Restoring corporate integrity and public trust. (Financial Reporting).

Following the spate of corporate accounting scandals, and even before the huge Wall Street settlement was announced, much discussion has centered around the $7-plus trillion in stock market and investor losses: who's to blame, what are the remedies and how to regain investor confidence. The "settlement"--the recent $1.4 billion agreement between regulators and 10 Wall Street firms accused of issuing tainted stock research to investors--seeks to end conflicts of interest between analysts and investment bankers through new rules. In each case, the 10 firms did not admit or deny the charges.

If improving corporate reporting and restoring corporate integrity and public trust involves a wave of new regulations, publications, meetings, broadcasts, conferences and lots of dialogue, we are well on the way.

In one meeting, The Conference Board, in April, gathered together an impressive group that "played" to a full house at the Plaza Hotel in New York. Stakeholders from the various affected communities--the public, private industry, government, regulatory, investment firms, unions and even the professional practices, auditors and lawyers--participated in a variety of panels to exchange views on current developments, political finger-pointing and ideas and expectations on going forward.

One thing is certain: even with this esteemed group of speakers, many questions remain. But, bottom line, one thread running through the conference was the belief that restoring investor confidence is central to improving the U.. economy.

Leon Panetta, Director, The Panetta Institute, opened the meeting by setting the tone: "We believe that we have the strongest free market system in the world. But just as our democracy depends on trust, so does our economy--on the trust of CEOs, boards of directors, the investing public, the public in general. We cannot have a strong economy in this country without the confidence of the investing public."

What follows are some takeaways and quotables:

The problem, he said, is that over the last few years, trust has been badly damaged by a series of scandals and abuses that have hurt the economy, those involved with corporate America and, probably worst of all, hurt the employees of many corporations and the investing public. The conference, he continued, would review the new rules of the game: How do we enforce those rules? What do we do to try to restore confidence? He said the responsibility rests with the New York Stock Exchange and the other exchanges, the Securities and Exchange Commission, the attorneys general, accountants, lawyers, CEOs, directors, workers and the public itself.

Richard A. Grasso, Chairman and CEO, New York Stock Exchange Inc., said, "We live in the most successful free-enterprise experience that the world has ever known," comprised of some 15,000 publicly traded corporations. In the last 20 years, he said, America has gone from a defined benefit to a defined contribution society, and in the last 50 years, we've gone from fewer than 3 million owners of publicly traded companies to more than 85 million owners.

How sad recent problems are, said Grasso, referring to reporting scandals at Enron Corp., Adelphia Communications, Tyco International Ltd. An NorldCom Inc. "If that number were only one, it would e one too many, e-cause the employees of those great companies lost everything. We are in a society that is blessed to have the best and the worst of the free market process," he said.

Besides extolling the market's virtues, Grasso conceded a need to step back and deal with the failures and lessons to be learned. The market today, he explained, is experiencing a "trust discount." It's also in the middle of a war discount and a terrorism discount. The war and the terrorism discounts will evaporate, as the U.S. concludes the exercise in Iraq and agents involved in the 9/11 terrorism on U.S. soil are found and removed from society. The trust discount, he said, "is left to us--those in the business, self-regulating and. legislative communities."

First and foremost, said Grasso, is the need to restore the public's trust and confidence in capitalism, "We've go to communicate openly, candidly and without spin," he said, calling for swift punishment for the wrongdoers. "We need to send a very powerful message that wrongdoers in the system will be rooted out." Citing the premise "if you rob a bank, you go to jail," he added, "If you rob shareholders, the same should happen," with no situation where the CFO or CEO of a publicly traded company should take home a $20 million or $25 million dollar "consolation prize" to a homestead-shielded state. "Everything must be lost," he asserted. "No one is above the law, or able to in any way escape prosecutorial vigor."

At both the national and state level, Grasso indicated, is emerging a public-private partnership, much like the one that successfully dealt with the aftermath of 9/11, restoring trading in four days -- a task most thought would take months. That type of system is in the final stages of producing what he describes as a "new paradigm in financial services."

Grasso is optimistic. "As challenged as our economy may be, it is still the strongest on earth, and it is the economy that will lead global economic expansion."

Eliot Spitzer, New York State Attorney General, provided what he dubbed "remarkable numbers that speak to some of the issues in corporate America:" In 1980, the ratio of average CEO compensation to the average workers' compensation was 42-to-i. By 2001, the ratio had exploded to 411-to-1.

"I don't think there is any rational way you can state that CEOs have multiplied their value [tenfold] in ratio to the average worker," said Spitzer, adding that these numbers clearly indicate "a problem that results when you have a society that permits that to happen."

Over the last 10 to 15 years, he said, there has been a change in the corporate conscience -- a "diminution in values, diminution in the expectations of living up to values, and consequently, over time, when things were apparently as easy as they seemed to be, people's behavior began to change." The question we're all asking today, he said, is: what is the answer to that? Answering his own question, he suggested that Tom Wolfe's book, Bonfire of the Vanities, be required reading for anyone who gets a job in an accounting firm or a board of director position or who graduates from business or law school.

"If there was ever a book that defines what happens when you think you've become a master of the universe, and how quickly, with one wrong turn into a neighborhood you don't know, you suddenly find yourself in a different world -- that should pierce that balloon of invincibility that's surrounding too many folks now," said Spitzer.

He explained his thinking that during the past decade we had a kind of "imperial CEO" -- because the links in the chain of corporate decision-making failed, and they all failed simultaneously, from the board to the audit committee, to the institutional shareholder, investment bankers and the lawyers. He sees good news ahead, however: "We have tried to resurrect and create a new legal environment, a new set of obligations for each one of these links. Whether we succeed or not, we won't know for some period of time."

Spitzer offered three steps to restore investor confidence. First, change the structural rules. Secondly, deal with the issue of restitution for shareholders, which is in process and will continue over time. The third step is "to take those individuals who know they misled and make them pay the price."

It will take some time to work those cases through the system, he added, but that trilogy of objectives needs to be integrated into some overall reform package.

RELATED ARTICLE: Clinton Opines 

Following lunch at The Conference Board program, former President William Jefferson (Bill) Clinton was interviewed by Marvin Kalb, Senior Fellow, Joan Shorenstein Center on the Press, Politics and Public Policy, John F. Kennedy School of Government, Harvard University. What follows is a capsule of this reporter's notes of Clinton's comments:

* On Sarbanes-Oxley and other Bill Clinton regulation to help restore investor confidence: [I'm] skeptical when people say laws don't make a difference. I think they do.

* On the corporate trust situation: This is serious, what we're going through. [Yet] there has never been a problem-free era. If we don't have problems, we'll make up some.

* On the general state of the U.S.: Neither make the picture too rosy or too dark, but feel good about the trajectory of where we are going. We've got to get a grip. If we have to fight terrorism, we will do it.

* On terrorism: The problem [with fighting al Quaeda] is that there is no governing theory. For the Cold War, it was: 'beat communism.' Now we need a paradigm. We need to turn our interdependent world into an interdependent global economy.

* On the economy: [While there were] problems under the rosy 1 1990s, there is rosy [reality behind the] problems now.

* On decision-making: When people are under stress, they hate to think. That's the time they most need to think.

* On elections: I never met anybody who couldn't be beat. If they hold an election, you could lose -- especially if the Supreme Court decides what votes to count!

Ellen M. Heffes