Winning back the public's trust.

• Position: Governance Reform

'I don't have any doubt at all that the compensation issue is one of the driving forces in this rapid decline in public trust.' A conversation with Peter G. Peterson on the reform movement afoot to restore confidence in business leadership--with the 'toxic' issue of executive pay getting tackled first.

WHEN THE CONFERENCE BOARD formed its Blue Ribbon Commission on Public Trust and Private Enterprise in June of this year, the organization's president and CEO, Richard Cavanagh, felt that the public trust in business was "probably at its lowest ebb since 1916." That was the year the Conference Board was founded, and it was a year, he pointedly notes, that witnessed "a depression, a stock panic, an industrial strike, passage of the Clayton Antitrust Act, and creation of the Federal Trade Commission and the Federal Reserve System to deal with the problems then." In other words, a momentous year indeed for public disdain of business and for addressing the problems that gave rise to that public crisis in confidence.

That's certainly a fair comparison with the year 2002. The past 12 months have witnessed one saga of corporate woe after another--driving public backlash, instigating new legislation, and spurring initiatives within the corporate sector to redress its own egregious failures. The Conference Board's commission is one such effort by the corporate establishment to launch a reform counteroffensive. The commission's distinguished members (see box on page 22) worked quickly--"basically ruining their summer," Cavanagh acknowledges--to do a sweeping study of the issues and formulate an agenda of concrete reforms. By September, the commission was ready to unveil its first set of proposals, which focused on executive compensation. Its suggested reforms (see box on page 21 for fuller detail) include:

Retention and direction of compensation experts by compensation committees--not management.

* Compensation committees setting pay not simply by ratcheting up industry averages.

* Uniformly expensing stock options.

* Substantial director and top management stock ownership for extended holding periods.

* Avoiding "special purpose entity" compensation to executives.

* Greater disclosure of equity dilution and employment agreements.

* Shareholder approval of option repricing.

* Advanced notice of executive stock sales.

The commission is co-chaired by Blackstone Group Chairman Peter G. Peterson and CSX Corp. Chairman John Snow. Peterson took the lead in organizing the commissions work on the compensation studies. DIRECTORS & BOARDS Chairman Robert Rock and Editor James Kristie met with him a few days prior to the press conference in which he would be detailing the compensation proposals and the rationale behind them. In a somber mood, obviously troubled by the behavioral problems besetting the corporate community and the corresponding damage to public trust in business leadership, Peterson discussed the commission and its goals, as well as the crisis that caused such a commission to have to come into existence.

DIRECTORS & BOARDS: What motivated you to get involved with this Conference Board Commission on Public Trust and Private Enterprise?

Peter G. Peterson: I reflected on two things. One, being the son of Greek immigrants who came over to this country without a penny and with a third grade education, it is no accident that my father's favorite song was "God Bless America." I am the luckiest possible beneficiary of the American capitalist system. And, the malaise in public attitude towards business executives is a problem that could obviously affect the functioning of this wonderful economic system.

We need fundamental trust in our capital markets in this country. We depend heavily on capital markets that really work. In particular, we depend heavily on the import of foreign capital because we have an abysmally low savings rate, our budget deficits are resurging, and we have an unprecedented trade deficit that is resulting in a record current account deficit. You may recall that in the Eighties, when the current account deficit was a little under 3% of the GDP, the dollar fell by one-third--50% against the yen--and there were other ill effects on our economy. It is now at 4.5% of the GDP, much higher than it has ever been, requiring about $500 billion of foreign capital a year--and is heading north. Foreign confidence is an extremely important factor. Should we lose that confidence, I could imagine a variety of unfortunate effects on our economy as a whole. I also am chairman of the Federal Reserve Bank of New York, where we are focusing on this current account deficit, and where President Bill McDonoug h has spoken very forcefully about the implications of this breakdown in public trust and its effects on our capital markets and our economy as a whole.

These private commissions are a great deal of work if you want to do them right, but on balance I decided to take it on, fully realizing that not only would it be a lot of work but it is no way to win a popularity contest in the business community to point up what we honestly believe the problems to be.

A 'sickening' survey

D&B: What is your sense of the depth of the problem?

Peterson: I have been a businessperson all my life. I was a CEO before I went into government for eight years. Most of my best friends are businessmen. I have had the traditional view that the vast majority of businessmen are honest, good guys -- that there are only a few rotten apples. And I still believe that, even after looking at the problems that have surfaced. But that isn't the point. This commission is about restoring public trust in business, not businessmen's trust in business. In that sense, what I think doesn't matter very much. The question is: How do we persuade the public that businessmen deserve respect?

My first job out of college was in the market research business, so I knew that I wanted to get a good feel of public surveys as part of our commission's research. Just take a look at that Fortune cover [Ed. Note: "You Bought, They Sold," Sept. 2, 2002, a withering critique of selling done by prominent chief executives in advance of precipitous declines in their companies' stocks]. That cover looks like a rogue's gallery, what Fortune called "hundreds of greedy executives." Or the Financial Times survey showing $3.3 billion going to executives in bankrupt companies with the headline, "Stunning Payoff For Corporate Failure?' I talked with Dan Yankelovich and to a number of other people who understand the public better than I do. One survey that I found upsetting, even sickening, was this: When asked...