Despite the wrongdoings that have convulsed corporate America in recent months, SEC Commissioner Harvey J. Goldschmid believes that the business world is on the mend.
"I have a very optimistic view," he said. "Out of scandal comes healing and reform."
Sharing Goldschmid's optimism were New Jersey Senator and former Goldman Sachs co-head Jon S. Corzine, and Ernst & Young chairman James S. Turley. In assessing the current business climate at the Restoring Confidence in American Business conference at Harvard Business School on April 21, the panel agreed that the root causes of the scandals were systemic rather than a matter of a proverbial "few bad apples." In the panel, moderated by HBS professor Krishna Palepu, panelists also said that new laws ,and regulations were already making a difference in improving the situation. And they didn't hesitate to point to history to make their case.
The country's first major financial crisis—the Great Depression—led to the Securities Acts of 1933 and 1934, which effectively regulated the stock market for nearly seventy years, noted Goldschmid. "We have to remember that these two great securities acts came out of scandal," he said.
Just as happened in the early ‘30s, the current corporate scandal was caused in large part by a lack of gatekeepers, Goldschmid added.
"[The business community] in recent years was dependent on auditors, lawyers, and investment bankers and they didn't come through," he said, noting that the drive for investment banking revenues on Wall Street led to conflicts of interest between those sectors. "Self-governing, particularly in the auditing process, was a disaster."
| Out of scandal comes healing and reform. |
| — Harvey J. Goldschmid |
The "vast creation of wealth" in the 1990s led to both increased greed and a breakdown in leadership in corporate America, Corzine said. The mistake Congress made was to let the Securities Acts of the 1930s grow too large to be effective, he continued.
Corzine, who played a key role in ensuring passage of the Sarbanes-Oxley Act of 2002 in the Senate, said that the new law's value is that it helps eliminate conflicts of interest between auditors and a company's board of directors by decreeing that directors establish an independent accounting oversight board. "This ‘auditor for the auditors' is a hell of a good thing," Corzine said. Now that Congress has doubled the SEC's budget under Sarbanes-Oxley, "the SEC can now compete more effectively in the marketplace."
Confidence that was lost on all levels during the stock market's ten-year bull run is now being restored, said Ernst & Young's Jim Turley.
"Celebrity CEOs and CFOs became cheerleaders for marketing and sales and forgot their role as the conscience of their organizations," he said. "…But there's been a lot of changes in the last eight months under the Sarbanes-Oxley Act. It's a very positive step that the self-regulation of the auditing profession is over."
What goes on in corporate boardrooms today is "dramatically different" from two years ago, now that boards are empowering audit committees, Turley said. Noting that 20 percent of companies changed audit firms after Arthur Anderson's collapse, he added: "Audit committees understand that they are in charge. There is now a much better focus on the complexity and risks of business and a real drilling into the issue of coziness [between auditors and managers]."
The Restoring Confidence in American Business conference was co-sponsored by the Harvard Business School Association of Boston and the Boston Security Analysts Society.