New York Times
June 6, 2002
Goldman Chief Urges Reforms in Corporations
By PATRICK McGEEHAN
WASHINGTON, June 5 - In a rare public appearance, the chairman and chief
executive of Goldman Sachs, Henry M. Paulson Jr., called for changes
today in how public companies are run, audited and regulated to help
restore investor confidence.
Mr. Paulson said faith in corporate executives was at a low and was
forestalling a recovery in financial markets. He proposed several
measures to rebuild trust, including restrictions on the ability of
chief executives to sell shares of their own companies.
Tracing the crisis back to the collapse of the Enron Corporation last
fall, Mr. Paulson said during a lunch meeting at the National Press Club
here, "I cannot think of a time when business over all has been held in
less repute."
In his speech, he was surprisingly critical of the corporate executives
and directors who make up the client base of major investment banks like
Goldman. Seldom does such a powerful Wall Street executive take on
corporate America so directly.
"The business community has been given a black eye by the activities and
behavior of some C.E.O.'s and other notable insiders who sold large
numbers of shares just before dramatic declines in their companies'
share prices," he said in his speech. He did not name any companies on
that score.
Corporate directors should require executive officers to hold their
company stock for "significant periods of time" and company insiders
should have to give back any gains from sales of their companies' stock
made less than a year before a bankruptcy filing, he said.
Wall Street firms have their own troubles, of course, and Mr. Paulson
spent a few minutes discussing conflicts of interest at investment banks
like Goldman. He said he felt compelled to speak out because the
situation had become dire. Other than the two top executives of Merrill
Lynch, which has been embroiled in an investigation into investment
recommendations of its stock analysts, senior executives on Wall Street
have kept low profiles in recent months.
"I think this speech is a month or two overdue," Mr. Paulson said.
Still, he devoted most of his speech to corporate governance and
accounting reform. In the wake of several notable restatements of
company earnings, investors have lost faith in the American accounting
system, he said.
He cited two factors: the pressure chief executives feel to report
bigger profits every quarter and the complexity of the "rules-based
approach" that underlies the generally accepted accounting principles
set by the Financial Accounting Standards Board. That system, he said,
is "ripe for manipulation" and should be updated and simplified quickly,
under the oversight of the Securities and Exchange Commission.
"If the outcome of all we have been through in the last six months, all
the soul-searching and debate, is business as usual at the F.A.S.B.,
then we will have missed an enormous opportunity for improvement," Mr.
Paulson said.
The accounting used by J. P. Morgan Chase and some of the huge banks
that compete with Goldman has long been a pet peeve among their
investment bank rivals. Mr. Paulson reiterated that complaint yesterday,
saying that companies specializing in financial services should be
forced to carry assets and liabilities on their books at their current
market value, not at their historical cost as many do now.
To the certain consternation of many of Goldman's clients, Mr. Paulson
predicted that companies eventually would have to treat the stock
options they give executives and employees as an expense. Executives of
technology companies, among others, have fiercely fought efforts to make
companies count the value of options - a big component of pay in certain
industries - as a cost of doing business.
"Ultimately, I think options will be expensed and the accountants will
win out," he said. "But who knows?"
Mr. Paulson also said companies, to avoid the appearance of a conflict
of interest, should not buy consulting services from the accounting
firms that audit their financial reports. As for Goldman's own conflicts
of interest in trying to serve corporations and investors who buy their
stocks and bonds, investors should trust the firm to police itself, he
said.
"For an integrated investment bank like Goldman Sachs, conflict
management has always been a core competency," he said. But he added
that, through the boom and bust of telecommunications and technology
stocks, "we have not done as good a job as we might have of preserving
and protecting the independence of our research analysts."
Goldman has made some changes in the organization of its stock research
operation, installing an ombudsman and giving the audit committee of the
firm's board oversight of research. But the firm, like Merrill and
others, has clung to the view that analysts must play a role in helping
to land investment banking assignments from the companies that they
rate.
"The major part of our effort will be to continue to focus on doing
better fundamental analysis," Mr. Paulson said. "The next time something
looks too good to be true, we hope we have the wisdom to see it and the
courage of our conviction to act accordingly."
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