| Arthur Levitt interview, Aug. 16, 2002
GEOFF COLVIN: Scandals like these have made several issues suddenly urgent for
investors: reforming the accounting profession, expensing stock options, protecting shareholders.
Arthur Levitt was fighting for all those changes back in the 90s, when times were seemingly
good but he saw trouble ahead. Levitt was chairman of the Securities and Exchange Commission
from 1993 until early last year, and in light of all that has happened to investors over the past 12
months, a lot of people wish they had listened to him more carefully. Arthur Levitt, welcome.
ARTHUR LEVITT: Good to be here.
COLVIN: You know, a lot has happened now in the past several weeks. We had a big, new
corporate governance, corporate control sort of law passed and very enthusiastically signed by
the President. We had this new certification deadline imposed and now passed. We'll get to those
things, but the first thing I want to ask you is what more needs to be done?
LEVITT: I don't think there is any specific rule or any specific law that must be passed. I
think they can loosen up on the standards for bringing actions, but that's really background
music. I think it's essential that public confidence be restored, and the most immediate way of
doing that is by the quality of individuals that the SEC appoints to the new oversight panel, as
well as the continuing efforts of corporate America to embrace the practice of expensing stock
options. That's become a litmus test for whether a company stands with investors or whether a
company has a fortress mentality and says investors go their own way, we will continue business
COLVIN: Well, let me ask you more about that, because of course when you were SEC
chairman, I remember this so very well, in 1993 and '94 you fought a battle to attempt to require
companies to expense stock options. And if I recall properly, they lobbied in one of the most
furious lobbying efforts ever seen, to prevent that rule from happening. Yes?
LEVITT: Yes. It was absolutely an enormous fight, and ultimately when Congress
threatened to overrule the independent standard setter, I backed down, and it was probably the
biggest mistake I made while I was at the Commission. The standard setter is funded by the very
business community for whom they are setting standards, and that created a terrible problem and
really fed into the Enron problem by their inability to come up with a standard for the subsidiary
operations because of business opposition. Now the Sarbanes bill has addressed that and has
given independent funding, funding that doesn't come from the business community for the
purpose of establishing fair and independent standards.
COLVIN: And just to be clear, when you referred earlier to the oversight board, you meant
the new oversight board that will oversee the accounting profession, yes?
LEVITT: Five-member, full-time board to be appointed by the SEC.
COLVIN: Okay. A question that every investor is wondering now is just what to do. This
certification deadline was intended to create in effect a list of companies that investors could now
buy without fear of some huge new accounting scandal. Do you think it did that?
LEVITT: I think that the psychic value of that process was important and the kind of mind
set that corporate executives have to take in requiring their members of the company to certify to
I think that was probably useful, and of course the Sarbanes bill puts it in terms of legislative language as well. But I sit on a number of boards and on a number of audit committees, and embarrassment has really created a vast cultural change in the way boards are addressing these issues. And I think that, more than legislation and rule making, will change the corporate culture and the kind of governance that will induce investors to once again have trust in our markets.
COLVIN: Who's showing leadership in all of this?
LEVITT: You know, if you had to name five individuals who had the kind of probity that
would be accepted by America's investors as leading business people of integrity, you'd be hard
pressed to go past Paul Volcker. Sure, there are some names, but they're not very obvious.
COLVIN: Senators from both parties have said that the current chairman of the SEC, Harvey
Pitt, isn't the man for the job, should resign or be replaced. Do you agree?
LEVITT: I think that every chairman of the SEC begins after a period of time to come right
back to the center no matter what his ideology may be. Harvey Pitt came from the SEC, was one
of the finest security lawyers in America, and is certainly highly qualified. He's had some bad
luck and some bad breaks, but I think in due course that will work itself out.
COLVIN: Arthur Levitt, thank you so much for your perspective on this. Glad you were
LEVITT: Good to be here.