Q&A: Volcker on the Crisis of Faith

Lots of people talk about the need for corporate reform. Paul A. Volcker tried to make it happen. For months this spring, the former Federal Reserve Board chairman headed an oversight board that struggled to rescue Arthur Andersen LLP by turning the embattled accountancy into a model auditing-only firm. That experience left Volcker with mixed feelings about Corporate America's interest in cleaning up after the wave of current scandals, as he explains in an interview with Washington Senior Correspondent Mike McNamee.

Q: When you were working to reform Andersen, where were Corporate America's CEOs? Were they behind you--or way behind you?

A: Well, I didn't see anybody out in front of me.

I received a lot of expressions of sympathy. But Corporate America was not there in any organized way. [CEOs] privately told me they were sympathetic--but basically they wanted to be quiet. Why would they get out in front? It was not in their short-term best interest. We thought the best way to get reform was to prove that it was possible.

Q: You've said that the current state of accounting and business poses "a clear and present danger to the effectiveness and efficiency of capital markets." What is that risk?

A: Enron and Andersen are the extreme example. But we have seen a lot of other examples of corporate practices that the most kind thing you can say is they stretched the envelope--stretched it all too often beyond recognition. Auditors have not been able or willing to exercise discipline in an environment that's extremely difficult. Accounting standards themselves have not kept up with business practices. And the stock market boom created enormous wealth and enormous pressure to manage earnings and keep up the growth. These all led to pressures that were inconsistent with executives' and auditors' responsibilities.

People now don't have faith and reasonable confidence in financial reporting. That affects the flow of capital, and ultimately it could affect the amount of capital that's available to business. In a capitalist system, that's not good.

Q: Do you see any signs that Corporate America is changing?

A: I am sure there's a lot of new thinking within boards and audit committees and among executives. My friends who are on boards tell me they are much more sensitive to accounting issues. It's gotten tough for an auditing company to do large-scale consulting for the firms they audit. This is all welcome. The trouble is, I'm not sure how long it will last.

Q: What changes should be imposed in boardrooms?

A: Well, there's the [Treasury Secretary] Paul O'Neill view of things--that the major way to improve matters, more important than supervision and regulation, or preaching ethics, is putting real responsibility on the CEO. Have him sign the financial statements. If the statements prove to be a fraud, he bears the responsibility. It is a sentiment that I respect. CEOs are being paid to be responsible.

Q: What about expensing stock options?

A: Stock options have been abused, no matter how they're accounted for. The executives I've talked to say, "I think it's wrong to expense options if nobody else is doing it. But if everybody has to [expense them], that's fine." Of course, these aren't high-tech or big financial companies--more mainstream industrial companies.

Q: Are there other ways to improve corporate governance?

A: I know this really makes me popular with Corporate America, but I think every public company should separate the job of chairman, should have a nonexecutive chairman for the board. I've seen it work well in many other countries. At the very least, companies should have a strong lead director, but that's not an adequate substitute for a nonexecutive chairman.

Corporate responsibility is mainly a matter of attitudes, and the attitudes got corrupted by the mentality in the markets in the 1990s. We went from "greed is good" being said as a joke to people thinking that "greed is good" was a fundamental fact.

Q: Can those attitudes change, or do we have to wait for a new generation? Can you teach an old CEO new tricks?

A: Well, they taught themselves new tricks on how to maximize their incomes. That didn't take too long.

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