11/20/2002 - While the disclosure of phony financial statements appears to have slowed to a trickle, firms may have yet to bear the full brunt of investors’ wrath for the financial trickery played out by a few companies during the past months, said experts at the Kellogg School’s Nov. 20 “Focus on Finance
“I would guess that a large number of investors today believe the deck is stacked against them for a number of reasons — corporate greed, CEOs who care more about their own pocketbooks than shareholders, the failure of companies and accountants to disclose information, and the failure of financial institutions to provide credible information,” said Robert D. Hormats, vice chair of Goldman Sachs International and managing director of Goldman, Sachs & Co.
Hormats was a keynote speaker at “Focus on Finance: Regaining Shareholder Confidence.” The Kellogg conference addressed the toll corporate accounting scandals have taken on investors during the past year. The event, held at the James L. Allen Center, also included a keynote address by Douglas A. Scovanner, CFO and executive vice president for Target Corp., as well as discussions by panel participants who have seen investors grow jaded by the scandals.
Hosted by the Kellogg School Department of Finance
, the Career Management Center
and the Investment Banking, Sales Trading Research, and Investment Management and Finance student clubs, organizers hope to make this first-ever conference an annual event that draws on Kellogg’s finance department, which was ranked among the very best in the recent BusinessWeek rankings.
In delivering his keynote, Hormats said some investors who were burned when stocks tanked and companies crashed have pulled their money out of the market and will never return. What better evidence of that, he added, than the fact there is currently some $2 trillion in money market accounts in this country, on which the real yield is negative. “If this is not a measure of a high degree of caution and distrust by the average investor, I don’t know what is,” he said.
Prescriptions for regaining investor confidence discussed at the conference ranged from passing stricter corporate fraud legislation to changing compensation methods for stock analysts to ensure the independence of their picks.
Jonathan Sokobin, deputy chief economist of the Office of Economic Analysis for the Securities and Exchange Commission, said legislation that attempts to curb corporate offenses, as well as stiff penalties for those who have already done wrong, is one way to prevent corporate abuses in the future and may be a recipe for restoring shareholder confidence.
“The question is what we do today that makes sure we don’t have the same complete failures the next time that big bag of money is sitting on the table,” Sokobin said.
Dealing with the realities of a post-Enron business climate won’t be easy for investors, who don’t know what information they can trust anymore, panel participants said. But this new increased scrutiny by investors and legislators alike is also presenting challenges for honest companies, said Nancy Hobor, vice president of investor relations and communications for W.W. Grainger Inc.
“The reality is that information, which is key to our industry, is exploding,” said Hobor, who discussed the increased amount of financial reporting mandated by the Sarbanes-Oxley Act, passed by Congress this summer. “How anybody is going to be able to get their hands around this information presents a real challenge.”
One thing most participants agreed upon is that the task of rebuilding credibility will be a slow one for corporations.
“Confidence can only be restored one CEO, one CFO, one accountant, one lawyer, one analyst at a time,” Hormats said.