is financial fraud within the company. The responsibility of independence is more of a moral responsibility rather than a legal one because if the CFO is part of the company, (he/she) is not truly independent but has an independent responsibility.
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