Sam Fletcher
Senior Writer
Oil & Gas Journal
For the devastated merchant energy companies profiled in this issue's cover story, beginning on p. 29, regaining stakeholder trust is crucial to survival, much less future prosperity. But trust is an issue that extends to the entire American business community.
After so many corporate scandals in recent years, it will take "an unrelenting commitment to changing corporate culture" to regain public trust in the business community overall and to develop good corporate governance, said Arthur Levitt, former chairman of the US Securities and Exchange Commission.
"Trust, the critical element that makes our market system work, has been called into question, not just in relation to one company or one industry but in the market as a whole," said Levitt at a KPMG LLP energy conference in Houston earlier this year.
Moreover, Levitt said, "You in the energy field face a particular problem,U the inevitable public negativismUblaming [oil companies] for costs imposed on individuals" by higher energy prices.
"Restoring trust in our private sector and establishing good corporate governance can't be accomplished by any one piece of legislation [such as the Sarbanes-Oxley Act of 2002] or the overhaul of one company's practice," Levitt said. "It's about constant vigilance. It calls for a change in [corporate] attitude. This is not a discrete period in the history of American business. This represents a continuum of events that from time to time reflect a cultural change on the part of the business community and on the part of investors as well."
Compliance costs
Although corporate executives complain about the cost of complying with Sarbanes-Oxley requirements, Levitt said, "I believe that compliance and controls are worth the costs. I think there is a recognition and the ultimate pragmatism of a market environment that public confidence might be restored [through] Sarbanes-Oxley."
He said, "The primary cost is in complying with Section 404 [of Sarbanes-Oxley, requiring documentation of internal controls and auditing standards] to ensure that companies are able to provide the information that investors need and deserve." However, Levitt claimed, "Investments in internal controls are long overdue." The $5 million calculated to have been spent by "each of the entire Fortune 1000" to comply with Section 404 "is pocket change compared with the $90 billion investors lost on Enron [Corp.] alone," he said. On that basis, said Levitt, "Sarbanes-Oxley clearly meets the cost-benefits test and is worth every penny."
Levitt said, "I'm convinced that good disclosure is good business. I've always believed that companies that are upfront with their shareholders, embrace transparency, and see disclosure as a responsibility rather than a chore are going to be rewarded in the marketplace. Recently that certainly has been the case. Companies that are evasive or try to hide behind rosy accounting have been punished by investors and some by regulatory bodies as well."
On the other hand, government regulators need to write accounting and governance standards that are "based on sound principle and provide transparency. Standards must be understandable," he said.
Compensation issue
One major issue that must be addressed is that of "astronomically high executive compensation," Levitt said.
One study of 350 major US companies "found that CEOs in office at least 2 years enjoyed a rise in total direct compensation from the previous year of 16.5% to a median of $3.6 million." In that group, the average CEO "collected $155,759/ week while the average production worker took home $517," he said.
Such "huge discrepancies in compensation call into question notions of fairness and equality," said Levitt.
Moreover, the common practice of granting of stock options as a primary form of executive compensation provides the "wrong incentive" to executives who "too often are managing the numbers for short-term gain and personal payout and not managing the business for long-term growth and shareholder value," Levitt said.
"Simply, this must stop. The time to reform executive compensation has come, and the single most important thing we can do to bring that about is to expense stock options," he said. "This issue is not going away. It is the foremost issue in the minds of US investors today."
Stowers named OGFJ chief editor
Don Stowers has been named chief editor of Oil & Gas Financial Journal.
He is the first full-time staff member of the new quarterly magazine, the publishing frequency of which will increase next year.
A journalism graduate of the University of Houston, Stowers most recently has been a freelance writer and energy editor of the consultancy Skipping Stone. Before that he was Houston editor of Energy & Power Risk Management (now Energy Risk), London.
During 1999-2000 he edited and wrote most of Power Trading Technology, a start-up newsletter of the former Waters Information Services, New York.
Earlier, he was editor of Hart's Energy Markets, a reporter and editor for the Houston Post, and communications manager at an oil field equipment manufacturer.
