Baruch College Forum Strikes at Heart of Board Accountability, Professional Regulation Issues

By Tom Morris, Editor, The CPA Journal

Proving how much corporate governance issues are on people's minds these days, more than 250 individuals attended a public forum at Baruch College titled "Corporate Governance in the Post-Enron Era: Ideas for Reform," on May 27, even though the event was planned and presented with little advance notice or promotion. That the forum moderator was former Securities and Exchange Commission Chairman Arthur Levitt, a high-profile and vocal critic of both the accounting profession and the investment community, no doubt contributed to the large turnout at the second-largest school of accountancy in the U.S.

Douglas Carmichael, Wollman Distinguished Professor of Accountancy and founding director of the Baruch Center for Integrity in Financial Reporting, introduced Levitt, now senior adviser to the Carlyle Group, a private equity firm, and the other forum participants, including William Crist, president of California Public Employees Retirement System (CalPERS), and Jack Bogle, founder of the Vanguard family of mutual funds.

Bogle, whom Levitt said restored his own faith in our market system, stated that he thinks mutual funds share responsibility for the disconnect between stock prices and value caused by the breakdown in corporate governance. He noted that "speculative bubbles" occasionally occur with stock prices, and that prolonged bull markets create unrealistic expectations. Saying that "the system is corrupt but not the people," Bogle denounced corporate stock options for corporate executives. Levitt, agreeing with Bogle that investors share responsibility for the recent bubble debacle, pointed out that investors must be aware of and accept the risk/reward trade-offs inherent in investing, and not accept do-nothing boards of directors.

Bogle concurred with Levitt regarding problems of passive board members, saying many of them have too much power and are "treated like the Pope." Both Crist and Bogle agreed with Levitt's suggestion that proxy statements should include directors' attendance records. Bogle, however, added, "You can lead a director into the board meeting but you can't make them think," acknowledging that attendance at board meetings, although measurable, doesn't guarantee active participation.

In addressing a question submitted by an audience member about the importance of expensing stock options to improve corporate governance, both Crist and Bogle supported the idea.

When Levitt read an audience question about changing self-regulatory organizations to make them "more than passive, best-practices apostles," both Crist and Bogle supported such a change. Crist said such a lowest-common-denominator approach would be analogous to the stock exchanges' listing requirements.

Levitt responded to a question submitted by an audience member about the current role of the American Institute of CPAs (AICPA) and the state societies. Levitt spoke frankly, decrying what he called the AICPA's "dismal track record" and drawing a spontaneous round of applause from the audience. He characterized the AICPA leadership as being "self-serving" and showing a "fortress mentality," stating that their direction must change. He spoke favorably, however, of the state societies in general and made clear that he saw them as being very different and separate from the AICPA.

The forum participants were not in agreement on all points. Responding to a question about term limits, Crist said he favors five-year term limits for directors and auditors. Bogle, though, said he opposes term limits for either directors or auditors, adding that the real problem is CEOs who act as if they, not the shareholders, own the company. He said board turnover is a problem and term limits would only make it worse.

Asked by a member of the audience whether there is a shortage of qualified directors, Crist said he does not believe so. Responding to a question for their opinions on using executive recruiters to find corporate directors, Bogle said he supports and encourages the tactic, saying that in his opinion the process works well and is healthy. Crist agreed.

Sitting in the audience, noted economist Josh Weston asked the forum about the SEC and its "resources to create constructive fear." Levitt said the SEC lacks the resources, such as pay equity, to do enough, therefore, he continued, investors, to a degree, must protect themselves. "How the SEC uses its resources is more important than the dollar amount," Levitt concluded.

Raymond A. Norton, of CBIZ Business Solutions, Inc., and a member of the New York State Society of CPAs Financial Accounting Standards Committee, said he was impressed with the quality of the program and the high level of discussion. "Baruch did themselves proud," he said, noting that the forum's subject definitely was pertinent to current events.

Norton said the message from the forum that he took back to CBIZ is that a company's direction is set at the top, which in a corporation is the board of directors. "In the case of Enron and obviously many other companies these days," Norton said, "the board of directors has not been proactive enough. I think the authority of senior management has held sway too long, and I think that now we'll see boards of directors more directly involved in management of the company. The SEC and the exchanges will require them to do more, to be more proactive and not rely on senior management as much. And I think we'll see more accountability for corporate boards of directors.

"I thought Levitt's response to the question about the AICPA was appropriate," Norton continued. "I thought the round of applause he got was understandable because New York state CPAs, as evidenced by the NYSSCPA itself, have for some time been extremely active in opposing misguided initiatives from the AICPA."