Jewish World Review May 21, 2003 / 19 Iyar, 5763
Wall Street's new imperative: Integrity
http://www.jewishworldreview.com | At this time a year ago, the Sarbanes-Oxley corporate reform legislation was making its way through Congress, finally passing in late July. A lot has happened since that time, much of it positive.
We've won the war against Saddam Hussein. The economy and the financial markets are finally showing signs of sustained improvement. And progress has been made in repairing investor trust in Wall Street after the worst outbreak of corporate corruption in decades, including the recent $1.4 billion settlement between New York Attorney General Eliot Spitzer, regulators and 10 leading brokerages.
But risks remain. Most notably, the risk that as conditions improve, Wall Street and Washington will conveniently forget the critical importance of integrity and transparency to the market and to investors.
"I think that the marketplace is becoming increasingly secure," William Donaldson, the new chairman of the Securities and Exchange Commission, told me last week. "A number of the reforms that have come, via the Sarbanes-Oxley Act and a number of things that we have done at the SEC, are basically making everybody take a new look at how they're performing their duty as a director, how they're performing their duties on audit committees and compensation committees."
"I think the reforms that came as a part of the large settlement are going to change the way research and investment banking are done, to the betterment of the individual investor."
Among other significant milestones reached in recent months: CEOs and CFOs are now required to sign off on their corporations' financial statements. The New York Stock Exchange is tightening up its corporate-governance regulations on its listed members and on its own board - the latter in reaction to an outcry over NYSE Chairman Dick Grasso's exorbitant compensation package. On Thursday, the Big Board announced it had formed a committee to conduct a thorough review of its governance policies. And the SEC has moved quickly to quiet the controversy created by former SEC Chairman Harvey Pitt. The agency recently won acclaim over its appointment of former New York Federal Reserve President William McDonough to head up the new accounting standards board.
Due in part to these efforts, we're finally seeing signs of a return of confidence in the market. Investor optimism in April increased to the highest level in 10 months, according to the UBS/Gallup Index of Investor Optimism. And more than half of those surveyed say that now is a good time to invest. The Dow is now trading near a four-month high, and the Nasdaq is near an 11-month high. And, in perhaps the most compelling show of renewed investor enthusiasm, equity funds reported net cash inflows of $12.9 billion in April - the largest amount in a year.
But, as I mentioned, risks remain, such as the $2.5 billion accounting scandal now unfolding at HealthSouth.
Donaldson says the SEC remains fully committed to cleaning up Wall Street.
"We're deadly serious about bringing reform into the marketplace," Donaldson said. "We're deadly serious about some of the actions we've taken. And when we see people who don't appear to be taking it too seriously, we're going to get to them right away."
Go get 'em, Mr. Chairman.
The outbreak of corporate abuses was exacerbated by the cyclical downturn in the economy and stocks following a period of explosive growth. Now, we are seeing many positives in the market and the economy. One has to hope that as the recovery strengthens, Wall Street executives, regulators and investors will continue to recognize the essential role that integrity now plays in this market.
Every weekday JewishWorldReview.com publishes what many in Washington and in the media consider "must reading." Sign up for the daily JWR update. It's free. Just click here.
05/13/03: Losing sight of the dangers in creating further fiscal stimulus