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Old Sheet Music: Money Talks
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Transcript: Risky Business
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BILL MOYERS: Richard Moore, you are the treasurer of North Carolina, you are responsible for the pension plans of how many people?

RICHARD MOORE: More than six hundred thousand people.

MOYERS: For all the ballyhooed recent reforms what makes you sure that those people aren't being hoodwinked again?

RICHARD MOORE: Well I'm not, I'm not sure at all.

MOYERS: What are you telling your six hundred thousand folks about the safety of their money?

RICHARD MOORE: Our portfolio has been properly diversified and we have not lost very much money. We have lost a couple of percent. We are the largest shareholder of every major publicly traded company in America and while stocks were going up everybody was happy. We've learned that that doesn't always happen and what do we do to make sure that we can price risk. Nobody guarantees your losses but you do have a right to make sure that if you and I are in the same investment that you make money and I lose money that we make sure that that doesn't happen.

MOYERS: But that is what happened. I mean, that's exactly...

RICHARD MOORE: That's exactly what happened.

MOYERS: Yes, that's exactly what happened. And why did it happen?

JOANNA UNDERWOOD: I think this problem is much broader than a few cases of financial shenanigans, the hiding of wealth, the tax shelters.

I think that we've had over the last decade a real shift in the purpose of doing business, and that's unbridled race for wealth. And it's something that corporations are looking at putting more money into top salaries and earnings than into investment in the long term future.

It's what's happening on boards of directors that are often friends of the managers of the company and you have the auditors who want to keep their jobs auditing. You have the financial press. You've had also shareholders that, the whole list of characters that are happy as long as they see money and excitement and wealth. And…

MOYERS: Are you saying the system is rotten?

JOANNA UNDERWOOD: I think the system has a value problem and ethics problem that needs to be addressed.

STEPHEN MOORE: The system isn't rotten. In fact, if you look over the last 20 years even accounting for this meltdown in the market that we've had over the last 18 months, this has been the greatest period of wealth creation in history of civilization.

You go back to 1982 when the Reagan revolution really began and this boom market began, remember the Dow Jones was 800 in the summer of 1982. And we've seen an explosion of wealth creation. By my estimation the United States has created somewhere in the neighborhood of $8 to $10 trillion in new financial wealth.

This has made middle class Americans and wealthy Americans much wealthier.

WILLIAM LERACH: To say that the system isn't rotten really overlooks a lot of what's occurred in the past couple of years. It's rather myopic to say that over the long term there's been a great deal of wealth creation. How has that wealth been shared?

It's been shared disproportionately to corporate executives, investment bankers and the like. And a large amount of that wealth that went to the executives was created by the falsification of financial statements and the deliberate inflation of stock prices.

Now look at the price that's being paid for that: investor confidence has been undermined, capital formation has been impaired, the markets have collapsed. And none of us know how much further that has to go. Was that good for the country in the long term? I'm not sure that that's clear yet.

STEPHEN MOORE: That's an important lesson for investors to learn, that markets just don't go up, they go down.

You go back to 1987 when we had a collapse in the market and everyone's saying, oh my God, this is a meltdown and too much capitalism, too much grief.

And if you look at what happened in 1987 on a long term, you know, chart on the stock market, 1987 shows up as a little blip. I believe if you have us back 10 years from now, Bill, we will look at this and we'll say, yes, it was a bit of a downturn, but the market is going to go back on its merry way.

WILLIAM LERACH: Or it's going to be like the Nikkei Index in Japan where we looked back, and that Index has been going down for 17 years.

STEPHEN MOORE: Luckily we're not like Japan.

MOYERS: How can anyone, millions of stockholders, how can they trust those investments if they can't trust the information the accounting firms are giving them, the executives are saying. I mean, that's the whole essence of...

STEPHEN MOORE: I agree with that. And certainly I'm not saying that there aren't crooks out there and I'm not saying that there isn't corruption that took place. And I do believe that those people who engaged in willing fraud should be put in jail. What I'm arguing with is this idea that there is a culture of corruption in corporate America and I reject that.

ALAN PATRICOFF: I would agree with you. I think it's really a shame that corporate America is being given this image of hoodwinking people, of corruption running through business. that's not really the case.

I mean I've been investing in companies for 30, 40 years and the number of fraud examples have been so minuscule. And what really has happened and people should distinguish it, the economy in the last couple of years has gotten very soft. And that has accounted for a lot of the declines taking place in the market.

This has now been exacerbated by a few, a handful, who knows what the number is going to be, of companies that have the appearance of things that have been done improperly.

Most companies have very little problem with their system. Does it need improvement? Absolutely. But that needed improvement before this last round.

WILLIAM LERACH: think over 900 accounting restatements in four years indicates a few bad apples? Do you realize that the companies on the NASDAQ wrote off $148 billion of previously reported profits. The companies that lead the NASDAQ never made an honest dollar of profit in the last five years of the 1990s.

ALAN PATRICOFF: That's not true.

WILLIAM LERACH: It is true, and the Wall Street Journal reported it, that every dollar of profit reported on that so called new economy index was wiped out by subsequent accounting write downs. The accounting in this country has been phony and false and it's misled investors and it's cost them trillions of dollars.

CAROLYN BRANCATO: I think going forward the problem is that there are certainly some areas of fraud that need to be rooted out. But I think the issue is that the corporations need to start taking corporate governance seriously, entirely through the organization. The board has been too collegial in most cases. The issue of managers and...

MOYERS: By collegial you mean...?


MOYERS: Cronies.

CAROLYN BRANCATO: Well, agreeing with the CEO...

MALE: Cozy.



MOYERS: Looking the other way?

CAROLYN BRANCATO: Well, I think that the issue is the amount of oversight that the board exercises. Boards have only recently really taken responsibility seriously of duty of care and duty of loyalty and their fiduciary responsibilities and they're going to have to step that up.

MOYERS: Why did they wait so long? You've been studying this. Why didn't they wait until after the horse was out of the barn?

CAROLYN BRANCATO: I think some of them have taken it seriously.

Some companies of years ago, General Motors, came out with a series of corporate governance guidelines. And so we've seen a slow and a gradual pace but I think that the problem is that the corporate governance has to be entirely through the corporation. And as well, the investors I agree have to start taking more responsibility for their role in oversight.

MOYERS: Hasn't corporate governance been entirely on its own the last 10, 20 years?

CAROLYN BRANCATO: Corporate governance has been evolving gradually for two decades actually in this country starting in the early eighties, when we had a lot of the merger craziness in the early eighties. And so boards have slowly been realizing and the courts have pressured them in different cases coming up to be more proactive. And I do think that this whole system focuses on the corporation and pushes the corporation to become better.

RICHARD MOORE: I agree. I agree overall that markets are going to fine. It's still one of the greatest markets. In overall fairness, most people in corporate America are honest.

But here is what is new. If you want to find one thing that's new, over the last 30 years two dynamics have changed. One is that large companies in America, either the founder or the founder's children or the founder's grandchildren have disappeared from seats around the board table.

And the reason that's important is because those people were not spending somebody else's money. They were large, individual shareholders that corporate governance was a word they never thought about. But they implemented it every day because that CEO, they wanted to make sure it was a fair way so that the options will position the right way.

So we dissipated the individual or the founder's family's power at the boardroom table who, they weren't spending somebody else's money; they were spending their money. At the same time that happened, corporate pension funds in America and mutual funds in America exploded.

They exploded because the tax code in this country enticed you to go into these things. You were made to feel stupid if you didn't make these investments. The consultants told the people that ran pension funds if you don't have a 50, 60, 70 percent allocation to stocks, you're not doing the right thing.

Thirty years ago every pension fund was in bonds. So as one group is exiting from the board rooms, these passive investors are entering the board room. So if you're a student of human nature, and the only systems that work are human nature, you've set up the situation where everybody is spending everybody else's money and we'd better be careful. We have to make sure that we have safeguards.

STEPHEN MOORE: Don't forget: investors still have the ultimate vote and they have the ultimate control because...

MALE: But that's not...

MALE: ...but they have the...

ALAN PATRICOFF: Well, Richard's saying the opposite. What Richard is saying is absolutely correct, is what's happened in this country is that we've gone from a country where companies were owned by the people who managed the businesses...

MALE: Right.

ALAN PATRICOFF: an absentee type of ownership which is the institutions. And that has been going inexorably ahead. I don't know what the numbers, it's up to 40, 50...

MOYERS: To hired managers. I mean, then these companies hired the managers and the managers as I understand it begin to transfer the wealth from the investors to themselves.

WILLIAM LERACH: But they also were given stock options, which dilute the true owners of the company. Burrough identified this problem many years ago. The separation between management and ownership. And I think we need to be careful.

Control your enthusiasm for corporate governance. I'm a corporate governance advocate. But look at WorldCom and Enron. They both had prestigious boards. Independent audit committees. Conformed with the council of institutional investor guidelines. And yet these debacles happen.

I suggest to you that procedures and great resumes and prestigious pedigrees don't guarantee independent skepticism. How do you legislate that? Where do we get that? That's what you need on boards.

People are going to look at a Ken Lay or a Bernie Ebbers and say, no, you're not going to do that, we're not going to let the CFO run a partnership that's going to do business...

ALAN PATRICOFF: It's very hard for a public environment under the scenario that we just described a minute ago of management not owning major shares of the company. The people that own them not actively voting their shares, although I must say it's gotten better in the last couple of years. And the managers being totally focused on short term performance, quarterly earnings. The pressure is enormous.

MOYERS: Where does that come from?

ALAN PATRICOFF: It comes from the analysts, it comes from the.... It's been built into the investment community today to watch first call estimates and be on the.... Companies run their businesses virtually on what is expected of them in the quarter and it's forced a lot of managers to react to that and manage their earnings. I mean, managing earnings has been around for…

MOYERS: So you sacrifice your integrity to do that?

MALE: And it…that's got to put an awful lot f pressure…

MOYERS: But that's what's happened, manager after manager has been lying about all…

ALAN PATRICOFF: No, I don't want to say lying. I'd say there's a lot of pressure and then you have the flexibility of, do you capitalize something or do you expense it? It is an enormous pressure.

MOYERS: These top guys at Enron, Global Crossing, even Xerox systematically lied about the condition of their companies in order to rationalize granting themselves these huge sums of money.

ALAN PATRICOFF: But, Bill, I think you're follows the other. I don't think it's in order to rationalize necessarily. I think the system built up over the last several years, last decades of an option. And options aren't all bad. Options are a good thing. And in many companies, options is a spread to almost everybody in the company.

You've read about Intel. Everybody in Intel owns options in the company. That's been good for America. It's built a lot of wealth. But the problem is that managers have been on a race to keep their stock prices going and it affects their judgment.

MALE SPEAKER: This argument that...

ALAN PATRICOFF: And they're not dishonest.

JOANNA UNDERWOOD: I'd like to jump in on the issue of accumulation of wealth and its importance in a society. It's nice to have enough to live, to eat, to live well. But I distinguish between cases of real financial fraud and crooks and on the other side, simply a society that has floated into more and more including its business sector, a focus on accumulation of money and wealth and short term gains. No delayed gratification.

They're buying cars by the pound with SUVs and a lot of the world looks at us and says, why are we so resource inefficient? The values of business, I think, need to reflect the desire to make a good product, the desire to leave a healthy and resource rich world for our children...

...the desire to have a strong company that is participating in the life of its communities, the desire to be part of a country that understands its role in the world, not that is nearsighted and saying, it's just about us, we're invulnerable and doing business in a way that protects our environment and our global climate.

I think all of those ingredients need to be part of the values of what people do individually and how corporations make decisions. Yes, they have to make money. But this is a question of how much, where and what are the other values that determine what businesses do.

MOYERS: I want to join what Richard Moore said to what Joanna Underwood was talking about. The companies changed, managers were hired, independent managers became very powerful.

More than one critic warned that the unchecked power of managers was a cancer eating at the heart of American capitalism. Why didn't anybody listen?

WILLIAM LERACH: I'd say we were making too much money. Richard Moore's point, and you know, people who are right are often ignored for a long time. It just.... We worshiped the corporate culture in this country in the last 20 years. It's not unlike the turn of the last century with the robber barons.

There are periods that America goes through whether we felt we weren't sufficiently competitive in the world, whether we wanted to have more wealth in a Reagan revolution. Something happened to us beginning in the last seventies and eighties.

We cut taxes, we changed stock options, we chased wealth. And it accumulated a tremendous momentum that in at least the late stages tempted a lot of people to misbehave either out of greed or envy or whatever it was. And today we're looking at the ruins of that.

STEPHEN MOORE: But there's a reason people worship the corporate community and that's because they made $10 to $15 trillion of wealth for us. And we are all much, much richer because of it.

WILLIAM LERACH: I just disagree with that.

WILLIAM LERACH: How can you say that, with ordinary Americans working for so little with the disparity between what corporate executives get and ordinary working people. I could not disagree with you more.

STEPHEN MOORE: Half of Americans own stocks now. They benefitted from the...

WILLIAM LERACH: Yes, when did Americans return to the equity market? Sixty percent of household wealth was in the stock market in the beginning of the year 2000. Do you know the last time it reached that level? September 1929, Americans...

STEPHEN MOORE: If you look at...

WILLIAM LERACH: sucked into the market at the top and lost trillions.

STEPHEN MOORE: ...stop and look at average household wealth from 1980 to 1990 to 2000, it exploded. And it wasn't just the rich, it was average household.

ALAN PATRICOFF: ...indict the whole corporate system because of things that have just happened in the most recent past. There is...what I'm very supportive is, is a new look at how corporations are being governed. That is a very constructive effort.

CAROLYN BRANCATO: I think corporations are not monolithic. And logistics investors are not monolithic. You've got the public pension funds, they're largely indexed. You've got mutual fund managers, they can be very active investors and have a high turnover and so on.

But you've got this whole spectrum of corporate America. So I think we should talk about corporations in different categories and not just lump them all to one. Clearly a lot of the drug companies do have long term investments. They've held that line in terms of making long term investments.

Utilities do not have these high salaries. So there are a lot of differences.

MOYERS: Carolyn, the ones that did it right, the ones that lived by their values, they're not responsible for what's happened. We wouldn't be here today if there weren't sufficient numbers of corporations that were not doing what you are saying. 10 01 37

CAROLYN BRANCATO: Well again, I'm not sure what you'd consider sufficient numbers. I'm not...

MOYERS: Enough to create the chaos of the moment.

WILLIAM LERACH: A thousand restatements in four years?

MOYERS: What do you mean by that?

WILLIAM LERACH: Restatements are when companies change their previously reported financial results to admit they were false when they were issued.

MOYERS: A thousand?

WILLIAM LERACH: A thousand companies. There are only about 10,000 real public companies in this country. That's 10 percent. That's a hugely material amount.

MOYERS: Is that a crime?

WILLIAM LERACH: If it's done with knowledge and intent it's a crime, and who do you...

STEPHEN MOORE: In most cases it was not criminal.

WILLIAM LERACH: Well, I'd respectfully disagree. Who do you think cooks the books? You think some janitor...

STEPHEN MOORE: Out of those thousand you think most of them are criminal?

WILLIAM LERACH: I absolutely...

WILLIAM LERACH: I think most of them were intentional.

STEPHEN MOORE: That is ...

WILLIAM LERACH: Who makes the decisions on what the financial results would be?

STEPHEN MOORE: Because the accounting.... Because one of the reasons they're restating is because new data is coming...

WILLIAM LERACH: No, that's not true.

STEPHEN MOORE: It sure is.

WILLIAM LERACH: And you know it's not. You restate based on the current, then existing accounting rules when you issued the financial statements. This is a very serious indictment of corporate America that there have been 1,000 restatements.

Now you tell me, who's responsible for the financial statements?

STEPHEN MOORE: Well, the board of directors.

WILLIAM LERACH: And the CFO and the CEO. And those numbers are the result of deliberate decisions.

STEPHEN MOORE: But it's not a result of fraud.

ALAN PATRICOFF: First of all, we have to understand. Bill's profession is attacking people who are fraudulent. So it's a great statement to say there are 1,000 companies who restated and they're all frauds. I don't believe it. I just don't believe 1,000 companies falsely -- that's a strong word -- falsely adjusted their figures.

MOYERS: So what happened now in your judgment?

ALAN PATRICOFF: I don't know. I'd have to know more about the facts. Are there restatements? All the time, all the time. many cases legitimately.

ALAN PATRICOFF: You change items, developments take place, you find out we've had a.... In fact, one of the major things I think I understand what you're saying now is that goodwill has been changed on the balance sheet, a whole new concept came out this year.

STEPHEN MOORE: That's right.

WILLIAM LERACH: And now hundreds of companies, hundreds legitimately had to rewrite, had to write down their goodwill which had previously been capitalized which was a fundamental change in the accounting profession.

RICHARD MOORE: But before we get back down into the details of this issue, I'm intrigued by what you said about a corporate aristocracy. I'm intrigued by what you said about the way we raise our children.

How are we...and you said that corporations are not monolithic, which is absolutely of course is true. But I tell you something that is true and this is something else that's changed over the last 30 years. There are a lot less corporations.

And maybe the better question here is how are we raising our managers? Not how are we raising our children. And if our managers are being raised at the palace in a very artificial environment where a generation ago the manager was being raised in a mom and pop organization that knew what it was like to have the church come by for a donation for new choir robes or to sponsor a little league baseball team.

And now they're in this remote place where their every whim is taken care of. And because we've had this tremendous consolidation in this country, just ten years ago we had a lot of small and medium size, not publicly-traded but private companies, who were there on Main Street in America. And many of those companies have been bought out. And the people that owned them, had shared greatly in their wealth. My brother happens to be one of those people but he feels now that he's taking orders from somebody in a remote situation -- that they don't understand the cycles of the business. That they've gotten rid of the good people. That they're going to be sorry for in five years. They don't participate in the community, they don't really respond; they don't give to the United Way like they used to. I'm mean really huge cultural changes.

WILLIAM LERACH: There's been a deterioration of character and just core standards. It's a problem. You can't ignore it.

STEPHEN MOORE: But why are you saying that's just in the business community though? It happens in the legal profession too.

WILLIAM LERACH: Let's talk about that. I happen to agree with you. There's been a terrific shortfall of the gatekeepers of the corporate community. We don't let corporations and their boards just run wild in this country.

We have accounting firms, law firms, investment banking firms. They're supposed to act as governors, gatekeepers on the system. Investment bankers to block lousy public offerings. Accountants to make sure the numbers bear reality.

And most of all, the corporate lawyers to make sure that there aren't illegal deals structured. There's been a colossal across the board failure there.

MOYERS: What you are all describing strikes the layman, the journalist, as chaos. I mean, we have a system that is in...

STEPHEN MOORE: No, it's democracy, really.

I mean, the greatest democratic institution in the history of the planet is the stock market, because no one has control over it, right

And there are millions of investors. No one person can control the market. And ultimately when you get to this question that you raised about what's happening to our values and so on, I mean, one of the things that I think is a problem with our values is this new ethic of victimization, that everybody is a victim.

You know, so shareholders, when I get my 401K and I look that, I lost my money, because I made some stupid investments, I'm not saying I was stupid, I'm saying, somebody else is responsible.

And what I'm saying is the lesson we've learned from this stock market collapse is that markets are risky. And if you don't want to take the risk, get out of the market.

MOYERS: What could the shareholders of Enron, the employees of Enron...

MALE: They could have sold.

MOYERS: Should they get their money back because they were....defrauded? The investors in Enron?

STEPHEN MOORE: Who.... Should they get their money back from whom?

MOYERS: Kenneth Lay and Jeffrey...

STEPHEN MOORE: Yes, I think actually yes, I think they should go after the corporate crooks. Yes.

WILLIAM LERACH: And the investment bankers...

RICHARD MOORE: You have an obligation if through tax policy and through PR, you entice 80 plus million Americans to come into a marketplace and you tell them it's safe, you do your homework, you understand price to earnings ratios, you understand diversification of your portfolio, that you're going to be okay. We're not going to guarantee you make money, but you're going to be okay.

What we cannot tolerate and what every one of these corporate incidences illustrated, some people made money on an investment that most people lost on. And you can't...that really will...

STEPHEN MOORE: I agree. I agree. I agree.

RICHARD MOORE: This market will fall all to pieces.

WILLIAM LERACH: Now, look, let's go back to 1933 and 1934 in the wake of the huge stock market crash and the Pecora hearings which exposed widespread falsification and wrongdoing on Wall Street. We made a fundamental decision in this country: we were going to get rid of the buyer beware to protect the buyer in the securities markets.

STEPHEN MOORE: I think that's been the problem.

WILLIAM LERACH: Make honesty the coin of the realm. Well, if you think that's a problem...

STEPHEN MOORE: Because investors should not feel that they've got a veil of protection. Markets are risky.

RICHARD MOORE: Well, I respectfully disagree. And the protections that we gave investors in this country in '33 and '34 produced the richest, deepest most desirable securities markets in the world.

The cutback on those laws in 1995 produced the carnage you see today. And if we go...

STEPHEN MOORE: That's not true. That's not true.

MALE: ...if we go in your direction...

ALAN PATRICOFF: ...the Pecora Commission dealt with endemic problems that have nothing to do with what's happening now. The system was sick. It had never been regulated. It was the first time you had significant real regulation in the stock market.

What we're going through right now are.... I shouldn't say burring at the edges; it's more than that. But it's correcting something that has grown up based on the change in ownership concepts in America, we're shifting the institutional ownership and we need some new systems in place to make it stronger. The reason...

MOYERS: And who should put those systems in place, Alan? When one party knows something about a transaction that the other party doesn't know and attempts to use that knowledge...

ALAN PATRICOFF: That's insider trading and that's against the law. Period.

The greater part by far of people who have lost money in the last two years in the stock market, and that's what I was trying to distinguish, have lost money because they bought stocks that were overpriced, the businesses weren't fundamental, and the stocks have gone down. And that's one issue.

STEPHEN MOORE: That's not a crime.

MOYERS: But they bought stocks that were overpriced because they were told by the corporate executives and their accountants and their auditors that that price was really...


WILLIAM LERACH: That's exactly right. When you say "overpriced" how about inflated...

ALAN PATRICOFF: Let's distinguish....let's distinguish between those companies that I've talked about that were fundamental companies that were for one reason or another people got excited about, they paid higher and higher and higher prices, because they...for the greed reason, they wanted to make money, they wanted to get rich.

Some of them were lucky enough to sell out and buy houses and buy cars and boats. And a lot of them stayed and lost money. That's one segment of the market. What we're talking about, and I keep distinguishing, is a certain number of companies who perhaps have falsified records, who have traded in insider information, had been inappropriate, and that's a very, in my opinion, going to be a very small segment of the corporate scene.

WILLIAM LERACH: To try to shift responsibility for what has happened, this carnage, to investors, is, I respectfully say to you, pathetic.


WILLIAM LERACH: Because this was done by Wall Street investment bankers, corrupt analysts, corrupt accountants and greedy corporate executives. And for you...

STEPHEN MOORE: Weren't investors greedy?

WILLIAM LERACH: Well, investors... So it's the investors' fault that Enron falsified its books?

WILLIAM LERACH: It's not just Enron and WorldCom; it's pervasive.

ALAN PATRICOFF: No one is saying those people should be put in jail.

JOANNA UNDERWOOD: I think everyone has agreed at this table that there is a problem with greed.

I think it is clear we have a problem, some of which can be corrected by changes in corporate governance, some of which might be corrected by more outside board members, by changing the quarterly statement so that that is singular to this country and it has imprisoned corporations to say, I'm going to show I get more earnings this quarter or I may be abandoned.

That does not inspire long term thinking about the strength of a company, the jobs it provides, the quality of its products.

RICHARD MOORE: And that's what the institutional investor wants. We want long term steady growth, because we're in this market.

JOANNA UNDERWOOD: So what are...what if we had to come up with a dozen rules that would accomplish just this corporate side of the greed equation? What if we say it's got our attention? It's got Congress' attention?

MOYERS: Who is going to do these things, Joanna? Stephen Moore does not want government doing these things.

STEPHEN MOORE: I think America will work. America is already making these changes.

JOANNA UNDERWOOD: Government has a very important role here to do what...

RICHARD MOORE: That's exactly right. No, no, Steven, I disagree with you very much if the government does not give a level playing field in this market.

What I'm afraid will happen, and this will be catastrophic, is that in the exercise of my fiduciary duty and groups like myself, we will exit this market.


RICHARD MOORE: You give me a fair playing field that I have the level of sophistication to participate in, I don't have the luxury of becoming too much more sophisticated. You enticed me on to this playing field by telling me it was going to be level. You assure me it's level or I leave.

And if I leave, corporate America loses the most efficient means to access capital, which has made us the greatest nation on the face of the earth. This is not something to sit back and say, no, no, this is not...

STEPHEN MOORE: But you know what? If you threaten to do that, if you say, look, we're out of this market...

RICHARD MOORE: Well, we are! I just did!

MOYERS: Richard, what will it take, what will it take for you to feel that there is a level playing field?

RICHARD MOORE: A well informed independent well equipped cop on the beat.

MOYERS:And that is...?

RICHARD MOORE: The SEC was designed to do that, I believe that it has the capability to do that.

But it must be an arm's length situation. And I don't want to get into any personalities attacking anybody anywhere...

MOYERS: No, no, all right.

RICHARD MOORE: But it's got to be a true regulatory agency.

MOYERS: But in 1995 when the SEC asked for more money from Congress in order to hire more enforcement officials who could monitor corporate statements and make sure that they were honest, Congress, under powerful pressure from industry, from corporations, refused to give them that money.

That same Congress made it very difficult for investors to sue corporations and accounting firms. I mean, how can you get a level playing field when politics has become legalized bribery and corporations can afford the biggest bribe?

RICHARD MOORE: And Bill, what I'm telling you is there are enough people that control enough dollars who are outside of that system that in the exercise of fiduciary duty we have to put our head on a pillow at night and sleep well.

If I don't have the comfort level that I get, I leave. I hope somebody's listening. But if they're not, I leave, and that will be a tremendously painful exercise for this country.

WILLIAM LERACH: You've put your finger on a real problem. Let's just stop here for a second. The New York Times recently had a column where they listed about 35 or 40 of the terrible companies from Adelphia to Qwest, the whole, you know, ring of suspects.

And then they had political contributions, democrat and republican. And the numbers were astonishing. These companies gave tons of money to both political parties.

MOYERS: It's about even really.

MOYERS: ...but both parties are bought off in Congress.

MALE: And the problem here, and you know, I mean, I'm a democrat...

ALAN PATRICOFF: And you're an active participant in the system too.

MALE: Yes, I am, and an unsuccessful one it appears often because look, there's no question that one of the problems shareholders face in this country is supposed progressives in Congress are not, they're economically conservative. And they belong to the corporate community.

You know, you and I haven't agreed on a single thing, but I'm going to tell you something we agree upon. Regulation is not really the answer, government regulation.

STEPHEN MOORE: Well, the SEC was asleep at the switch.


WILLIAM LERACH: Shareholder empowerment is the answer.


WILLIAM LERACH: Let the free markets work...

MOYERS: What do you mean by that? C'mon, now, you've got to help me understand that, because I don't understand it. I thought shareholders were empowered.

WILLIAM LERACH: What that means from my perspective, letting shareholders who are cheated or mistreated have fair access to the courts to hold those accountable...

WILLIAM LERACH: You don't like that free market…

ALAN PATRICOFF: This should have a disclaimer…

MOYERS: Which is...?

ALAN PATRICOFF: That Mr. Lerach's whole profession is based on what he's asking for right now in that comment.

MOYERS: Are you saying that you want the right to sue these corporations on behalf of his pension fund and private investors?

WILLIAM LERACH: Forget me, I'm just one lawyer. I want investors to be empowered to...

MOYERS: And they're not? I thought they were.

WILLIAM LERACH: They are not. The tilt...the playing field is tilted well in favor of the corporations. Look, let's confess something.

Most corporations are incorporated in this country in Delaware. Why? Because Delaware is domestic Liechtenstein that sells its corporation law to American corporations to protect managers and directors and disadvantage shareholders. Now, those are harsh words but there's a lot of truth to it.

Secondly, the Federal Securities Laws have been diluted. Shareholder protections have been undermined. And if you want...if you believe in a private system, then let the regulation be private as well. You know, the courts are there, let's have a level playing field.

MOYERS: Who's going to deliver that?

STEPHEN MOORE: Well, the SEC has to, and all sorts of the corporate governance has to deal with this...

MOYERS: So you're for a vigorous SEC enforcement.

STEPHEN MOORE: Well, I think that clearly the SEC needs to have a bigger role in enforcing corporate governance. However, the stock market has gone down substantially since the Sarbanes Bill passed.

MOYERS: The Sarbanes Bill. Let's explain that. What is the Sarbanes Bill.

STEPHEN MOORE: This is the legislation that Congress passed and President Bush signed into law which basically has new penalties for corporate crooks and other corporate governance issues. And more regulations.

And in fact, and more ability for investors to sue. There's civil litigation features of that bill. And the question has been, why has the market not responded in a positive way to that bill? And my opinion is because investors are worried that there is now a culture on Capitol Hill of bash big business, tax big business, over regulate big business.

And the fact is that businesses are the ones that are providing the wealth. And you can't say that deregulation is a good thing for the markets and then say, well, we're going to rush to re-regulate.

So part of getting the market back is changing this tone of conversation to say even at this table there's a culture of corruption in corporate America. If people believe that, then the market is going to fall substantially.

MOYERS: Is it possible the market went down because people a) don't believe those reforms will do what they said on the basis of previous experience, or b) they want to wait to see if they actually work? Eighty-two percent of people...

STEPHEN MOORE: It might be b) but not a). I don't... ALAN PATRICOFF It went down because of disappointment with the economy. The economy...

RICHARD MOORE: No, that's exactly right. No, no, no, you can't...

I don't think there's anything that happened in Washington that has anything to do with the stock market going down except one very important thing that I think the Sarbanes Bill was effective at: it is going to bring out meaningful change in accounting.

And, if you're an investor and you're trying to price risk all you have is history. You know, if we could tell the future this would all be easy. But so to evaluate the history, you go to price to earnings. It's the most simple, the best measurement in the world. The reason the market is so shaky and continues to go down is people don't have a comfort level that stated earnings in the past are yet accurate.

STEPHEN MOORE: That's true.

RICHARD MOORE: And it will not go up until that comfort level returns. And I think we're going to get there pretty quickly.

ALAN PATRICOFF: I want to bring us to reality. Do you know what happens today when a company...a company lives under these first call estimates, and someone, let's say, is estimating they're going to earn 20 cents for the quarter. And let's say last year they earned 15 cents.

The difference between 15 cents and 20 cents is, what's that, 25 percent or a third? I forget. I always forget how to...a third. A third increase. Pretty good, right? Fabulous. If the company reports 19 cents, the stock will go down five, 10, 15 percent on the day. It may have only gone up 28 percent, but the fact is that they've been focused on these quarterly estimates that are so endemic to the system today, public we're talking about, that everybody lives and dies by it.

WILLIAM LERACH: Because the executive compensation depends so much on stock options and because the executives are going to exercise their options and sell the stock in what's called the trading window, which normally opens about five days or a few days after those earnings are announced, every corporate executive knows when those earnings go out I'm going to be selling my stock in a few days.

And stock options have become a part of ordinary ongoing compensation not a long term alignment of the executive interest with the company.

STEPHEN MOORE: But isn't the concept of stock options a good thing?

WILLIAM LERACH: Let me finish. Wait. I think it is, long term.


WILLIAM LERACH: The problem with the current system is it leads to horrible pressures on the managers to make the numbers and their ways to do it. You know, all the discretionary accruals that can be made and whatever.

We should adopt rules that require executives when they exercise the stock option to hold it, hold the stock for some decent period of time. Not forever...

MOYERS: How long?

WILLIAM LERACH: A year. Six months, nine months.

MOYERS: Didn't that used to be the case?

WILLIAM LERACH: Sure it did, and the SEC fell...

ALAN PATRICOFF: Oh, the person who exercises it, he's in a terrible position if he doesn't...

WILLIAM LERACH: So change the tax laws.

WILLIAM LERACH: If we're going to make him hold the stock, give him a break on the...

ALAN PATRICOFF: Exactly. MALE: On the box.

MOYERS: But he's making money from the sale. MALE: No, he's not. Not until he sells it, Bill.

WILLIAM LERACH: ...many, many executives got to hold it. If that would realign a little bit the interest, get people to think a little bit more,

MOYERS: I'm chief executive, I've got stock options. What are you saying?

WILLIAM LERACH: You're going to get a right now to buy 100,000 shares of stock. When you exercise that right, you now own the 100,000 shares of stock, but you can't sell it tomorrow. You have to hold on to that 100,000 shares of stock for a year.

The way the rule is now, you can sell that stock one minute after you exercise the option and own the 100,000 shares. It's riskless, it's cashless, and it puts pressure on people to fudge the numbers.

ALAN PATRICOFF: But, you have to pay a tax.

WILLIAM LERACH: You can protect him on the tax. See, it used to be the rule that the executive...

ALAN PATRICOFF: No, no, no. You're went too quickly. Now, he is taxed. So if he doesn't sell, if he exercises his option and he holds it and the stock collapses, he has a tax on the implied gain, and yet...

We have take the people, I don't know the facts specifically, at Time Warner, AOL/Time Warner. There must be enormous numbers of people who exercised options and have lost money because they held on to the stock as long term shareholders. That's the consequence.

WILLIAM LERACH: So you should change the tax law because that motivates people too and make it fair. The rule used to be that the executives have to hold the stock that they got by option for six months or else it was presumed insider trading. Great mistake made by the SEC about 15 years ago: they changed that rule and they let the executives sell immediately. It's too much temptation, it's too much pressure.

CAROLYN BRANCATO: That's why you need alternative compensation methods as well. I mean, you can have some of the stock so that they have skin in the game. But there are other ways to compensate executives for creating long term shareholder value. And you can create compensation systems that relate to long term shareholder increases, long term earnings per share increases. Long term quality improvements, environmental improvements, safety improvements.

The problem is right now we really have a very ill developed and not coordinated system of measuring. But FASB for example is looking at non financial measures of performance that will measure the strategic value of the company. And what better way to align the shareholder interest with the long term instead of just stock price.

MOYERS: Carolyn, at the moment isn't election to corporate boards a sham?

CAROLYN BRANCATO: Oh, I think again, like, it's not a monolithic corporation, you can't monolithically say that all elections are shams. I think some companies take a lot of time, they have independent board members who do the nomination committee.

They've got corporate governance committees of the board that really try to get outsiders, evaluate them effectively and bring independence into the boardroom.

WILLIAM LERACH: Look what happened when the institutional investor community tried to prevent the election of a certain individual who was on the Enron board to two other boards. Those two boards of those two companies just squashed that and they reelected him.

To me the election of directors is just a ceremonial thing. I mean, how often can you even mention a time when some insurgent succeeded. If we're going to try to make things...

CAROLYN BRANCATO: Well, we've replaced an entire board.

JOANNA UNDERWOOD: It's very difficult for board members when they're sitting there with billions and billions flowing through a corporation and operations all over the world to, with a few meetings a year monitor. They can ask for particular values, but it is very, almost impossible, for them to do something that management isn't doing.

MOYERS: Yes, the WALL STREET JOURNAL says it's even hard for a Jack Welch to know what General Electric is doing, much less Richard Moore down in North Carolina trying to know...

WILLIAM LERACH: Let's say that's true. Doesn't that really raise, though, a horrible problem for us all on corporate governance? If we admit that that's true, then all the laws in the world aren't going to enable directors to exercise oversight effectively. What are we going to do with public corporations?

STEPHEN MOORE: There's one good way actually to regulate this, and this is a mistake that we made in the early nineties, which is, if you've got an out of control board of directors that is not adding value for shareholders, hostile takeovers are a very good way to basically clean out the...

ALAN PATRICOFF: ...but that's a difficult thing to accomplish, and...

STEPHEN MOORE: I think... hostile takeovers are precisely the boards of directors who...

STEPHEN MOORE: What's wrong with hostile takeovers?

ALAN PATRICOFF: I have personally been on the board of at least 20 companies in my life and at least a dozen of them have been public. And as conscientious as I may be and as my fellow board members, it's very tough to be a board member of any company, private or public, to exercise the time that's involved to do the thoroughness, the preparation.

I'm sympathetic with board members. And they're well meaning. I have virtually...I don't want to say never, but hardly ever met any board member who wasn't very sincere. But you know, you have sometimes four meetings a year, sometimes six meetings. The amount of paperwork today to be a board member. And people don't fully appreciate...

CAROLYN BRANCATO: But you have to manage your board as well as you manage your company. That's the one thing that when we work with boards we have to say, is your board managed as effectively as your company is managed? And if it isn't, you have a problem.

ALAN PATRICOFF: Carolyn, you're absolutely right. I'm on today I think three boards at the moment. And I'm chairman of the audit committee of three of them -- all three.

CAROLYN BRANCATO: My condolences.

ALAN PATRICOFF: My point is that people should understand, you know, being on an audit committee, to be a chairman which is really not any different than a member, I mean, the 10Qs and the 10Ks and the proxies that have to be reviewed, I don't think people have a concept of a 10K, a 10Q...

...Let's say, that has to be filed 45 days after the end of the quarter that comes in usually two days before the 45 or three days at most because it takes a long time to get this paperwork ready. And it's a hundred or a 150 pages of dense type with all kinds of sub...with notes and documentation...

ALAN PATRICOFF: It's a very, very serious responsibility.

WILLIAM LERACH: You're making a very powerful argument that there might be an inherent structural defect in the public corporation model.

I'm not doing this to be critical of people. He's very sincere in what he is saying. And if we're depending on these overworked under-resourced people to protect trillions of dollars of assets, maybe we ought to reexamine that.

RICHARD MOORE: We have to have better ways to reach out to those board members, because they are the safeguard in the system that's supposed to be familiar. I think in the past...

MOYERS: We being the...?

RICHARD MOORE: We being the institutional shareholders, the large shareholders.

MOYERS: The State of North Carolina needs to reach out and talk to...?

RICHARD MOORE: Look, Bill, if we're going to own one and a half percent of X corporation, you know, that's...we've got a lot of skin in that game, and we need to have a relationship where if a good honest board of directors, and I have no reason to believe, I mean, these people are very accomplished people like Alan who are asking - this is a position of honor in our society, or has been until recently, and we want to have systematic ways to let our views be known that we want you to ask periodically, do your options, do you understand the option scheme of the company that you participate in? Is it long term united with our interests?

Are there proper safeguards that someone is not incentivized to lie? Do you have a situation where.... Because, see, most people, and I was a white collar criminal prosecutor for a while, and there are two kinds of criminals out there in the world.

There's the kind that they're unfortunately I don't know if it's evil or what it is, but the day they walked in the door they're trying to rip everybody off. And there may be one or two of these folks in this last cast of characters that fit that description.

The other half have been the people, you're sitting there, you've worked 20 years, and here is the decision you have before you. I tell the truth, and I make $500,000 next year. I lie, and I make $5 million next year.

That's the kind of situation we don't want. And we can build.... I really think that we can begin to pull those things out if we have more activist board, and I think that's part of my responsibility.

The other possible solution out there we talked about a little while ago. We talked about private regulation. Well, private regulation exists. We have a public board that's called the SEC. But we also have the New York Stock Exchange and the NASDAQ that are purely private police forces.

And this is plea to corporate America, if there is an aristocracy out there and they're listening, to say, you'd better understand you need to come back to the table here. You need to help us. You don't need to fight this. Or we may walk with our feet.

And some enterprising person out there is going to say, aha! Why don't we start a new exchange? And I will vouch to you large institutional holders that if you come and play in my game, I'll make sure that there are independent accountants and that there are activist board. And these are the rules of my game. Now, who wants to come join? And I don't think that's farfetched.

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