Leadership & Growth in the New Regulatory Environment

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Summit Attendees Query Levitt

If you were to advise the next President of the United States, what would you choose to say?

Levitt: I would advise him to stay clear of the weeds. Now, what I mean by that is that it's very easy to allow some of these issues to fall into a political arena, which would be tragic. Without getting political, President Bush became the first President in history to concern himself with an accounting standard. Within the first six months of his incumbency, he came out against expensing stock options. Fortunately, he has stayed away from that issue ever since then.

There are two issues — at least two issues — in America that defy the political process. One is closing military bases and the other is establishing accounting standards. And it's simply inappropriate for that to be morphed into the political arena, certainly by the President of the United States.
I would urge the President to stand back from the kinds of issues that really should be decided by the public sector. And most importantly, I would urge the President to keep uppermost in his mind the importance of speaking about these issues, about the importance of independence, about the importance of disclosure, about the importance of preserving a system that has stood this country in such good stead, and not neglecting it, and, certainly, making appointments to key regulatory agencies that respect the independence of those agencies.
For years, the SEC has been a nonpolitical body. And I think it's critical that it continue to be that. And I think that the FCC is another such agency that should be nonpolitical.

But I think that like anyone else the President must be a role model, and this must be an important issue because the landscape for corporate America is built upon the fundamental conviction that the system is not rigged for one part of the population vs. the other, so that we don't have shareholders battling against stakeholders and against management.

The next President must, through his actions and his speeches, try to bring together the interest of the various elements that make up our markets. He can do that by speechmaking. He can do that by a special convening of those groups. He can do that by personal behavior. There is a lot that can be done by the new President or the continuing President to bring us together rather than pull us apart.

Can you share some perspective on the recent insurance scandals?

Levitt: I do believe that the insurance scandals, which took me by total surprise, really are far more pernicious than almost any other scandal of this decade. While the mutual fund industry [scandal] hurt very few individual investors, the implications of this to our markets and their trustworthiness and the backlash in terms of the appearance of commercial bribery is very, very serious for U.S. markets and U.S. companies. And I think that this is an issue that has to be dealt with directly rather than hysterically.

The best cure is from the companies themselves and the boards of directors themselves. This is terribly important for all of us, and the boards are going to be held more accountable than they ever have been before. And what's playing out in Wilmington is singularly critical because it's not just the plaintiff's lawyers who are going to create heartache for directors and make it more difficult to recruit competent directors. I believe that you'll see regulators paying much closer attention to other directors who are doing their jobs.

And the whole area of corporate responsibility has come into question. I think that consultants and accountants and journalists have got to think hard and long about how we deal with this issue responsibly, because independent directors really are the bedrock of our system. And whether they have been good or bad, in general they've been terrific and better than any other system in the world. We've got to preserve that system of independence, and this goes hand in glove with a system of disclosure that is not just so open that it's confusing, but clear disclosure that's understandable. And that's a responsibility of government. It's a responsibility of the legal profession and it's a responsibility of boards themselves.

What are you hearing about the pace at which European nations might either reach agreement or clear disagreement with the principles that underlie Sarbanes-Oxley?

Levitt: The issue on a global basis is quite serious. No market in the world has the cultural heritage of shareholder ownership that U.S. markets have. No market in the world has the culture of disclosure that we have in the United States. There is great resistance to morphing overnight into the kinds of disclosure and the kinds of regulations that Sarbanes-Oxley has imposed upon companies that choose to list in U.S. markets.
Yet it's very difficult to create any kind of two-tier regulation, and I believe that we simply are not going to do that. It is troublesome, but so are accounting standards troublesome.

Right now, we have a huge battle going on with the International Accounting Standards Board, which has come out with very rigorous standards, and in some regard the European Union has rejected certain aspects of those standards. But they're far ahead of U.S. standards with respect to expensing stock options.

This is a question of communication. And it's not going to happen overnight. There are companies that will not list in the U.S. That is a loss to U.S. capital markets, and there is going to have to be some measure of compromise as we move along, and a lot of dialogue. It's a very serious problem because in my judgment, we are moving within the next three to five years to globalize electronic markets. And if we have globalized electronic markets, we're not just talking about stock exchanges and electronic markets. We're talking about the way business is regulated, the way standards are set, and it's terribly important that we move in a cooperative rather than a confrontational fashion.

What can you tell us about how you view electronic markets and the future? Will there, for instance, be a New York Stock Exchange?
Levitt: I think that we will have a New York Stock Exchange. I think that we're certainly not going to have a floor the way the floor is presently structured. I certainly hope that we have a blended market such as we have today, consisting of both auction/dealer and electronic markets.
We've got the best auction market, the finest, best-regulated dealer market, and the fastest growing electronic market in the history of markets. But there has been no time in history when our primacy in markets has been more jeopardized internationally, because of the very evolution of electronic markets that makes it so easy to compete against us.

I hope that regulators understand the meaning of balance and that our legislators do as well. I hope that the market participants, the brokerage firms, the market leaders, their boards understand the importance of getting their acts together collectively rather than fighting among themselves in a self-destructive war. So I think that market structure is an issue you haven't thought about but is critical to the future of U.S. business.
From my perspective and the issues that I've dealt with, I think that this is terribly important. And I think that we all have a stake in it. I wish that we had our institutional America, which has been empowered by recent scandals, working to create a better-educated investor community.
Right now, we have an investor community that goes with the wind. When there are scandals, they want to string up every accountant and every corporate executive. I think that what happened to Arthur Anderson is a national economic tragedy, and it didn't need to happen. We got caught up in a killing environment at that point in time.

I think that for the future, we can't afford the luxury of politicizing issues that must be dealt with thoughtfully rather than emotionally. That's what calls for balanced leadership, and I would hope that you as consultants would give some thought to aspects of the issue that often get lost in the development of numbers and formulas and PowerPoint presentations.