NYSE’s Bill Johnston on Corporate Governance and The State of The MarketPublished: October 23, 2002 in Knowledge@Emory
William R. Johnston has witnessed the good and bad times of the stock market. As a veteran of the equity market, he became a member of the New York Stock Exchange in 1964. Johnston eventually served as president and COO of the Exchange from 1996 to 2002. While president, Johnston oversaw a $2.5 billion technology improvement project that brought the NYSE to conducting 50% of its trades electronically. Now Johnston serves as the senior advisor to the chairman of the Exchange, Dick Grasso.
During a recent visit to Emory University’s Goizueta Business School, Johnston spoke frankly about the current state of the market, the controversy surrounding corporate governance and the recent downfall of several publicly traded companies – a few of which trade on the NYSE. Johnston shared his knowledge as part of the Goizueta Leadership Speaker Series. The series is sponsored by KPMG.
Not surprisingly, the issue of corporate governance and investor confidence was high on his topic list. “Because of all the companies that have failed recently, investors are really giving pause to where they are going to place their hard earned dollars,” Johnston says. “Management enriching themselves at stockholders expense troubles us. All of this makes us wonder and concerns us.”
To address the issue at the NYSE, “we put together a committee with members of our board and some outsiders that looked at the whole listing standard question of the New York Stock Exchange and corporate governance. We came out with some pretty significant recommendations.
“Our recommendations began with boards and states that there should be a majority of independent directors on each board.” Johnston notes that “independence” will be defined over time, but an early definition states, “If an individual has been involved with a company prior to [within the last] five years, he or she is not deemed to be independent.” That definition was previously measured at three years. In addition, companies will have two years to come up with independent boards, a move that Johnston says “most of industrial America is already up to speed on this.” “As an investor, you need companies to have an independent board so you can feel safe investing in those companies. Currently, the 85 million Americans that own stock are not receiving the soundest information about where they’re investing. We need to hear what companies’ commitments are to the individual investors.”
While Johnston weighed his remarks carefully, there was no mistaking the hard line he takes on the recent rash of corporate wrongdoing. “The boards of companies are there to represent the share holders and, if they don’t do it, then off with their heads. And off with the heads of others who have broken rules, whether it’s through taking money from shareholders, creating partnerships that no one can define, engaging in insider trading, or whatever else,” stresses Johnston. “These people need to go to jail…a hard jail. This won’t happen soon enough and I say this as an individual shareholder and as someone who works for the world’s largest stock market. There has got to be some kind of payment for what these people have done.”
In addition to rules that dictate who can serve on corporate boards, the NYSE is going to tighten the reins on their existing honor code. “Just as Emory has an honor code regarding the integrity of each student’s work, the floor of the exchange has an honor code: Your word is your bond. Traders who break the bond will be terminated.” Further stressing his point to the audience, Johnston says, “I want to reiterate how important honesty is in all this. I hope all of you will be whistle blowers and stick your neck out when you see someone doing something wrong. The whistleblowers at Enron are the heroes.”
In the aftermath of Enron and others, Johnston foresees distinct changes in the investment landscape. First, a redefined role for investment analysts. “We are starting to see a separation of church and state with the analyst community and the investment bankers. The analyst market is going to shrink in the near future. Their role is going to be defined as giving good recommendations to their clients, not on attending board meetings or by the price of the stock they cover.”
Second, he predicts that companies will expense stock options, making it easier for investors to read proxy statements and compare companies. “We need to continue to encourage investors to trust in the market and do their own due diligence before they invest,” Johnston says. “At the same time, we need to empower individual investors to police brokers and call a regulator when they fail to obey the rules. Insider trading will be detected and stopped through investors bringing suspicious activity to the attention of authorities who can do something about it.”
If Congress or the Securities and Exchange Commission doesn’t do enough to regulate the issuer, the NYSE plans to get involved and go after corporations themselves. “We’ll kick them out of our country club, if they don’t meet the requirements,” maintains Johnston.
Although the gains of the 90s almost seem a distant memory, Johnston fervently believes that investing in equities in the long run is the best place for investors’ money and is optimistic about the future. “We’ve seen worse times before and as bad as some past events have been -- October 19, 1987, when the market was down 22.6% in one day -- we’ve recovered and come out of these events for the better.” This remains true for the current downturn and Johnston promises, “There will be good times again.”