"Earn the Public's Trust"

By B. Joseph White, The Wilbur K. Pierpont Collegiate Professor and Former Dean of the Business School

In the Business School’s 36th annual William K. McInally Memorial Lecture, B. Joseph White examined the current crisis of confidence in American business and outlined what business leaders must do to earn the public’s trust.

We meet at a time of crisis in American business. Crisis is not a term I use lightly. We know that trust and confidence are the essential underpinnings of healthy markets and a well-functioning business system. Unfortunately, trust, confidence and the credibility of American business leadership have been badly shaken by events of the last year.

We are in a crisis because the American public’s sense of fairness, which I think has a remarkably high tolerance level, is inflamed.

It’s inflamed by highly visible, over-the-top executive pay packages, by absurdly rich retirement deals for people who are already very rich, and by the truly enormous and fast growing multiple by which, in some companies, the CEO’s compensation exceeds that of the average employee.

The sad truth is that in a succession of highly visible cases including Enron, WorldCom, Adelphia, and Global Crossing, as well as others less visible, the multiple guardians of public company wealth and the investing public failed miserably.

None of us dreamed, just a few years ago, that the layers of protection against mismanagement, fraud, and conflicts of interest in public companies, the financial industry and capital markets could fail so completely.

So, what will it take to restore trust and confidence in American business leadership? The answer is, a lot. Here’s my list.

• First, it will take time, stronger economic growth, better corporate earnings, and an improved stock market. None of this will occur overnight, and we won’t be fully back on track until it does.
• Second, wrongdoers, especially the most rapacious "big fish" need to be punished. I like the statement by Deputy Attorney General Larry Thompson: "We aim to put the bad guys in prison and take away their money." (By the way, Thompson is a University of Michigan Law School graduate.)
• Third, we need financial reporting that is accurate, consistent and trustworthy.
• Fourth, conflicts of interest in the banking and financial services industry must be eliminated. The same is true in the auditing profession, which needs to rediscover the joy of being an authority above reproach, even if the consulting cousins are richer.
• Fifth, we need a Securities and Exchange Commission that is an aggressive shareholder advocate and an effective watchdog, with an S.E.C. Chairman, a Congress and a White House that support these roles.
• Sixth, we need high quality corporate governance that works for shareholders and with management, not for management. Directors and trustees must, among other things, ensure financial reporting that reflects the true state of the business and bring a higher degree of sanity and proportionality to executive compensation practices.
• Finally, we need a fundamental change in the values and focus of the leadership of some American companies, from short term to long term, from stock price to enduring value, from "Is it legal?" to "Is it right?" and most important, from selfishness to stewardship.

There is simply no substitute for individual integrity, starting with the chairman and CEO, for high expectations, and for personal courage when it comes to creating and sustaining a culture of honesty and integrity in the board room. Legislation, regulation, and externally imposed rules, guidelines and penalties have a role to play.

They can set the stage, encourage good behavior and discourage bad behavior. But ultimately, it is the personal values, mutual expectations, and independence of those to whom we entrust our public companies that matter most.