Former SEC chairman calls for change in corporate culture to regain public trust

Sam Fletcher
Senior Writer

HOUSTON, May 26 -- It will require "an unrelenting commitment to changing corporate culture" in all businesses to regain public trust and develop good corporate governance, said Arthur Levitt, former chairman of the US Securities and Exchange Commission, at the opening session Tuesday of a 2-day global energy conference in Houston.

"Trust, the critical element that makes our market system work, has been called into question, not just in relation to one company or one industry but in the market as a whole," said Levitt, who also is a former chairman of the American Stock Exchange. The conference was hosted by KPMG LLP.

Corporate operations in general are "going though an extraordinary period of change, which will affect the public attitude toward the business community," he said.

Moreover, Levitt said, "You in the energy field face a particular problem that you've faced before, . . . the inevitable public negativism . . . blaming [oil companies] for costs imposed on individuals" by higher energy prices."

"Restoring trust in our private sector and establishing good corporate governance can't be accomplished by any one piece of legislation [such as the Sarbanes-Oxley Act, passed by the US Congress in 2002 to deter corporate fraud in financial reporting with the threat of stiffer penalties] or the overhaul of one company's practice," Levitt said. "It's about constant vigilance. It calls for a change in [corporate] attitude. This is not a discrete period in the history of American business. This represents a continuum of events that from time to time reflect a cultural change on the part of the business community and on the part of investors as well."

Although corporate executives frequently complain about the cost of complying with Sarbanes-Oxley requirements, Levitt said, "I believe that compliance and controls are worth the costs. I think there is a recognition and the ultimate pragmatism of a market environment that public confidence might be restored [through] Sarbanes-Oxley."

He said, "The primary cost is in complying with Section 404 [of Sarbanes-Oxley, requiring documentation of internal controls and auditing standards] to ensure that companies are able to provide the information that investors need and deserve." However, Levitt claimed, "Investments in internal controls are long overdue." The $5 million calculated to have been spent by "each of the entire Fortune 1000" to comply with Section 404 "is pocket change compared with the $90 billion investors lost on Enron [Corp.] alone," he said. On that basis, said Levitt, "Sarbanes-Oxley clearly meets the cost benefits test and is worth every penny."

Levitt said, "I'm convinced that good disclosure is good business. I've always believed that companies that are upfront with their shareholders, [that] embrace transparency and see disclosure as a responsibility rather than a chore are going to be rewarded in the marketplace. Recently that certainly has been the case. Companies that are evasive or try to hide behind rosy accounting have been punished by investors and some by regulatory bodies as well."

On the other hand, government regulators need to write accounting and governance standards that are "based on sound principle and provide transparency. Standards must be understandable," he said.

Compensation issue
One major issue that must be addressed is that of "astronomically high executive compensation," Levitt said.

One study of 350 major US companies "found that CEOs in office at least 2 years enjoyed a rise in total direct compensation from the previous year of 16.5% to a median of $3.6 million." In that group, the average CEO "collected $155,759/week while the average production worker took home $517," he said.

Such "huge discrepancies in compensation call into question notions of fairness and equality," said Levitt.

Moreover, the common practice of granting of stock options as a primary form of executive compensation provides the "wrong incentive" to executives who "too often are managing the numbers for short-term gain and personal payout and not managing the business for long-term growth and shareholder value," Levitt said.

"Simply, this must stop. The time to reform executive compensation has come, and the single most important thing we can do to bring that about is to expense stock options," he said. "This issue is not going away. It is the foremost issue in the minds of US investors today."

Contact Sam Fletcher at [email protected]