Thank you, Clare... and thank you, ladies and
gentlemen. It's a pleasure to be in Cleveland -- and a real honor to address
the City Club Forum.
Few cities in America have a public speaking
series as prestigious as this one... and I'm privileged to have been invited
to speak here.
Three years ago, my company became part of East
Ohio Gas Company's long and proud history when we purchased its parent company,
Consolidated Natural Gas. As you may know, The East Ohio Gas Company has roots
in this area going back to 1898 -- pre-dating even the City Club. The company
was formed by John D. Rockefeller's Standard Oil of New Jersey to bring natural
gas across the Ohio River from West Virginia to the citizens of northeastern
Ohio.
Dominion is a proud old company also. We date
back to 1787 when George Washington was one of the incorporators. Back then,
we were called the Upper Appomattox Company. We barged rum upstream and tobacco
downstream. You could say we started out in the "Sin Trade."
When we merged with Consolidated Natural Gas,
East Ohio's parent, we were pleased with what we found at East Ohio Gas. We
didn't even fiddle much with the name.
Today, Dominion East Ohio is our largest retail
gas distribution franchise. We serve more than 1 million homes and businesses
here in the Buckeye State. Cleveland is our home base, and we enjoy being part
of the business community in one of America's great cities.
In short, it's been a great transition -- a win/win
story with many lessons learned and practical experiences worthy of a speech
at this distinguished forum.
Yet, I've taken the opportunity at other recent public events to talk about
trust -- more specifically, the public's loss of trust in Corporate America,
and what the business community needs to do to regain it.
With the possible exception of the students in
the audience, I'm guessing most folks here are old enough to remember a hit
TV series by the name of "Dallas." If you ever tuned in, you recall
that the main character, J. R. Ewing, was the greediest, most conniving, meanest
oil tycoon ever to grace the television screen. He clearly hit a chord. The
show spanned three decades. It seemed like great fantasy at the time.
In 2002, we didn't need Hollywood to bring us
shady characters like J. R. Ewing. C-N-N, C-N-B-C and Fox News did the job quite
nicely. It's sad. Not since the days of J. R. have America's business leaders
been held in such low esteem.
A recent Conference Board public opinion survey
ranked CEOs only one notch above car dealers, which I assume are above bank
robbers and child molesters.
Enron -- another villain from the state of Texas
-- gets considerable credit for that, but certainly not all. After the Enron
collapse, Arthur Andersen crumbled. WorldCom came crashing down. Tyco imploded.
A wave of corporate accounting scandals -- not
to mention the ongoing power crisis in California and the debacle in the Catholic
Church -- cast a dark shadow over America's institutions. Public confidence
took a dramatic nose dive.
These events have been a painful wake up call
for business leaders. A skeptical, cynical America creates serious problems
for the business community.
Let me begin by saying that I'm an unapologetic
capitalist. In my opinion, the system is not broken; however, it could use a
little mid-course correction. It needs more transparency and accountability
by corporate management.
A lot of people have lost a lot of money recently
in the market. Part of it was the fault of corporate management, but part of
the blame also lies with the investors. The dot-coms never made economic sense.
They never had earnings -- only projected revenues.
Security analysts were making absurd calculations.
They would project revenues 5 to 10 years out for a company, then compute earnings
as a percentage of those estimated revenues, then discount the earnings back
to get a net present value for the projected earnings, and then apply a multiple
to the earnings to derive a share price.
This is a preposterous practice! Some of the
people running corporations did the same thing, but when their pie-in-the-sky
assumptions didn't pan out, they played accounting games and tried to hide their
mistakes. Many investors were defrauded.
The corporate bad actors that did this need 15
or 20 years of free room and board -- in a federal rest home. I am told that
the food there does not get even a half-star and the wine list is lousy.
Free markets need trust in order to work properly.
Investors need to have confidence in the information on which they base their
decisions. Consumers want to trust the quality of the goods and services they
buy. Corporations need strong bonds with the communities they serve. Corporate
wrongdoing threatens those bonds.
Generally speaking, the damage is widespread.
It has transcended specific companies or industries. Restoring credibility is
going to take time, patience and hard work on many fronts by business leaders
and the rank and file as well.
The way I look at it, companies fail for one
of three reasons. Either their business plan is flawed, the execution is flawed,
or their leadership is flawed.
Most of the dot-com failures of the past few years and the problems in the energy
industry can be blamed on flawed business models or flawed execution.
Unfortunately, the current crisis is more about
flawed leadership.
Leaders at the top have to set the tone for the
whole organization. Values and expectations have to be explicit. Most corporations
are run by women and men who are honest, hardworking and have integrity. But,
as in any group, there are a few bad apples.
Back in 1988, we had a joint venture with Enron
that lasted a few years. We terminated our relationship because we felt that
our corporate cultures were too different. They thought we were too staid and
conservative - they used the term "gummy." We thought they had itchy
trigger fingers and wore their six-guns strapped around their knees.
Their corporate philosophy was different from
ours. They rewarded people for signing contracts or conceiving projects. It
didn't make any difference if it was a terrible contract or a dumb project.
Their people got big bonuses up front before it could be determined if the contract
or the project would ever make money. This was an adverse incentive -- an incentive
to enter into contracts or develop projects to collect bonuses, not for economic
reasons that would grow earnings per share.
I believe the secret to running a successful
corporation is not that complicated: Just don't do anything big and dumb.
Enron did many big and dumb things. They thought
they had cornered the market on intelligence - Hubris. Because they thought
they were smarter than we mere mortals, they didn't have to play by the rules.
They got into projects they knew nothing about in places they did not understand.
A big, dumb electric project in India where they
didn't understand the politics, purchasing a major water company in the U.K.
when they had no expertise in running water companies, projects in China, Indonesia
and Latin America, trying to game the electric market in California.
As each of these projects started losing money,
corporate management got creative in hiding the losses. They created off-balance
sheet entities to hide their losses and the debt they incurred. They booked
fictional revenues and earnings and moved assets and debt among their various
subsidiaries in an attempt to cover up their big, dumb decisions.
Were they immoral? Yes. Were they unethical?
Yes. Were they illegal? Yes!
In my opinion, Messrs. Lay, Skilling, Fastow
and others should also be given free room and board for a substantial period.
Looking at Enron reminds one of what William
Makepeace Thackeray said he wanted to do when writing Vanity Fair: "What
I want to make is a set of people living without God in the world, greedy, pompous,
men, perfectly self-satisfied for the most part, and at ease with their superior
value."
A few bad characters ruin it for all of corporate
America. Any corporate chieftain who wants to avoid the fate of Enron's Ken
Lay or WorldCom's Bernie Ebbers has to be able to answer a variety of important
questions:
Are we disclosing all the information shareholders need
to know?
Is our outside auditor helping us do it right?
Do our board members have all the information they need
to ask the right questions? Do we encourage them to question our actions?
What's our typical response to a crisis? Do we deal with
it openly and pay the price? Or do we cover it up and try to hide it?
Am I, as CEO, setting a proper, ethical and moral example
for the people who work in the corporation?
Do I encourage people to be open with me about any concerns
they may have about the way the corporation conducts business?
Do I take action immediately to correct or alleviate their
concerns?
There are more than 11,000 publicly traded companies
in the United States. The vast majority of their CEOs understand and act on
the premise that corporate responsibility pays. Unfortunately, there are also
some who prefer to believe that corporate irresponsibility pays.
As President Bush said in a speech to Wall Street
last summer, "...the American system of enterprise has not failed us. Some
dishonest individuals have failed our system."
The perks of leadership -- including money, power
and influence -- have to be balanced with a clear sense of accountability to
shareholders, employees, customers and the public. Otherwise, greed and ego
can wreak incredible havoc, as we've seen.
Some legislative and regulatory solutions make
sense. One example is the improvements to the financial disclosure system contained
in the Sarbanes-Oxley Act. Clearly, investors need to be protected from fraud,
error and undue risk.
But the pendulum can swing too far. Over-zealous
regulation is counterproductive. It stifles economic growth, threatens innovation,
hinders flexible decision-making and reduces risk-taking. Risk-taking is important
if you are to grow earnings. The point is not to take a risk where you don't
understand the risk, or think you do and bet the whole company or a material
part of it.
I'm a true believer in free market capitalism.
Over the long haul, capital markets do a much better job of disciplining corporations
than the legal or regulatory system ever could.
As "Exhibit A," I point to the way
the global marketplace has responded to recent accounting scandals. Whenever
a company has released suspect numbers -- names like Tyco, Bristol-Myers Squibb,
Enron and Dynegy come to mind -- their stocks and bonds have been hammered.
And many more CEOs have been axed by boards of
directors concerned about collapsing share prices than through new laws or governmental
investigations.
The point is, markets punish wrongdoing by hammering
stocks and throwing managements out the door. And management today lives and
dies with stock prices.
No economic model is perfect. But I'll carry
the torch for America's free enterprise system any day.
When business is at its best, we fuel economic
growth, improve the standard of living and meet consumer needs and expectations.
The American capitalistic system has been able to organize work more productively
than any other institution known to mankind. Corporations have contributed mightily
to national objectives -- to capital formation, to more productive and higher
paying jobs, to advances in technology and standards of living. We invent, innovate,
problemsolve and pioneer. We also give back to the community through the arts,
education, and health and human services.
These and other positive virtues of American
business cannot be overlooked.
Have no doubts, the stock market will come back.
While the economy grew only modestly last quarter, earnings were up almost 10
percent for the S&P 500 companies that have so far reported their earnings
for that quarter.
For the same quarter a year ago, S&P 500
earnings were down over 20 percent. The latest figures I've seen show there's
between $5 trillion and $6 trillion sitting along the sidelines in money market
funds. When these funds decide to come into the market, where are they going
to go? -- into French or German growth stocks, or Japanese government bonds?
I don't think so. The market will return and,
as we all know, a rising tide lifts all boats. We can -- and will -- weather
the current crisis of confidence and restore the public trust.
But it won't happen by imposing controls and
passing more laws and regulations. Those are short-term fixes that bandage the
wound without curing the disease.
In the end, there's no substitute for personal
integrity. Corporations and their leaders must be good, and they must do good.
Organizations must earn the trust of their stakeholders, day in and day out.
America's business leaders must be consistent
in their words and in their deeds. They must recommit -- and communicate --
their organization's dedication to ethical performance.
In the near term, Iraq, homeland security and
the war on terrorism may get more press than economic growth and wealth creation.
Capitalism faces a clear and present danger. It's nursing a black eye. Its credibility
is on the line. It's going to take repeated demonstrations of corporate character
and institutional integrity to get back on track.
In the words of Thomas Jefferson, we must "lay
down true principles and adhere to them inflexibly."
Ethical leadership in the modern business enterprise
is a subject that could fill volumes.
At a minimum, I hope I have provided you with
some food for thought about an important issue -- one we're sure to hear a lot
more about.
Again, my thanks to The City Club for inviting
me to join you today. I look forward to your comments and questions.
