Paul Volcker Discusses Corporate Governance

Paul Volcker Discusses Corporate Governance and Conflicts in Business Today

By Fiona Mackenzie ’04, March 2003

Columbia Business School was privileged to have Paul Volcker address a packed audience at the Annual Klion Forum. As Chairman of the Federal Reserve Board from 1979 to 1987 and current chairman of the International Accounting Standards Board’s oversight committee, Mr. Volcker is uniquely qualified to comment on the many recent business scandals in the United States. In his view corporate “melt-downs” such as Enron and WorldCom, though large and extreme, are not isolated examples of corporate governance gone wrong. Rather, they are indicative of fundamental problems in the financial system. They result from a “peculiar but not unprecedented set of circumstances” similar to those experienced in the economic excesses of the 1890s and 1930s, namely rapid advances in technology, increased complexity in the financial markets, and “infectious greed” (a phrase coined by Alan Greenspan). In the new economy, this manifested itself in traditional firms feeling pressured to find new ways to achieve higher returns.

Mr Volcker identified four areas where he believes reform is needed:

  • Accounting standards which need to be more reflective of the highly complex financial environment, as well as be consistent globally;
  • A disciplined auditing profession to enforce improved accounting standards with clear procedures governing enforcement. This would include removing the current conflict of interest that arises when an accounting firm provides auditing services as well as higher margin tax and consulting services;
  • Separation of oversight (independent directors) and management (chief executive officer) functions by requiring companies to have an independent chairperson; and
  • Accounting for stock options which have distorted management priorities in terms of how excess cash should be used, to buy back stock or pay dividends.

Mr. Volcker also believes that business schools over the past decades have taught students to prize an increased stock price above all else and argued that this represented an overly narrow management focus. He would like to see a new generation of management trained in balancing long-term stockholder wealth creation with the interests of other stakeholders such as employees, government, and the community. In Mr. Volcker’s opinion, a more balanced management approach would be far more effective in curbing corporate excesses than the impact of new legislation alone.

The depth of Mr Volcker’s experience was apparent as he fielded diverse questions from the audience. One student asked whether an example should be made of key players in recent business scandals by handing out jail sentences. “I would be disappointed if only the peripheral players do jail time,” he said. He also believes institutional investors tend to take a very passive approach to corporate governance and proxy voting, possibly due to conflicts as the institutional investor is competing to manage companies’ pension plans. Another student asked about the role that financial engineering has played in encouraging growth in the economy. However in Mr Volcker’s view, no value is added to a company through the use of financial derivatives but “they aren’t going away”.

Note: The KPMG Peat Marwick / Stanley R. Klion Forum is now organized by Leadership and Ethics Board of the Sanford C. Bernstein & Co. Center for Leadership and Ethics