NEW YORK - A crisis of confidence among investors is worse than many thought, a panel of investment executives hosted by the New York Society of Security Analysts concurred last week.
In order to regain that trust, publicly traded companies and investment firms will have to radically change the way they do business, they said. Companies can strengthen corporate governance by developing truly objective investment analysis, enforcing transparent accounting practices and making executives more accountable to shareholders, they said.
Even fund portfolio managers could do a better job of analyzing stocks, one panelist said.
The pundits gathered on Tuesday before a packed banquet room at the Princeton Club to discuss how companies should respond to investors' crumbling faith in the markets following financial scandals involving Enron, WorldCom, Adelphia, Tyco and other firms.
"This breakdown in trust is very widespread and very deep," said panel member Byron Wien, managing director and senior investment strategist at Morgan Stanley of New York. "It will not change unless some very drastic action is taken."
"All of you people have a big job to get that confidence back again," said another panel member, Delos Smith, a senior business analyst at The Conference Board, a New York not-for-profit organization that researches business trends. Investors, he continued, "are shell shocked. They need Prozac. They don't want to buy or sell; they just want to sue."
The debate, between seven executives and one congressman, was often heated. It included discussion of new anti-fraud legislation signed this summer by President Bush as well as questions involving executives' accountability to shareholders, conflicts of interest among analysts and the need for companies to expense employee stock options, as Coca-Cola of Atlanta and The Washington Post of Washington said they would.
In addition, panel members sometimes questioned the veracity of each other's statements and accused the investment industry of pointing fingers instead of seeking solutions.
Asked after the debate what a typical mutual fund investor might have thought of the discussion, Wien said, "I think they would have been disappointed. They want to see examples where [executives] are putting shareholders ahead of themselves."
The panel did not touch on the issue of fund companies' role in restoring investors' confidence, but several executives said privately that funds can do more to make sure their investors are not affected by corporate imbroglios.
Some officials expressed support for an idea pitched earlier this year by Vanguard Group founder John Bogle. He proposed informally uniting fund companies in an effort to pressure corporations into reform.
"Mutual funds should take an active role in looking at corporate governance," Louis Thompson Jr., also a panel member and head of the National Investor Relations Institute in Vienna, Va., told MFMN.
Thompson said that 75% of all mutual funds own 45% of all outstanding stock shares. "That's a lot of concentrated power" when it comes to proxy votes and other ways to influence companies, he said.
In addition, Thompson said that portfolio managers should do a better job of analyzing the stocks in which they invest. "I want to know that people managing my money are going beyond their fiduciary responsibilities," he said, adding with an incredulous tone, "If you don't understand a company, get out of it! It floors me to death!"
Much of the discussion concentrated on the legislation Bush signed into law in late July. Sponsored by Sen. Paul Sarbanes (D-Md.) and Michael Oxley (R-Ohio), the law creates a regulatory board to oversee the accounting industry and sets new guidelines for prosecuting alleged fraud among executives.
The majority of the panel said they would prefer that the industry police itself. But they also conceded that investor confidence was at such a low, they understood why Congress intervened.
"We think the bill is just about right," said John Castellani, a panel member and president of the Business Roundtable in Washington, D.C., an association of CEOs from the nation's top companies.
Castellani said the Business Roundtable was "just as outraged about what has happened" as other observers. And he said the organization has been a supporter of reforming corporate governance.
But another panel speaker, Rep. John LaFalce (D-N.Y.) responded skeptically. "I'd love for you to make public all of those letters and phone calls to Congress," he said, adding that he has "great respect for the Business Roundtable, but it can only go as far as its members want to go."
LaFalce said there was certainly no way the private sector could adequately set standards that would avoid future debacles and that the legislation was a good start in preventing such problems.
"I think we need to go further than the bill that passed Congress," LaFalce said. "If [self regulation] can't work with Congress, it just can't work."
Morgan Stanely's Wien, who was often blunt and even surly, was the last to weigh in on the legislation. "I disagree with almost everything that has been said," Wien said.
He accused his fellow panel members of "looking at this from a parochial" perspective and considering the issue "from their own point of view."
Wien said more CEOs should come forward with best practices aimed at preventing future scandals. But instead, he said, CEOs are "waiting to find out what they can get away with. CEOs are hiding behind the government and private regulatory bodies. CEOs need to just do what's right no matter what the regulatory bodies say."
"We don't have enough heroes," he continued. "When we have enough CEOs doing the right thing, then we will begin to solve this problem."
Other speakers on the panel included Thomas Bowman, CEO of the Association for Investment Management and Research of New York, Robert Herz, chairman of the Financial Accounting Standards Board of Norwalk, Conn., and Marc E. Lackritz, president of the Securities Industry Association of Washington.