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Arthur Levitt Jr.
Former Chairman, U.S. Securities and Exchange Commission
For nearly 100 years this has been a forum for some of the most important and engaging speakers from all over the nation and all over the world. I've been here several times before, I've never been disappointed and I hope I don't disappoint you this evening. About 16 months ago The Commonwealth Club was addressed by one of these high profile speakers. This man was one of the most respected business leaders in the nation; lionized on magazine covers, admired by business students all over the globe. His topic was the crisis in California's electricity market. While many in California, especially politicians, look to place blame on corporate America this leader offered a ringing defense of his company and the entire energy industry. "If we had anything to do with this," he said, "then we are the stupidest people in the world. I'd give anything to turn back the clock and get the marketplace right." The speaker was Jeffrey Skilling, CEO of Enron.
I won't cast dispersions on the intelligence of him or the rest of Enron's leadership, but while they may not have been the stupidest people in the world, today we know that they may have been the most conflicted; the most crooked and the most shortsighted group of corporate leaders in an era full of conflicts of interest, crookedness and shortsightedness. Like Skilling, I wish we could turn back the clock and get the marketplace right.
During my eight years at the SEC we tried, and in many areas we succeeded, to expose conflicts of interest, increase corporate and market transparency, empower investors and bring corporate criminals to justice. But in many areas we fell short. The political will simply was not there in Congress to stand up to the powerful, organized interests. Unfortunately, the public wasn't there either. Everyone was making too much money to complain.
Something else was missing as well: the leadership of the business community. Very few people were willing to stand up and say the obvious: Page clicks and eyeballs don't matter, profits and earnings do. Very few people were willing to point out the madness of the day. They were unwilling to point out the stupidity of day trading, and the virtues of diversified investing for the long term. Very few people questioned quarterly earnings that always beat expectations, or the wisdom of dot-coms valued more than real companies with real assets.
Looking for Leadership
The one thing that troubles me the most beyond Enron, beyond Andersen, beyond stock options and stock market bubbles and bad accounting, is the absence of true leaders of the business community. The kind of leadership that instinctively steps forward when needed; that puts public interest above corporate interest or career advantage; that doesn't just look to place blame or make a profit when things go wrong, but works with the policy-makers to make things right for the benefit of us all. I'm talking about private sector leadership influential enough to be listened to by politicians as they craft reform, and trusted enough by the public so when the drive for reform overreaches or otherwise hurts the very markets we are trying to save, private sector voices will be heard and listened to.
There are plenty of good and honorable people who head American corporations. But there are few business leaders recognized as being a spokesman or spokeswoman for a set of realistic, intelligent public-spirited values. I've been in and around our markets for nearly 40 years; I can't think of a time since I began my Wall Street career when our business community and market institutions have been viewed with greater disdain by the public. Ask anyone to draw up a list of business leaders to head an important public board or a commission, and I'm afraid the list would begin and end with Paul Volcker, and there's only so much that Paul can do. It wasn't always like this. We've relied on such leaders from the business community to help us through difficult economic transitions in the past.
Fin de Siecle Deja Vu
At the end of the century, in end of his term of office, the president addressed Congress and proudly boasted, "There has never been a time in our history when work was so abundant or when wages were as high." By the spring of that year, financial panic had set in. By the end of the year thousands of businesses had gone under, and unemployment was surging. There was political turmoil, angry shareholders, furious workers. Sound familiar? I mention this to highlight the optimism of the '90s - the 1890s. The president who said that wasn't Bill Clinton, but Benjamin Harrison; the century ending was the 19th, not the 20th.
More than 100 years separate us from the Panic of 1893, but the similarities are striking. Faced with an economic downturn and the reality that something had to be done to retool the economy and society for a rapidly changing time, many business leaders dug in forming powerful lobbies to resist change. They took the attitude summed up by railroad baron William Henry Vanderbilt: "The public be damned."
Others saw a middle ground had to be found. To make the market work in an industrial age new rules, new safeguards had to be written. People like Mark Hanna, a prominent Republican and industrialist, and Edward Filene, the department store magnate, formed groups like the National Bureau of Economic Research and the Cooperative League to research, to craft, to lobby for reforms. It was also at this time that The Commonwealth Club was founded. The Club brought together public officials and private sector leaders not only to debate issues but also to offer suggested courses of action on topics from child labor, to Indian rights and California's banking laws. The commitment to the national interest exhibited by this remarkable club, and organizations like it, helped this country through a most difficult time of transition: from an agricultural economy to an industrial one, from an isolated nation to a world player.
Fifty years later corporate leaders played a similar role during a similarly chaotic time immediately after World War II. At the urging of the secretary of commerce, who called for outstanding business authorities who were also public-spirited citizens, a bipartisan group of corporate executives formed the Committee for Economic Development (CED) to offer non-ideological guidance on how the United States could make the transition to a peacetime economy. With a sense of larger responsibility to society, the CED offered guidance on a variety of economic topics, from taxation to monetary policy, from urban renewal to government administration. Its contributions were absolutely invaluable. Tthe quality of leadership was such that when President Truman formed a committee to draft the Marshall Plan to rebuild Europe, five of the nine members of the committee were CED Trustees. This history I think instructive for one reason: We are now undergoing a transition in our global economy and geopolitics as great as the one at the beginning and the middle of the last century.
The Green Eyeshade War
As we navigate the proper relationships between the public and private sectors in creating a world safe from terrorism and suited for market prosperity, the impact of a responsible business leader is once again needed. By and large that leadership is simply not there. The private sector has forgotten its public obligations, to the detriment of both. That's not to say that there are not those engaged in public policy or politics. Business' interaction in public affairs is mostly of a certain and selfish kind.
During my years the SEC I encountered a staggering number of industry lobbyists whose sole purpose was to stop any minor change they saw as a threat to their own specific interest. A deregulatory Congress tried to thwart just about every pro-investor initiative that came out of the commission. They had no concerns as to how a proposal would affect the investing public or the market as a whole, how changes they were stopping or supporting would undermine the very market from which they were able to reach such prosperity. The worst example of this was the accounting industry.
The vast majority of accountants I know are good, honest, upright people; decent people working in a profession with a long history of probity and integrity. Yet the accountants' organized lobby sacrificed that and stubbornly resisted change. I will never forget an icy meeting I had with the leaders of the Big Five firms at the main office of Deloitte in New York. I laid out the SEC's proposal in terms of working through the issue of auditing and consulting services, and I asked that group of leaders to work with us in the public interest. The response was summed up by then-Arthur Andersen Chairman Bob Grafton, who said, "If you proceed with this proposal it's going to be war." We did go ahead, and it was war. And if you've never seen it, let me tell you that nothing can be quite as scary as an army of green eyeshades coming at you.
We proceeded to have public hearings for the first time, all around America. Witness after witness, academics, business leaders, foundation heads, testified as to the seriousness of the conflicts endured by the industry. Yet the industry resisted our proposal. We now know what happened. Because of its selfishness and shortsightedness the accountants now find themselves embroiled in a squabble with the government that will taint the profession for a generation.
This past year the stock exchanges, self-regulatory organizations, Congress, the president, the SEC, state attorneys general, governors and almost every candidate on the ballot put forward plans to regulate our markets and the institutions around it. Ironically, some of the most important work of cleaning up the market is being done by the market itself. Humiliation and embarrassment have done more to change the behavior in America's boardrooms than any amount of regulation or, God forbid, legislation. Failing businesses and poorly conceived business models are being cleaned up and closed down. Investment capital is back in the hands of skeptical investors, and some of our leading companies have taken the lead in making their operations more transparent and accountable to shareholders. Yet that doesn't mean that we don't need further reforms. Nor does it mean that the thirst for change has been quenched.
The only way we'll get the right kind of reform is if we have the right kind of private sector leadership: leadership that is trusted enough so that it can guide the process of policy-making away from overzealous regulation that impedes markets and toward commonsense rules that strengthen them. We need your voice to help strengthen corporate governance, especially in the critical area of executive compensation. There is no doubt that some executives have been paid too much. That is, more than they would if it weren't for boards of directors stacked with their cronies and friends, and if it weren't for quirks in our tax laws that favor certain kinds of stock options over other types of pay. Excessive executive compensation of the last decade is, in the words of Alan Greenspan, a system of infectious greed. It's not only patently unfair, but it's also a disservice to shareholders as executives use public companies as their private treasure chests. Some may clamor for Washington to step in. While there are some regulatory changes that could be helpful, such as the expensing of stock options, true reform must come from companies themselves. In the end, any hope of reforming executive compensation relies on corporate boards, executives and their peers putting down a marker that it's simply unacceptable for executives to show their faces in public if they've received huge unmerited handouts at the expense of shareholders.
A Culture of Accountability
We must restore the value of reputation. We need a cultural change that rejects excess and skirting the rules. A culture in which directors and CEOs all put pressure on each other to uphold standards of acceptable behavior. We need private sector leaders at all levels to dedicate themselves to creating a culture of accountability and fostering an ethic of service. During the 1980s and 1990s, the image of a superstar CEO was a muscular one, invariably an individual who could acquire a huge company at the stroke of a pen, fire 20,000 employees with another stroke, and several years later sell off the enterprise for much less than shareholders paid for it in the first place. It was these impatient, tough, bottom-line oriented corporate rock stars who graced the covers of Fortune and Business Week. It is small wonder that today we can recall few of those names in the pantheon of selfless, committed public-spirited executives recognized by nearly every literate American for integrity, probity and honor. It is small wonder that there doesn't even exist a handful of individuals who match the public recognition of Mark Hanna, Edward Filene, Irving Shapiro or John Whitehead.
The coming generation of business leadership in the phalanx of the movement to restore public confidence will be a very different mold: sensitive, caring, thoughtful and committed personalities working, I suspect, in public-private sector partnerships to support the fabric of our society rather than simply boosting the bottom-lines of their companies. The public is looking for a reason to have confidence, not just in corporate America as a whole, but in businessmen and women as part of America's leadership class. It's asking for something as old as America itself: self-interest rightly understood. What I'm talking about is what's happening in public education in the city of New York today. Joel Klein, the new chancellor, left his post as CEO and chairman of Bertelsmann to take over that job of leading New York schools. In one of his first moves he launched an effort to reach out to private sector leaders to tap their expertise as he works to rejuvenate the public schools in our nation's largest city. He appointed Caroline Kennedy to head a new office of strategic partnerships to oversee this effort, and already Chancellor Klein has secured two large grants from the Eli Broad and Julian Robertson foundations to fund a path-breaking reexamination of every aspect of New York City's public school system. It will take a lot of hard work, but this effort is the kind of engagement that not only will improve the public good, but also start the process of rebuilding people's faith and people's trust in business leadership.
Ultimately, the restoration of trust is what is needed more than any regulation, any rule, any law. Trust is the glue that makes markets work, that gives people the confidence to invest and to build for the future. Decades before The Commonwealth Club was founded, when California was still the frontier of the Old West, this economy relied on two important pieces of equipment: a bank's brass scales and its vault. To a 49er prospecting for gold, every fraction of an ounce mattered. Every miner had to have confidence that the value of their finds was accurately measured and appraised, that they would be given a fair deal, and they had to have confidence that those with whom they invested and trusted their money were diligent in protecting it. Of course, this was hard to guarantee. There's a story of a fire in Grass Valley, California, in 1855 that devastated the entire town except the local bank's vault. As the town's people gathered around to see if their savings were safe, the vault was opened and every cent was there. Being able to trust the numbers, being able to trust those with whom they invested their money, this was the foundation upon which business in California was built and this state and our entire country was able to prosper. While those who come prospecting for fortunes in California now are more concerned with packets of data than nuggets of gold, one thing hasn't changed: Trust in the measures of our markets and in the companies that power them is the absolute key to economic growth, and it is all of us and all corporate leaders who must lead the way in restoring this trust, who must show Americans that we recognize a state in society progressing on a broad front, not just in the success of our own businesses and investment projects. When we do this faith will be restored, trust will return and our markets will flourish once again.
Tom Campbell
Dee Dee Myers