Last fall, former Securities and Exchange Commission Chairman Arthur Levitt, Jr., was named the inaugural Citigroup Distinguished Fellow in Leadership and Ethics for the 2003-2004 academic year. The new Citigroup Leadership and Ethics Program, run in coordination with NYU Stern’s existing Markets, Ethics and Law Program, represents an extension of Stern’s longstanding commitment to the practice of professionally responsible business.

Mr. Levitt, who headed the SEC from July 1993 to February 2001, is the longest-serving chairman in the SEC’s history. Throughout his tenure, he oversaw the introduction of a host of initiatives designed to educate, empower, and protect America's 50 million investors. These included: the launch of the EDGAR system; regulations that strengthened auditor independence; requiring companies to release important information to all investors at the same time; and mandating the use of “plain English” in public communications. A graduate of Williams College, Mr. Levitt worked in the brokerage industry for 16 years. From 1978 to 1989 he was the Chairman of the American Stock Exchange. Mr. Levitt currently is a senior adviser to The Carlyle Group, a global private equity investment firm, and serves on the board of Bloomberg L.P. His memoir, Take on the Street: How to Fight for Your Financial Future, was published in 2002.

In December, Mr. Levitt prepared remarks for the “Integrity of Financial Markets” conference held at NYU Stern. Excerpts from these remarks follow.


I must admit to having a degree of skepticism toward the entire endeavor of teaching ethics. I believe that ethics can’t be taught in one conference, one weekend, or one semester. A sense of what is right and wrong comes from one’s upbringing and the cues we take from society at large.

But that doesn’t absolve us of the responsibility of trying to shape ethical business leaders. Rather, it places upon us a larger burden. We must ourselves teach ethics everyday – by how we run our companies and how we choose to conduct ourselves in the public arena. In just my one semester of teaching here at Stern I’ve learned that young people interested in business aren’t just searching for the path to success, they’re also searching for role models. And so we need to move toward the day when there is a critical mass of ethical, public-spirited business leaders dedicated to the common good, when ethical behavior is seen as standard operating procedure.

Unfortunately, this leadership was missing over the past decade and a half. The bull market built up wealth just as quickly as it tore down ethical standards. The symptoms first arose in the executive suites – and came to our attention two years ago this week with the bankruptcy filing of Enron. What was uncovered at Enron, WorldCom, and the rest brought to the public’s attention the sad truth that CEO’s were managing the numbers, not necessarily managing their companies.

Auditors were complicit. Accounting standards – especially as they relate to the expensing of stock options – were a catalyst. Corporate boards were catatonic. This erosion of trust and independence infected investment banking and stock research as well. And with the recent revelations about the mutual fund industry, even more individual investors realized that they had been taken along for a ride.


Leadership Deficit

Better regulations and more effective oversight were not the only things that were missing. Something else was missing as well: the leadership of the business community. During the 1990’s, very few people were willing to stand up and point out the madness of day-trading and the virtues of diversified investing for the long-term. Very few people questioned quarterly earnings that always beat expectations or mutual fund advertisements that boasted of returns that defied gravity.
“Young people interested in business aren’t just searching for the path to success, they’re also searching for role models.”

We lacked the kind of leadership that instinctively puts the public interest above corporate interest or career advantage and works constructively with policymakers. There are today few business leaders recognized as being spokesmen or spokeswomen for a set of realistic, intelligent public-spirited values.

I’ve been in and around the markets for 40 years. And I can’t think of a time since when our business community and market institutions have been viewed with such disdain by the general public. In a recent poll on the ethical standards of various professions, only about 15 percent said that stockbrokers and business executives had “high” or “very high” ethical standards. The good news is that stockbrokers and business executives ranked ahead of insurance salesmen and car salesmen. The bad news is that they still ranked at the bottom of the pack – just behind United States Senators.

It wasn’t always like this. In the past, business leaders not only led their companies, they helped us through difficult economic transitions. At the end of the century and the end of his term in office, a President proudly boasted to Congress: “There has never been a time in our history when work was so abundant, or when wages were as high.” By the end of the year, however, a financial panic took place, thousands of businesses had gone under, and unemployment was surging. Sound familiar? I mention this to highlight the optimism of the ‘90’s – the 1890’s. The President who said this wasn’t Bill Clinton, but Benjamin Harrison.

Then, as now, faced with an economic downturn and the reality that the economy and society had to be retooled for a rapidly changing time, many business leaders formed powerful lobbies to resist change. They took the attitude famously summed up by railroad baron William Henry Vanderbilt: “The public be damned!” But others recognized that making the market work in an industrial age would require new rules and safeguards. And so people like Mark Hanna, a prominent Republican and industrialist, and Edward Filene, the department store magnate, formed groups like the National Bureau of Economic Research and the Cooperative League to research, craft, and lobby for reforms. As Jeffrey Garten explains in his excellent new book, The Politics of Fortune, their commitment to the national interest helped this country through the difficult transition from an agricultural economy to an industrial one; from an isolated nation to a world player.

Corporate leaders played a similar role during a similarly chaotic time immediately after World War II. At the urging of the Secretary of Commerce, a bi-partisan group of corporate executives formed the Committee on Economic Development to offer non-ideological guidance on how the U.S. could make the transition to a peacetime economy. The CED offered invaluable advice on a variety of economic topics – from taxation to monetary policy, from urban renewal to government administration. When President Truman formed a committee to draft a plan to rebuild Europe, five of the nine on the committee were CED trustees.

Today, as we navigate the proper relationships between the public and private sectors in creating a world that is safe from terrorism and suited for market prosperity, the input of responsible business leaders is once again needed. Yet, by and large, the leadership is not there. That is not to say that there are not those engaged in public policy or politics. But business’s interaction in public affairs is mostly of a certain, selfish kind. During my time at the SEC, I encountered a staggering number of industry lobbyists whose sole purpose was to stop any minor change that they saw as a threat to their own specific interest. They had no thought at all as to how the changes they were stopping or supporting would undermine the very market from which they were able to reap such prosperity.

Instead, we need public-minded leadership that offers to our elected officials insight into how best to set the rules for fair and vigorous competitions in a global economy, and that is unafraid to expose and condemn those actions that undermine market capitalism itself.

Such leadership is needed now more than ever in the mutual fund industry. Today, 95 million investors count on mutual funds for their retirements, college tuitions, and life savings. If we do not clean up this industry, we stand to lose a whole generation of investors.

For some time, mutual fund companies have abused their place of privilege in the investing world. The industry often misleads investors into buying funds based on past performance. Fees – along with the effect of annual expenses, sales loads, and trading costs – are hidden. Fund directors, as a whole, are stretched too thin and show little interest in exercising vigorous oversight. The cumulative effect of this lack of accountability and transparency has manifested itself in late-trading and other preferential treatment for hedge funds and other large investors.


Reform From Within

Such dealings, at best, turn individual investors into second-class citizens, and, at worst, into sheep to be fleeced. The time has come for a real clean-up, not cosmetic policy changes or image campaigns. Some of these changes will require governmental action. But true reform won’t occur – and investor trust won’t be regained – unless mutual fund companies show public-spirited leadership. Today, mutual fund companies can erect barriers to market-timing by requiring significant redemption fees for those who want to flip their funds’ shares. Today, mutual fund companies can shake up their boards by appointing and empowering independent directors. Today, mutual fund companies can put an end to broker incentives that damage investor interests, such as revenue-sharing and sales contests. And today, fund companies can end misleading performance advertising.
“I’ve been in and around the markets for 40 years. And I can’t think of a time since when our business community and market institutions have been viewed with such disdain by the general public.”

We can be sure that the SEC in the coming months will take action on all these fronts. But imagine, for a moment, what would happen if the heads of the 10 or 15 largest mutual fund companies announced that they have agreed to undertake all of these reforms on their own. It would bring about reform without the heavy hand of regulation. More importantly, it would let investors know that these companies take their obligation to their shareholders seriously.

Of course, I have been around long enough to know that the odds of such an announcement happening are long. Ultimately, we need a cultural change that rejects excess and skirting the rules – a culture in which directors and CEO’s all put pressure on each other to uphold standards of acceptable behavior. We need private sector leaders at all levels to dedicate themselves to creating a culture of accountability and foster an ethic of service. We need to change who our role models are.


A New Ethic

When I was coming up, people like Irving Shapiro of Dupont, John Whitehead of Goldman Sachs, and Walter Wriston of Citibank set the standard and fostered an ethic of accountability and service. But during the 80’s and 90’s, the image of a superstar CEO changed. Gracing the covers of Fortune and BusinessWeek were impatient, tough, bottom-line oriented corporate rock stars who could acquire a huge company at the stroke of a pen, fire 20,000 employees with another, and several years later sell the enterprise for much less than shareholders paid for it.

The market now demands something else: business leadership that will be at the vanguard in the movement to restore public confidence. The times call for sensitive, caring, thoughtful, and committed personalities – working in public-private partnerships to support the fabric of our society, rather than simply boosting their own bottom lines.

The public is not asking for business to stop caring about business. It’s asking for something as old as America itself: “self-interest rightly understood.” This new ethic will be taught in places like Stern. But the real lessons must be taught by those managing our companies, and building small businesses all over the country.

Business leaders must lift their sights above business, and spend part of each week on whatever kind of public-spirited purpose it might be – whether it’s conservation, foreign affairs, or health care reform. They must rediscover the habits of involvement and social leadership of an earlier era and through their actions, show a younger generation that public spiritedness is not just good public relations; it’s good business. That will go farther and be more effective in restoring public confidence in the markets and in the private sector, in lifting our stock markets, and in strengthening our economy than virtually any law we can pass, investigation we can lead, or regulation we can write.