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| Speakers: | Klaus Zumwinkel, Chairman of the Board, Deustche Post World Net |
|---|---|
| Paul S. Atkins, Commissioner, U.S. Securities and Exchange Commission |
December 10, 2007
Council on Foreign Relations
MODERATOR: Ladies and gentlemen. Thank you. Thank you very much. Thank you for being here -- in great numbers and great quality. I would like to welcome you to this roundtable, which is part of the Business and Foreign Policy cycle at the Council on Foreign Relations. You are reminded that this meeting is held on a not-for-attribution basis, which means that you are welcome to use the information you -- and the ideas you've heard, but you should not attribute the individual, nor his or her affiliation, nor that these ideas have been heard at the Council on Foreign Relations.
We are very fortunate to have Klaus Zumwinkel and Paul Atkins with us today to talk about governance in a global context. Now there are two questions that always come to mind -- to me, at any rate, it's, why?; and, why now? And I'll start with the latter. The level of activity and initiatives of shareholder activists is increasing every year, and on a global basis. So you have activists from the U.S. developing initiatives abroad -- in Europe, in particular, and very soon increasingly in Asia as well.
You have sovereign wealth funds and governments intervening more and more as investors. And, finally, you have had, over the past six months, issues pertaining to certain companies -- and financial services, in particular, that have had an effect, not only on shareholders, but on other stakeholders including borrowers -- millions of people who are affected by decisions, decisions that don't involve only management but they involve boards, directors and, therefore, they address the question of, what should good governance be in a global context?
So what we'd like to do is to address these questions, both from a corporate perspective and a policy perspective. That's really the essence of what this Business and Foreign Policy roundtable cycle is about. And we couldn't have better individuals around us to illustrate this nexus -- between business and policy, between business and foreign policy.
Klaus Zumwinkel is somebody who has grown into his current position as chairman of Deutsche Post World Net, from a varied career -- including studies in Germany and in the U.S.; including a 10-year stint at McKinsey, where he rose to senior management; senior position as CEO of a major German company, Quelle; and then, interestingly, he went to the public sector, as it were, and joined what was, at the time, a government agency -- the postal service.
Since 1990 to today, the transformations of this company that he heads-up have been breathtaking, and we will have opportunities to hear more from him about it. But just bear in mind one thing -- which is fascinating to me, that 21 days from now, the German market will be open to competition in all of the areas that Deutsche Post is involved in. And that is, in part, the achievement of Klaus Zumwinkel at the helm of Deutsche Post. Because he is also a director of many, several other companies -- and you have that in your biography, including major American companies -- we're here very much looking forward to his insights on this global perspective on corporate governance.
Likewise, Paul Atkins, who is a commissioner at the SEC -- and needs less of an introduction because he's familiar to many of you at the Council, is a person who is atypical in his own right, having spent over two years in Europe, and having a real personal sense for the differences between the European and the American environment as regards to corporate governance.
So I would like to kick this off as really a conversation. The less I speak, and the more you speak to each other, the better it will be. And we will do that for about 25 minutes, and then the floor will be to you, and it will be your turn to ask questions.
Dr. Zumwinkel, could you tell us a little bit -- when you're a little frustrated, as a director of Morgan Stanley, and you say, "Hmmm, -- "
MR. ZUMWINKEL: I'm not frustrating.
(Laughter.)
MODERATOR: Okay. When you're a little frustrated, as a director of German companies, is there something you think, say "Hmm, there's something we could learn from the U.S. in terms of corporate governance"? And so what is your view, as this -- having this unique vantage point of being on both sides of the water, as it were, in terms of what you can learn and what you can apply with respect to corporate governance in the other environment?
MR. ZUMWINKEL: What's not good in Germany is quota termination. We have 10 people from the employee side of the equation, and 10 people from the shareholder side. Yes, the chairman has the second vote. That is somehow discussed in Germany. It's a very seldom species we have in Germany, but we live with it. Not too bad, but it could be better.
Then, in the United States I always saw that the Germans are pretty bureaucratic, and developing a lot of regulation. But which I see here sometimes when I have to fill in -- do my kids go to a kindergarten in New York, yes or no? And do I receive some money for that? So I fill out, you know, a 20-pager, you know, being a member of the board of directors here. So, I mean, compared even to German regulations that is a lot. So maybe we can combine. (Laughter.)
MODERATOR: Do you -- I'm going to avert the same question to you -- you have been spearheading an initiative aiming at harmonizing some of the initiatives and actions of the SEC, and of various European regulatory agencies. Do you see anything there that echoes your experience in what Dr. Zumwinkel just said? Is there too much of an emphasis in America of checking the box, and not enough on principles?
MR. ATKINS: Well, I guess, to hear it said over the last few years, maybe we have been drifting that way. But first, David, I have to hand it to you for covering the waterfront here from A to Z -- from Atkins to Zumwinkel. (Laughter.) So, hopefully, when we bring everybody else in it'll be good. But we've had, over the last few years -- obviously, since Sarbanes-Oxley was signed into law back in 2002, we have seen complaints from a lot of people over that drift towards more of a bureaucratic, check-the-box approach, because of some of the rules that were put into place -- particularly with respect to Section 404 of Sarbanes-Oxley which, when you combine -- which was basically directed towards the accountants ultimately -- and you combine that with some of the problems that they saw in their own profession, and the disappearance of Arthur Anderson back in 2002, you know, there has been a huge emphasis on recordkeeping, of course, but even more towards much more of a "try to cover yourself for eventual lawsuit," or that sort of risk.
So we've seen that drifting in management, I think, and that because it's spurred on by the legal side, and by -- on the accounting side. With the SEC, we've been trying to respond to that. The first rule that implemented Sarbanes-Oxley 404, called Audit Standard Two, which was promulgated by the Public Company Accounting Oversight Board, PCAOB's endearingly referred to sometimes as "Peekaboo," by us, but which was a creature of Sarbanes-Oxley, meant to oversee the accountants.
This Audit Standard Two that they issued was very much in the weeds. It basically directed the accountants to do just that, to check the box -- not rely on anyone else's work. And there was literally no sense of materiality to that rule. We've changed that. That was thrown out completely and Audit Standard Five was adopted, allowing much more of a sense of materiality, being able to rely on other folk's work and that sort of thing. So, hopefully, costs are coming down and it's going to be -- because those costs are borne by shareholders, ultimately we hope that there's going to be more bang for the buck delivered through it.
MR. ZUMWINKEL: Maybe the Europeans can learn -- especially the continental Europeans, France, Italy, Germany -- can learn from the U.K. and the U.S. much more how to deal with shareholders. Now after the Second World War, the money came from the debt markets, and not from the equity markets. Therefore, the laws, the regulations were more concentrated how to protect the debtors, so to say. And now is equity naturally much stronger than in 1945. I mean, we need more kind of thinking, regulations, appliance of rules you have, in the United States, in the United Kingdom, and to focus more on the shareholder side of the equation.
Maybe that is the trend -- not in the United Kingdom, but in the other countries in continental Europe. And with that, they even change from the German, generally-accepted accounting principles, which were concentrating on, "Let's have historical values in the balance sheet in order to protect the debt." And now we have IFRS and everybody's trying to anticipate the -- (inaudible) -- for the next 130 years, and then with the right interest rate, and then we have fair value. But there is a change -- there is a change, I think, in Europe.
MODERATOR: Do you think shareholder rights are upheld the way they should be in Europe and in the companies you are involved in? Ultimately, is there a difference between the ordinary shareholder and the activist shareholder, in terms of their view of what is good for the shareholder base as a whole?
MR. ZUMWINKEL: Well, I think we could do more in Germany, especially France and some other countries, to give more rights to individual shareholders, et cetera. We have a special -- our annual meeting in Germany -- I mean, maybe some of you have sit in some annual meetings, I mean, I know it here it's one hour, that's it, yeah. But I'm chairman of Deutsche Telekom, and that was in a difficult situation -- we had it from 10:00 in the morning until 11:00 at night.
And then you have activist shareholders, employee shareholders, customers who were buying, you know, some shares before, and announcing or giving their concern coming out of that corner -- customer, employee, or whatever, in the annual meeting. And that takes long, so that is sometimes frustrating. So we have to move away from that, and naturally more concentrating on the shareholder thing.
We have a lot of shareholder activism in Germany, also in other countries. Sometimes it's good, sometimes it's bad but, my goodness, I mean, as a manager, every investor -- you have to welcome every investor. You have to argue with them, sometimes they have very good argument. And there's sleepy management, and then these activist shareholders can really wake the sleepy management up. So, why not? That's my --
MODERATOR: Five, six years ago, at the time of the Enron and Arthur Andersen issues, you heard a lot of the following argument: That corporations, instead of being reactive, and passive, and waiting for the government to take an initiative, should -- or should have gotten together, preempted, prevented, prepared for the situation that would have been much more under their control had they done it.
Now today we're facing a very different issue, which is less related to malfeasance -- or alleged malfeasance, and more to a responsibility of individuals when things go really wrong. And the question here is when will it be possible for boards to take more responsibility, as opposed to letting management be completely on the spot?
And so my question to you is, do you see regulators stepping in at one point and saying, okay, directors, you're going to have to be more responsible; you're going to have to do things differently; and you can't let the CEOs or other underlings take the totality of responsibility. And, you know, your former colleague or boss, Richard Breeden, might have something to say about Hollinger in that regard, but this is not confined to financial services companies. My question to you is, if it is very difficult -- the way it is today in the U.S., to remove a board, what is the ultimate sanction?
MR. ATKINS: Well, I guess I'd take a little bit of issue with your premise there. I'm not sure how difficult it is to remove a board, especially when you have -- like we've seen in some companies --
MODERATOR: Staggered boards?
MR. ATKINS: Well, there've been -- there's been a big issue, over the years a big drive to remove staggered boards, to get rid of cumulative voting, to provide for majority voting, all that sort of thing. Lots of companies have adopted that over years. And if you talk to some activist shareholders, they will tell you that it, you know, in fact, is not that difficult to, these days, to wage a campaign.
We've -- over the last year, in fact, we've driven, at the SEC, driven the costs down to wage these sorts of contested elections. We've driven those costs way down by providing for the use of electronic solicitation. You don't have to solicit everybody -- you know, sorry for Deutsche Post -- but you can do it by e-mail, you can target particular large institutional shareholders, and that sort of thing.
So when you compare that to, say, just a few years ago -- or even farther back, in 1992 when we first provided for the running of short slates, you don't have to run a complete alternate slate of directors, you can run one, three, five, you know, pick the number. And there sorts of things have brought more accountability to boards. We've seen -- I mean, you chose Richard Breeden, you've seen with H&R Block where the company ran into some issues where, basically, Richard there, through his hedge fund, was able to get 80-some percent of the vote for his alternate slate.
So, you know, there have been changes. There is more accountability. And then, on some of these things, obviously it's still too early to tell in some of the financial services area, but you have to allow people to take chances, take risks, and innovate. If the board itself was asleep, didn't do its job, didn't fulfill its fiduciary duty, there are ways for shareholders to challenge that through derivative suits, through suits directly against the board members.
There have been a limited number of those in the past, and who knows if that will continue. But ultimately, you know, we have to have a balance. Directors are valuable people who come in -- they have an oversight function; they also have an advisory function, and they represent the shareholders, owe a fiduciary duty to them.
We have to continue to attract good people who, for not very much money, are putting their reputations and their financial security on the line, potentially, to do these jobs. So there is a balance. They are not management of the company; they're not there every day; they fulfill an advisory and an oversight function, and we have to recognize that.
MR. ZUMWINKEL: Well, there's always a discussion between a two-tier system and the Anglo-Saxon system. And in my strong belief is, in a stress situation, a two-tier system is much better than a one-tier system, because there's a clear chairman, and there's a CEO. There are clear, outside directors, and then there are -- there's the management also. So in a stress situation, then there are clear roles for everybody involved.
Well, when everything is going fine, I mean, it's more effective. You know, if you -- you can deal faster, you don't have the routines -- you know, to have another meeting, to say okay to an investment in China of is a big amount. But, finally, I think the board is -- supervisory board is there to control, and, therefore, to help to prevent stress situations, so to say, and not to be really a driver for more effectiveness in our business. And, therefore, I think the two-tier system is a good one, and it --
MODERATOR: So Morgan Stanley should adopt a two-tier system?
MR. ZUMWINKEL: Well, I mean, you have to work in this environment, yeah.
MODERATOR: You know, you say stress. It's interesting, what about this -- I'm just throwing it for your consideration -- aren't there instances where there there's not enough stress? Think of the board of certain financial institutions -- I won't necessarily name them here, who -- whether the average tenure of a director, these are a major American financial institutions, 10 years, maybe there was to enough stress in their ability to oversee what's going on? -- maybe not the right incentives and disincentives?
MR. ZUMWINKEL: Yeah, but wait a minute. I mean, there are managers and board members. I mean, there are also a lot of managers not seeing, you know, what's -- what's going on, you know,
MODERATOR: Right.
MR. ZUMWINKEL: -- whereas the subprime in the derivative number 1,000, yaeh. And if you have these managers, a board can do a lot. Well, I think you need diversity, especially in financial situations, you need people who understand that, yeah.
So, I mean, can you imagine that somebody from, you know, the steel mill become the CEO of big bank in New York? I can't image that. I mean, you would be dead the next morning, because everybody would -- yeah, do what he thinks is the best thing to do, so. And also in a board, you need -- the core of a board in a financial institutions you need, let me call it "experts," but not in a technical sense, but then all the expert in that industry. at least, yeah, then you need some else.
So I think, well, I'm chairman of three companies in Germany -- Dax companies, that's our Dow Jones, you know, Deutsche Telekom, et cetera. So one of the main things for the chairman is to select the right people and form a team. You know, that somebody is -- let's say a telecom, you know, understands all this technology, then others who are internationally-oriented, and you can go on.
So it's like in a -- well, coming from Germany in a soccer team, yeah, you need -- you need a team at the end, you know, that one helps the other in this kind of stress situation or other situation. So this team formation is very good recipe.
MODERATOR: And the coach and the referee are functioning well enough to make sure the teams perform?
MR. ATKINS: Well, hopefully, we're not the coach at the government. Hopefully, that's, you know, internalized with a company, and the owners of a company, the shareholders. As the referee between the government and the courts -- the folks who make the rules and then judge whether or not the rules have been -- or you're out of bounds, then, you know, I think that's the proper function.
And you have to realize also -- unlike Europe where there's more now a trend towards, I guess, a centralization of rules through the European Union -- in the United States, we still have this idea of federalism and in -- especially in corporate governance and things corporate, the corporation is governed by state law and not federal law.
And Congress respected that also in Sarbanes-Oxley. They danced around it; they directed the SEC to do things to, you know, cause the stock exchanges to take certain steps, but Congress was careful not to really interfere with corporate governance as such.
So a lot of there debates, I think -- underlying them, have to do with what is the jurisdiction of the federal government? And I, for one, take that very seriously, that division. And I think, ever since Jefferson, we have viewed the states as being a very valuable laboratory to try different ideas out, and to have, sort of a market-based type of --
MODERATOR: Just to push back a little bit on that. If you give that level of importance to the states, don't you create an environment where you have -- where you promote jurisdiction shopping, and everybody converging to Delaware? And don't you think that's different from what's happening in Europe where the mirror equivalent of the federal are -- which could be Brussels, is taking more importance?
So that's my question to you. If you think of what happened recently with Volkswagen, which is that the European Union struck down a German law that would have prevented Porsche from acquiring a majority stake, and a controlling stake -- and so, don't we see two very different trends here? One, where --
MR. ZUMWINKEL: I would agree with that. I mean, now in Europe we still have -- I love competition, and we have competition between Belgium and Germany, you know, in these legal things, you know, like you have some always with the states here. Yes, it's moving more centrally. You know, the bureaucracy in Brussels is more and more, you know, trying to get their hands around that, and to harmonize everything.
But there is a lot of competition, and that is good. You know, sometimes, you know, this legal system is better in that case and then you can learn from each other. And so I think that is a -- that is a good competition, you know -- and that is in the tax systems; it is in the corporate governance, if you might do that.
And so there is another discussion in Germany, especially in Brussels, is -- this is another subject, I don't know but in corporate governance -- how to govern a huge multi-national organization, you know. And in my company I have 520,000 people, that's the sixth largest employer in the world, and to govern them it's quite a job. But for that you have also to have the right systems.
And then you have the normal things like corporate value, you know, integrity, and then we implemented world-wide global value office -- regional office for Asia, regional office for Latin America, regional office for the Middle East, yeah.
And then we implemented, which is not so often done in Europe, a very strong central finance organization. So the final controller in the south of Brazil is finally reporting to the CFO now. The divisions don't like that because they want to have provisions every quarter, and all these things.
But it is a very strict system that, you know, the CFO, you know, with the push of a button, has everything -- be it numbers, or KPIs or so, from let's say, Southern Brazil, so to say. And also the internal audit is a -- (audio break) -- there. Two hundred and fifty people world-wide -- they are located in Asia, is in Russia, et cetera, and they are auditing night and day, so to say, and they are directly reporting to me, or the CFO now.
And, therefore, with this kind of -- let me call it organizational systems, one has to control large multi-national corporation that, you don't come out one day and see, well, in Brazil, I mean, always the figures were black figures, but if you look really at that, I mean, since three years they are red or something -- or something outside the world of figures, you know, it can happen naturally too, so.
I mean, there has to be a very tough centralized thing and not, you know, voluntarily, et cetera, I mean, because we owe that to our shareholders and societies, et cetera, et cetera. So that is also a topic which is very much discussed in Europe -- what a good corporate governance inside a corporation is, and not only for banks, but also for industrial companies.
MR. ATKINS: Yeah, I wanted to take issue with one thing you said there as far as jurisdiction shopping in this situation. I think that's good. I think, frankly, when you see different states offering different things -- you know, Delaware has been very receptive to shareholder requests, and movements with respect to -- they were the first ones to adopt the provision for telephone meetings, board meetings. It's even provided for electronic shareholder meetings and things like that.
So that's Delaware, and the others have followed suit. Other folks, North Dakota us the first state that has adopted the provision to allow for this issue of shareholder access to the proxy statements. So there is a lot of experimentation out there. I think that's good.
When you look at even, say, the banking sector, for example, to take it out of corporate governance, to the -- where we have a competition between -- competition in quotations, between federal, state, chartering systems, and how the different regulators will allow or not allow different products -- I think it's better for the customers, it's better for shareholders to have that, sort of, friendly competition. It's not necessarily a race to the bottom.
MODERATOR: So competition amongst regulators is good? Could there be mergers between regulators?
(Laughter.)
MODERATOR: Just kidding.
(Laughter.)
MR. ATKINS: -- (inaudible) -- that's right.
(Laughter.)
MODERATOR: You know, a question that arises here a lot -- I mean, in this room, is that of sovereign wealth funds, governments as investors. Now you have managed -- I wouldn't say single-handedly, but with great initiative of yours in bringing down the government's stake in your company from 100 percent to 30-ish?
MR. ZUMWINKEL: Or 25, yeah.
MODERATOR: Twenty-five. That's quite remarkable. Yet this is still your largest shareholder. I would think -- query as to whether there would ever be appetite to take over the sixth largest company employer in the world? Maybe not, but theoretically, just theoretically, how do you view this apparent asymmetry of -- when you made acquisitions, substantial ones, in the U.S., in the U.K., elsewhere -- people saying, "Ah, yes, that's very nice; they make these acquisitions, but they are really impregnable and could not be a target. Which is something, when heard quite a bit last year with another company called DP, it stands for Dubai Ports this time -- which frankly would have been difficult to take over by anybody, and yet had intents over here. So how do you view asymmetry between what you can do, and what other people can't do?
MR. ZUMWINKEL: Okay, I have a key position there, but let me start with Deutsche Post World Net. I mean, in Germany we have a fine law acting that's -- and there in my, in my supervisory board, out of 20, there are two members representing the 30 percent from the state. And Germany had a wonderful experience after the Second World War, in privatizing nearly everything. They still have my company, 25 percent, and Deutsche Telekom, you know, the telecom infrastructure of the third-largest economic nation in the world, and then there is a little (appointee ?) in there, and that's it, yeah. I mean, compared to Italy and other countries, I mean, that is of France.
I mean, I think Germany was very successful because we always said privatization, privatization, privatization. It's the right thing to do, and then to put the old stuff in competition. And that was the reason when the then-Chancellor Kohl called me, "Dr. Zumwinkel, what do you think about the Post?" I said, well, that's a lousy office. And, "Yeah, we want to change it and to privatize it." And then I got some fire, so to say, and did it all the last many years. But that was Germany.
Now also in Europe is a big discussion like here, you know, "What if a Russian investment fund, or bank, or oligarch is investing in German gas company, or telephone company, and you know, they were in the papers, you know, there were initiatives in the papers, for example, for Deutsche Telekom.
I think you can't -- you cannot or should not regulate that. If some -- you cannot differentiate between bad money and good money. Money is money, I think. You know, if somebody -- and trust me, the money, and I have to work hard to give a good return for that, so that is if a country wants to do something, they have to define first the industries or pockets or segments, or whatever, or interests, a country is interested. And say, well, if somebody from a foreign company comes in and wants to invest in a company, then there should be rules out in that industry, not in that security, et cetera. You have that here in the United States, yeah. Can you prove that? I mean, somebody has to decide here, yeah. Dubai Ports. One has to decide that before and have, you know, a clear rule, regulations -- you know, what can be done.
And naturally, there might be cases in the future -- you know, in Europe they think the "yellow danger" is coming, you know, the Chinese, but they have -- I don't know, you know, a percentage of a percentage of a percentage invested in, for example, Western Europe, yeah.
MODERATOR: What about the locusts?
(Laughter.)
MR. ZUMWINKEL: Locusts are welcome, I mean --
MODERATOR: And your questions are welcome too.
MR. ZUMWINKEL: -- why not? Why not? So, I mean, there's a discussion, finally there will be a law in Germany that they define the interests before, yeah. There's a discussion on reciprocity, you know -- I cannot own real estate in Russia. I would like. I mean, we have big warehousing operations around Moscow, but they're always only rented, you know, you cannot. But they can buy real estate, so one has to talk about the reciprocity. You know, with China is the same, you know. Even with the WTO, it's -- it's pretty difficult to do this and that.
So I think politicians in that segment should work very hard on the reciprocity than 90 percent of all the issues we resolve.
MODERATOR: Thank you.
Questions? Could you introduce yourself, please, and your affiliation? Thank you.
Q Michael Schrag (sp) with MIT. And I say this partly as somebody who's served on the board of a publicly-traded company. The one thing that, sort of, does surprise me -- and it ties in a bit with what Dr. Zumwinkel's talking about, is the issue of to what extent should boards be aware of the level of risk that their companies initiatives and innovations are imposing upon the fiduciaries, because that's what board members are, you're fiduciaries.
And I am struck, and when you look at the financial system -- and you are on the board of Morgan Stanley, so I think this is particularly relevant for you -- do you think, and has it been your experience -- and of course, the SEC commissioner's response would be intriguing as well -- but the management does a good job of advising you of how the risk profile of a firm where your sole legal responsibility is as a fiduciary -- I don't see how you can be a fiduciary without understanding the risk exposure -- so do you believe that management has done a good job of presenting how the risk profile of the enterprise changes as it seeks to grow and innovate? And is that the role of oversight and advice for a board? Because how can you give good oversight and good advice if you don't understand the risks?
MR. ZUMWINKEL: Well, if you are incompetent, you should not sit on a board. I mean, that is the final answer, you're asking me. But, you know, I'm happy -- I have a -- I have a --
Q You'll forgive me, but there are people in the room -- when you say "if you're incompetent you shouldn't sit on a board," you wouldn't be criticizing, say, the boards of Citi, or other companies in this regard? Do you think those boards have been incompetent? Your words, not mine.
MR. ZUMWINKEL: Yeah, others should decide. I'm in a happy situation because in my group I have also a small bank with $200 billion euros, $300 billion dollars, so I know what banking is somehow. (Laughs.) I'm not a total expert.
Yeah, but, really, serious, I think to control means to control the risks and the people, yeah. And the risk profile of a company is changing so much -- beating banking, or go to telecommunications there they, you know, every two years there are other inventions really shaking the foundations of a company, with all the internet and many, many other inventions. So, I mean, yes, that is a real thing.
And on the advisory thing, that is the opportunities, you know. I think board members should not be just another auditor, so to say -- "Let's control, let's control and, you know, let's make, not tense -- stress tests, but -- or something like that. So the advisor role should be also on opportunities, international opportunities, et cetera. Yes, now with all the subprime things, everybody thinking, you know, that the emphasis should be on control. But in a normal time you should have both opportunities and risks.
MODERATOR: Paul?
MR. ATKINS: I mean, I agree. I mean, ultimately the business of a corporation is to take risks, and to try to make money based on those risks, and to weigh it. And so nobody was crying back, you know, a year or two ago when money was pouring in -- and obviously the risks were there, the environment changed, and so then, you know, obviously the results changed at some companies. So, you know, the shareholders are, you know, part of that equation as well. They vote for their directors; their directors are representing them. Shareholders can vote with their feet as well.
So I think all of it is tied together, but I think we can't -- as Dr. Zumwinkel said, we cannot turn directors into policemen, to the exclusion of everything else, because then I think you will really damage the whole fabric of what the free enterprise system is all about. But, ultimately, it does come down to shareholders and how they wish to have their corporations run and the risks that are taken.
Q I'm Kenneth Bealke (sp). And my question has to do somewhat with structure. We in the United States, since the internet implosion, have talked about almost nothing other than corporate governance and how to restructure our governance system so that problems don't come in. We went through the Sarbanes-Oxley experience; we invested tremendous amounts of money and time and energy introducing a whole new construct designed to assure, I guess, the -- that management and companies are going to function in accordance with what we want to have.
My question -- and we've seen, that as a result of Sarbanes-Oxley, there are innumerable new regulations, and restrictions, and restraints, and reports, and accountabilities, and transparencies -- and my question is, has the (gain ?) been worth the candle? That is, judging the output of the regulatory scheme, looking at the efforts that management and companies have spent to reform themselves, have they reformed? Have the changes; have the investments; have the restrictions, which have driven security analysts and observers away from looking into the interstices of companies because they can't get paid to do adequate research; have we been moving in the right direction to put a structure in place without really asking ourselves what are we doing about improving the performance of companies?
What are we doing to show that what really shareholders want -- besides having honest employees, are people who are worrying about the bottom line, the expansion of their markets, and the implementation of procedures to react to forces at work? The subprime issue may be a big issue, but surely there have been enough people -- bankers, journalists, regulators and others, who could have looked at all the public reports and said, maybe there's too much liquidity, and maybe there's too much credit, and maybe there's not enough surveillance all around to assure that when the punch-crunch comes, there'd be safeguards. In other words, have we been pursuing the right directions?
MR. ATKINS: That's a great question. I think time will tell. I think, on the positive side -- at least the directors that I talked to, tell me that directors nowadays are more, feel more empowered; they, through the law, I think could have developed independently but out of the outgrowth of some of those problems in the marketplace -- but anyway, the law provides directors to have access to their own counsel, to meet separately, you know, in executive session, and so forth. So directors, I think, feel more empowered these days.
But we clearly do have a question of cost versus benefit. For example, the CFO of Deutsche Telekom had told me they -- before Sarbanes-Oxley 404 applied to them, they wanted to be a corporate citizen, and set about to affect the internal control review. They came up with 500 internal controls they thought, system-wide, that needed to be documented, and described, and charted out. They brought their outside accountants in and said, "No, no, no, there's -- you only have 500. We think you have 20,000 that need to be charted-out and described." And if you just imagine that, each with one page. If it's a simple control, how many pages that would stretch out to be.
They ultimately compromised at fewer than that, but that's a lot of money for shareholders to pay to -- to your question, "to really what end, does that affect shareholder value in the end?" I visited a bio tech company that was paying more to its outside accountants and its 404 consultants to review their books, than it was paying to the CFO and all the people reporting to the CFO.
So it was paying more to audit its books than to put them together in the first place. And that, for a company that had no operating revenues; it had three products waiting to be approved by the FDA, so literally every dollar that was being paid to these third parties was a dollar out of shareholder's pockets that was not going to research and development for new products. So there you really have to question what is going on.
So I think, at the margins, you know, I do fear the worst. Biggest companies can survive this, but I think we have to ask what it's doing to innovation, especially for smaller companies.
MODERATOR: Is Sarbanes-Oxley importable to Germany?
MR. ZUMWINKEL: If you are listed in New York. I mean, for example, in one of these companies, Deutsche Telekom, we have Sarbanes-Oxley accounting system, and IFRS accounting system. We have two auditors. We have these 20,000 internal control systems, checks, so I mean, it's a lot of money.
But, coming back, I think, to you're question, (Ray ?), I think it was good that in the last five years or so, the balance of power shifted a little bit. There is more power now in the board. I think compared to the past, it's better. And I think a strong -- a strong management also needs a strong board. And weak managements normally have weak boards. I think there is a strong correlation with that.
So I think the last five years was a good experience. Now naturally then the question you're really asking, you know, what should we do in the future? Naturally, I don't know either, really, but I think if you cut down -- could cut down on some of the costs of some of the regulations, or so. To work now in an audit committee of a big industrial firm or bank, I mean, that is nearly a full-time job. I mean, and that is not good. I mean a board should not -- a director should not, you know, go into every little detail of Regulation Number 1013 (a)(b)(c). I mean, that is the duty of the management, so to say. So maybe one can do something there.
And then maybe to empower the board -- and some are doing this in subprime, over in technology, is that there is outside counsel to the board, yeah. That the board gets, let's say, a technical opinion, or independent opinion on this or that issue -- not only from the management, but also to and of from an outside counsel. Yes, that would -- yeah, that would cost more money but maybe in very difficult situations, that would be worthwhile. So net-net, balance of power shifted, I think that was good in the last five years, so there's some too cozy environments in some boards, yeah.
And I think that a strong management always will have a stronger board, and that is good. And that differentiates good returns for the bad returns.
Q Benjamin Barber (sp), University of Maryland. I was drawn today by your interesting title, "Making Governance Global: Who Oversees the Multi-national Enterprise," but instead we seemed to have had a traditional discussion of corporate governance and the relation between shareholders, board management, and a little bit of discussion of government, central and local.
I'd like, maybe these speakers to come back to the question that's posed here in our title about global governance of multi-national enterprises, because I think that raises fundamental questions that haven't been addressed today. The terms of discussion here -- shareholders primarily, suggest that shareholders in some way represent the public interest. They don't. They represent shareholder interests, which is not the same thing as the public interest, certainly not in a global setting.
We live in a world where markets have been globalized, firms have been globalized, and democracy has stayed locked-up in the box of 19th Century sovereign states. So even were we to go way beyond, Mr. Atkins, your understanding of what the role of a regulatory government was, we would still be in a position where regulatory governments, inside of traditional nation-states, could do little to regulate and oversee the global marketplace and the multi-national firms that operate the multi-national banks' financial capital that operate there.
So I wonder if you'd like to spend a minute, at least, addressing the question I thought you were going to raise, "making governance global," who does oversee the multi-national enterprise and protect the public interest in a post-sovereign ( ?) global market world?
MODERATOR: I'm glad you put us back on track. (Laughter.)
MR. ATKINS: Well, I, you know, at least, speaking from a financial services perspective, capital markets perspective of SEC, we do have the concept of a primary regulator, which is within a jurisdiction of a nation-state. So, for example, Morgan Stanley has as its primary regulator the SEC, there are others in Europe -- of course, banks, whether it be Deutsche Bank or whoever, who have other sorts of jurisdictions that oversee them -- so from that perspective, the public interest there, as far as the integrity of the financial services system, is overseen by a competent authority within a jurisdiction. We don't really have any multi-national type of -- say, for the EU, which is not really there yet, to oversee corporations from that perspective.
But when you're talking about -- to take your question to the next level, to talk about the public interest with respect to how a corporation operates, or whatnot, I think there, at least, you know, I would, philosophically, be on the side of the shareholders having primacy there, because a corporation is, you know, owned by the shareholders. It's their property; they have the interests of the, mainly, of the corporation rising or falling, and -- because they bear the ultimate burden. And I think, you know, other than complying with the jurisdictional laws and rules that the corporation has to operate in with each -- within each country, that it does business, I'm not sure that there is a role for a multi-national overseer, whoever that might be, to play.
MODERATOR: And yet, perhaps to be more specific, could you expand a little bit on your initiatives with your German, for example, counterparts in terms of the German SEC, BaFin, in terms of defining the terms of mutual recognition which could apply in both environments and, therefore, were getting a bit closer to the issue of global oversight?
MR. ATKINS: Well, we have had an initiative since the late '80s, early '90s, of building up a series of memoranda of understanding between the regulators and the financial services area, to cooperate on the terms of enforcement for folks who were doing what they should not be doing in the securities markets, and to cooperate on gathering evidence and bringing people to justice who were stealing from other people, essentially.
So that's that web of 'memorandum of understanding' has really expanded to -- at least with the SEC, has some 80 different of these agreements in place. There's an international group called the International Organization of Securities Commissions, IOSCO, which also serves to try to raise standards of individual regulator around the world.
Q Does it have any teeth?
MR. ATKINS: Well, I would say so. Many years ago -- I can remember 15 years ago, there was this one small country in the middle of Europe known for its bank secrecy laws, and things like that, where the SEC could get no cooperation, basically, with respect to insider trading investigations or other criminal investigations. And nowadays we have, because of a growth of working relationship over the last 15 years, we have a very strong relationship, and the cooperation has bagged us some pretty big game, I would say, in that respect.
MR. ZUMWINKEL: Yeah, but maybe the concept behind your question is, you know, a multi-national is working in -- like my company, in 220 countries and territories, and nobody is governing that company. I mean, that's the concept behind your question. But if you then say, if that is true today, you know, what could be better? Today is -- governance means finally some legal system; and today we don't have a world-wide legal system. I mean, there is not a "United Nations," and then you have -- hmmm -- (laughs) -- so maybe one future day, yeah, but not in the foreseeable future.
And I think that's good. I mean, one company is responsible, you know, for -- vis-a-vis SEC, other regulation -- regulatory bodies, and a German company is responsible there. And then shareholders know what they're rights are, et cetera, et cetera. And then a German multi-national, or a U.S. multi-national is then responsible vis-à-vis that kind of legal system.
Now in Europe maybe it's the first time that we are trying, you know, to expand that to 500 million people in the EU, where we are -- for example, have established the SE, you know, European --
MODERATOR: Societas Europaea.
MR. ZUMWINKEL: Societas Europaea, that you have a European company behind a European legal background. So it's not 100 percent done, I won't say. But, for example, you know, the biggest insurer we have in Germany, Allianz, you know, they are on SE, and they could move today from, let's say -- I mean, they could, I mean, just hypothetically -- you know, from Munich in Germany to let's say Paris in France -- or maybe another company --
(Laughter.)
MODERATOR: Slovakia.
MR. ZUMWINKEL: Yeah, maybe, I mean.
And then there is the -- then there is the concept of a European law behind it, yeah. So that could be a way, you know, we are trying in Europe to do. But finally you have to have a legal system. And yet it's so easy to say a multi-national is not responsible to anybody because they're in every country, and 220 countries are not sitting together and say well, no I have to regulate this company. So, therefore, I think what we have is -- okay, you are responsible to a tough regulator. And in Europe we are trying for the first time, you know, to have a European-wide law, and, therefore, a European-wide governance.
MODERATOR: Thank you.
I would just like to ask a final question, perhaps, to Paul.
We've been talking a lot about the U.S. and Europe, and very little about other markets. In Asia, you have environments -- and in the Middle East, where the level of transparency is not what we're accustomed to, necessarily, in the U.S. and Europe, both in terms of investment targets and also origination of investments, those sovereign wealth funds. So does the rise of Asia pose a particular challenge in terms of global corporate governance?
MR. ATKINS: Well, we're still seeing a lot of Asian companies come over to the United States, for example, to list their shares. Earlier this year we adopted a new rule at the SEC to allow the foreign companies to leave much more easily than they did in the past. Basically, if they have less than five percent of their trading volume here in the United States, they can pick up and deregister, and leave. So about 70 so companies have left, including some very large German companies.
But also we've had almost the same number of new entrants coming in, and a lot of them are from Asia. And a lot of the -- when you talk to the companies, they cite the higher standards of corporate governance, and shareholder activism, and other things here in the United States that they think make them a world-class company, and perceived to be that way, of them, if they were to be registered only on a Chinese exchange, for example.
So I think those sorts of things obviously then are translating into the premium that a company is being able to realize when it comes and list its shares over here in the United States, versus on its home market -- perceived stability in the marketplace, and that sort of thing, the transparency that is required.
So those -- I think that speaks well of what's going on here in the U.S. Of course, we've seen huge growth in markets overseas, in Asia. Whether or not that's sort of stable growth or not, we'll see. Time will tell. We saw -- certainly saw in the late '90s how there was a lot of volatility, and you saw institutional investors pull out of those countries pretty rapidly. So we'll see, but I think from a stability and shareholder, friendliness perspective, I think, the United States still has that covered.
MODERATOR: Thank you very much. Thank you for coming.
(Applause.)
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