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Crusading for corporate reform

Published Sep. 3, 2005

For the past 18 years, Sarah Teslik and the Council of Institutional Investors have been railing against overpaid corporate executives, rubber-stamping boards of directors and toothless regulators.

But on Thursday, as Congress was approving the strongest corporate reforms in decades, Teslik, executive director of CII, wasn't quite ready to celebrate. She praised the legislation as better than expected but said regulations proposed by the New York Stock Exchange, coming up for a vote Aug. 1, will have an even bigger impact on changing how public companies operate.

"I'll celebrate the evening of Aug. 1," she said.

Teslik, 48, doesn't sugarcoat her anger at financial fraud in corporate America. And when she speaks, CEOs listen because her Washington, D.C., group represents more than 100 public and corporate pension funds with more than $2-trillion in assets.

She spoke with the St. Petersburg Times before addressing a conference in Tampa. Here are excerpts, including her thoughts on who should go to jail, why SEC chief Harvey Pitt should step down and why baby boomers might as well forget about retirement:

Q: Put the past seven months of corporate scandal into perspective. How does it feel to see many of the reform efforts that have been advocated by CII for years finally enacted into law?

Teslik: The scandals were the best thing that could ever happen to shareholders. Over the last 65 years, investor protection was eroded to the point where it was almost reversed. And one scandal, Enron, was not enough.

It doesn't replace the money pensioners lost, but (Democratic Sen. Paul) Sarbanes' bill couldn't have gone through unless there had been another fraud, then another, then the market headed south. The legislation got critical mass. And the fact that the market was tanking allowed the conference committee to hold with the stronger Senate bill. But the changes in regulations by the New York Stock Exchange are likely to have more effect than any legislation.

Q: Why are the NYSE's new rules so important?

Teslik: Stock option plans will have to be disclosed and shareholders will get to vote on all option plans. Currently most are not disclosed or put up for a vote. And there's a bombshell in there. Brokers will not be able to vote for shareholders on stock option plans.

Since the motive for fraud is financial and these options make executives rich, a lot of the fraud will go away. CEOs have no interest in faking financials unless they gain from it.

The NYSE also calls for making the majority of the directors independent, and all the committees independent. Also as important is that at every single meeting, independent directors have to meet without any management present. And auditors will be hired and fired by the audit committee.

Q: Are you surprised by the extent of the NYSE's proposals?

Teslik: We've been one of NYSE's biggest detractors for 18 years. But when they brought their first draft of proposals to us, we had to admit they were very good. And when they asked for suggestions, we said, what the heck. We gave them our wish list and they included everything we asked for.

I think the NYSE has a very good handle on the pulse of America, and they recognize that if they didn't do something, they'd lose their edge as the premier exchange in the world.

Q: What about the Nasdaq Stock Market?

Teslik: The Nasdaq has been pussyfooting around. They said they'd been talking to investors and we asked who. We're investors and they've never talked to us. Their reform package probably won't make a difference. If Harvey Pitt (chairman of the Securities and Exchange Commission) wants to do something, it would be simple for him to say NYSE rules apply to all exchanges. Or Bush could say it. It would be the single best thing to make the reforms complete.

Q: You've been very critical of Pitt. Do you think he should be fired?

Teslik: In this case, the scandals are large enough and market problems big enough that I think he ought to voluntarily step down. It's one thing not to be a leader in good times. It's another when you're not a leader in bad times and you attack the leaders.

Harvey Pitt is famous for meeting with people who are under investigation but he's never called us. I don't particularly care to meet him, but it's interesting that if you come from the special-interest side, which he does, and you don't know investors, shouldn't he want to call us?

He's also phenomenally egotistical and his staff likes him less every day. And if you don't have your staff following you, they'll stab you in the back.

Q: How will investors know that corporate reform is real and not just rhetoric?

Teslik: There are a number of things investors can watch for to see if this administration is serious. First, where are the Enron indictments? They've indicted Adelphia and WorldCom executives, but not WASPy, Wall Street types. Keep your eye on Ken Lay because he's considered establishment. It's a good bet to commit fraud unless you're punished. Even a week of jail time would be enough to deter most CEOs.

Next, is the administration going to clean up FASB (Financial Accounting Standards Board)? Investors don't know if financial statements are fact or fiction and FASB was allowing off-balance sheet financing. The system needs to be fixed and it can't be done by CFOs and the big four accounting firms.

The new NYSE listing standards should apply to all public companies. And finally companies should be required to disclose all conflicts of interest among directors. Such conflicts have surfaced in every fraud to date and yet has Pitt said anything about it? It makes me think the SEC is not serious.

Q: Do you think that investors' expectation of continually improved earnings every quarter put pressure on corporations to cheat?

Teslik: Wall Street cares about how much the market is going to move next week but actual investors don't. And CEOs don't interact with us, they talk to analysts.

Our group recently heard the CEO of the Washington Post, Donald Graham, talk about how bizarre it is that a company's earnings are compared to "analysts' expectations." Who are these analysts? And if earnings are a penny off expectations, everyone panics.

But CEOs are paid to manage the company, not earnings. I'm not too sympathetic. I expect leadership for a few million dollars.

Q: What do you say to investors who are mad but feel powerless?

Teslik: Vote your proxies. Individual investors own half the stock market, and directors and executives notice those proxies. Go on employee chat rooms. If the employees can't stand the CEO, that's a bad sign. Pull together undisclosed director connections using Internet searches. We did this on the Bank of America board a couple of years ago and made a chart showing all kinds of connections among board members, as well as with the chairman. It takes a while, but you get good dirt.

If the company is retail or interacts with the public, go kick the tires. Then diversify your stocks and just hold. Close your eyes, stop reading about the indexes and hold.

One of my fears is that with investors pulling funds out of the stock market, some individuals will spend rather than save. That's not wise either.

Q: Your members, who include public, corporate and union pension funds, have seen their portfolio value hit hard in the declining market. What does this mean to the employees who have contributed to these funds?

Teslik: Current retirees are all fine. It's the current employees who are not. As the market has gone down, the assets are not there to pay promised pensions. And as the leading edge of baby boomers start to retire in 2006, a whole lot more money will be drawn out of the market and there will be fewer workers to support retirees. Even people in defined benefit plans won't get their promised pension.

At the top of the market, there were underfunded pension plans. But even "fully funded" funds played with assumptions, like unrealistic market returns or low inflation rates. Even in actuarially honest funds, current employees are going to have a problem.

Q: That's a pretty gloomy assessment.

Teslik: Keep Spam in your basement; it keeps for 20 years. Rely on your kids, especially grown sons, to pay for your nursing home expenses. And don't retire.