Unfortunately, this lack of leadership has also infected the ranks of financial professionals. Of course, CFOs like Enron's Andrew Fastow, WorldCom's Scott Sullivan, or Tyco's Mark Swartz are the most notorious. But during the past decade, how many financial executives found themselves caught up in the rush to manage earnings and boost stock prices? How many CFOs found themselves using their knowledge of accounting not to paint an accurate picture of a company's health, but to hide debt and a corporation's vulnerabilities in order to court favor with an overbearing CEO? How many CFOs worked hand in hand with the CEO to manage the numbers while failing to manage the business?
I'm afraid all too many CFOs fell into those traps. Those who guarded the numbers acceded to management's demands. And as John Bogle, the founder of The Vanguard Group, has pointed out, this led to a company's numbers becoming more important than a company's business.
That's not to say that CFOs are to blame. Not at all. But it is to say that a key gatekeeper joined the audit committee, the accountants, the lawyers, the analysts, the standard setters, the board members, the journalists, and the investors in being seduced by this culture of gamesmanship, a culture in which it was acceptable for corporations to bend the rules, to tweak the numbers, to let obvious problems slide in order to meet Wall Street's desires and expectations.
Moving forward, we need financial executives to reclaim their role as watchdogs and guardians of the shareholders' investments. I don't need to tell you how important your job has become. You are the ones who are putting your signatures on the company's financial reports, the ones in long meetings with auditors and with audit committees. And, if you should make a false statement in an SEC filing, you are the ones who face up to $5 million in fines or 20 years in jail.
Of course, exhorting you here to behave better is relatively simple, and an easy way out. But instead of finger-pointing, I'd like to offer some suggestions about how we can navigate this new world of tougher regulations — in some cases unreasonable regulations — and heightened security. I've drawn up a rough list of guiding principles to get through these challenging times:
(1) Select accounting principles from those that best reflect — from the view of the investor — the actual economics of the underlying business transaction. If it means more volatility and more complexity, so be it. Make your focus managing the business, not managing the numbers. If the business is well managed, good numbers will follow.
(2) Recognize that GAAP is not a standard to be met, but a foundation on which to build. In this new environment, the market is clearly going to reward companies that establish a reputation for both transparency and honesty. Since it is impossible to write rules to govern every potential set of facts or business transaction, it's up to you to ensure that the most relevant principles are being used.
(3) Consider what other key performance indicators (KPIs) investors need to know. In each company and each industry, there is a set of statistics that provides great predictive capability with respect to the future earning power and cash-flow-generating capability of a business. In some businesses, it may be the number of patents being used; in others, how many units of a product have been sold, where they have been purchased, when they will be paid for. While the SEC should consider whether and which KPIs should be disclosed, financial executives in the interim should take the initiative and begin to disclose this relevant information.
(4) Remember whom you work for — the shareholders. To that end, when you sign off on financial statements and disclosures, put yourself in the shoes of your shareholders. The experts say to invest only in companies whose business you understand. Therefore, make your statements obviously understandable. Ask yourself if there is any information that you would want to know about the company before investing in it that hasn't been made known, and if so, make it known.
(5) Guard and respect independence. It's crucial to engage with your audit-committee members in a meaningful way. And it is important to be responsive to their queries. Always respect their independence. At the same time, be sure to ensure your own independence from your company's outside auditors. While improvements in the auditor rotation rules and in stopping the revolving door between corporate suites and accounting firms have helped somewhat, we all know that the community of financial professionals is a small one. Only you can guarantee your independence.
(6) Remember that whoever governs, rules. Use your positions of power and influence within your companies to make sure that an effective corporate-governance structure is in place and that directors are of the highest quality. If we have learned anything from the past year it's that corporate governance is critical to making our private sector work. That's why earlier this year, to improve corporate effectiveness, the Blue Ribbon Conference Board Commission on Public Trust and Private Enterprise recommended a series of best practices regarding the future structure of corporate boards.
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