Bob Monks’ Review of Arthur Levitt’s Take on the Street. What Wall Street and Corporate America Don’t Want You to Know. What You Can Do to Fight Back.

[See Barron’s December 2, 2002 issue for published review]
 

Buy this book, because you will want to read it more than once.  It is great value on several levels. The writing is clear and informative; the analysis of investor alternatives is jargon free and penetrating.  Levitt makes Wall Street live. It is not a place where there are conflicts; it is a place comprised of conflicting interests.  The Glossary is hugely useful, although my impression is that a “secondary offering” refers to securities already outstanding in contradistinction to a primary offering by the company.  But what is best about this book is what it tells you of the author.

Arthur Levitt had a unique and almost mythically tragic role as an observer of the greatest peacetime transfer of wealth in recorded history – from shareholders to CEOs of public companies. He was not just unable to stop it, but unable to get anyone to take it very seriously. By ancestry and temperament, Levitt evidenced sincere concern for individual investors throughout his career as the founder of a major investment house and Chairman of the American Stock Exchange. He was convinced that “the ideal forum” for protecting shareholder interests “would be the SEC Chairmanship”. Having achieved his ambition, as Chairman during the Clinton Administration – and the biggest stock market boom in history, – he found that power to effect change was in the place he had left behind. “In the Washington lobbying hierarchy, the corporation is by far the most muscular power center…. the business point of views trumps everything else.” Levitt was experienced in the ways of Wall Street, but he did not become cynical until he saw it from Washington. 

Chairman Levitt was early “rolled” by corporate power. Business organized a public relations and political blitzkrieg against the regulators’ proposed accounting treatment for stock options. He becomingly acknowledges, “I failed to support this courageous and beleaguered organization [Financial Accounting Standards Board] in its time of need, and may have opened the door to more meddling by powerful corporations and Congress.” He has frequently opined that supporting “free options” was his biggest mistake in eight years at the Commission. This private regret does not, however, begin to acknowledge the consequences of the chief regulator’s abandonment of the integrity of the entire process of standard setting in the face of business pressures. This was arguably the single “mistake” that is most responsible for the corporate excesses of the nineties. “Free options” had pervasive consequences. Clearly the accounting profession and its regulators were demoralized by the apostasy of their supposed protector. “For the next eight years, the FASB would shy away from controversial issues because it feared setting off more political firestorms.”  “Free options” further inclined CEOs to direct corporate energies and consultant ingenuity to the daily stock price, which led to a cascade of abuses in the creation of short-term earnings. Finally, the extent of already unhealthy corporate power over public policy was exacerbated.  “Emboldened by their stock options victory, companies next tried to pull off a hostile takeover of the standard-setting process.” History will record that this was the time that business influence over government rose to its highest levels in more than a century and that corporate purpose became undistinguishable from enrichment of the CEO. And all of this happened on Arthur Levitt’s watch. 

Retrospective kibitzing must be indulged with humour and humility. An effective public official who offends too many constituencies soon ceases to be a public official. You have to get elected in order to be a statesman. An intriguing question is – at what point is it worthwhile to do what’s right, even at the cost of one’s job.  Might not Levitt’s successor Harvey Pitt find honourable resolution of his impossible conundrum by appointing John Biggs to the Chairmanship of the newly authorized accounting regulatory agency, and facing whatever consequences there may be? This particular act will long characterize his stewardship of the SEC. Eliot Richardson, Cyrus Vance and Peter Edelman at different times and different places on the political spectrum felt they could advance the public good by resigning? Repeated reference to ‘longest serving’ as a meaningful characterization of a public official’s performance suggests flabby motivation and inclines to be trivializing. 

This book is the story of failure of leadership by many. The extent of business leadership failure can only be suggested by the reality that the very “best” CEOs of the very “best” companies engaged in practices, particularly relating to their own compensation, that have come to be synonymous with greed. Government failed on several levels, starting with elected officials. “Despite Congress’s belated lurch toward reform, only a few law makers truly care more about individual investors than their corporate patrons.” Senator Carl Levin is one. Who is another?  

The SEC has shrunk to a sorry place in little ways – letters unanswered for more than ten years, shareholder resolutions with 501 words being rejected because they contained more than 500 words, and in big ones. Levitt touches on the edges of the open secret that the Commission has become the virtual subsidiary of the industry-lobbying group, Investment Company Institute, in its failure to regulate the mutual fund industry. Millions of individual investors are unprotected from graphs showing unreal performance and from fees, hardly if at all disclosed. Levitt’s SEC was not at all interested in the issue of mutual fund proxy voting and disclosure. Nor did he press beyond deference in urging listing requirement reforms on the Exchanges, which under different circumstances they have now rushed to adopt. Is this because of the interference of powerful legislators whom Levitt identifies?  Is it because of the unwillingness of the Congress to let the SEC use more of the “profits” it generates or of the President to request the Congressionally authorized budget? Or, are these problems endemic to all governmental functioning and the problem comes down to leadership?  

This is a book that belongs on the shelf of everyone who is interested in a lucid and well-informed insider’s account of the “roaring nineties”. Levitt’s unequal struggle with business interests has the ring of authenticity. At the end one is left with a sense of dread. If this well motivated accomplished, and above all – decent,  appointee can only be effective on the margin – Regulation Fair Disclosure (Reg FD), for example - what does this tell us about the health of the public sector in the United States at the turn of the century?