When you think of the quintessential trading floor, you think of the New York Stock Exchange. You think of the nightly updates of the Dow Jones index at the end of news programs around the world – the traders running past rows of computer screens as analysts describe market action that day.
You think of that nebulous entity that is Wall Street – defining much of the business of the financial world globally for the past century. In recent years, though, the image of Wall Street has conjured up other, more negative associations – corporate governance issues, conflicted analysts, lawsuits. It is therefore refreshing to hear the clipped, wellmeasured sentences of John Thain, NYSE’s CEO – succinctly conveying his adamantly positive message
about the future of the exchange – and financial markets.
“There’s been over 500 billion dollars in new equity capital raised in 2004 in the US alone. I think that is a testament to the strength of our markets, the continued growth in our industry and the need for capital. We continue to see funds flowing into private equity and we continue to see attractive returns in the private equity investing space. Those funds ultimately lead to the creation
of new companies and new initial public offerings (IPOs),” he says.
But, at the same time, he knows that it is vitally important to heed the lessons
and implications, even warnings and industry soul searching, that events since 2000 have prompted. It is now, he believes, essential that financial services companies actively work to repair the loss of investor confidence and the reputational damage they have sustained since the turn of the millennium.
“There’s no question that the bursting of the bubble and corporate scandals such as Worldcom and Enron, and the more recent mutual fund scandals, have all undermined investor confidence and damaged the reputation
of the financial industry. I think we’re making progress on that front, but there is still much to be done. It is key because investor confidence is vital to our business. We all must continually work together to restore that confidence,” Thain says.
It is easy for investors to be cynical though – to take the attitude that the industry might have been humbled by the last four years, but is now simply paying lip service to platitudes that are, at best, self-serving. Thain is quick to disagree.
“I think honesty and integrity in the financial services industry are crucial.
They are core cultural values. I also don’t think that they are empty platitudes for any long-term industry participant. I think you can see that when investors lose confidence, particularly individual investors, they pull away from the financial markets. They don’t have to invest in the financial markets. There are other ways to build wealth. They can always keep their money in their bank accounts. And so I think it is extremely important that we continue to focus on honesty and integrity,” he says.
He adds that it goes much farther than that.
“I think over time you will see the market values of companies being differentiated by how well they are able to maintain honesty and integrity in
their corporate culture and truly behave that way,” he says.
Using the NYSE as an example, he believes that corporate governance, how companies define the roles and limits between their boards of directors and senior executives, will be indispensable in making that happen.
“There have been very significant improvements in corporate governance.
Many of the changes that were adopted by the New York Stock Exchange and in the Sarbanes-Oxley Act (a US law passed in 2002 to strengthen corporate
governance) have gone a long way to improve corporate governance
in the US. I’ll give you a few examples. The New York StockExchange
has amended its corporate governance rules for listed companies
to require a majority of independent directors, to require that members of the audit committees, compensation committees, and nominating committees be fully independent, and that the independent directors must meet separately from
management,” Thain says.
Many of the companies that are complaining about over-regulation
as a result of the new measures are missing the point, Thain emphasizes.
“Companies can view the Sarbanes-Oxley provisions as bureaucratic
processes where there is a checklist to go through – that needs to be
complied with. Or they can view it as the opportunity to really rethink
their internal control structure and improve it – improve their management
information systems – and improve their processes. I would certainly
hope that the majority of companies are doing the latter,” Thain affirms.
The lessons should also not be lost on investors. Whenever they are considering putting some of their money into a company, they should
take a hard look at how independent the board of directors is, and
whether their accounts are transparent.
“Do you have true independence and a well-functioning board of directors?
I think that’s very important. How transparent is a company in terms of its business – what’s happening in its business and what’s going on with its
financial statements? So I would focus on the level of independence and the degree of transparency as the two critical areas of judging how far a company has gone in improving its corporate governance,” he says.
Still, it would be incomplete to say that companies simply have to change internal practices and controls – that investors must only peruse a company’s books before investing – and that the financial industry will simply contentedly ride into a collective sunset. There are some latent risks on the horizon that could pose a threat to financial stability.
“When we talk about threats to financial markets’ stability, I think we have to look at several different levels. First, on a global basis, terrorism and the impact of terrorism on markets is always a concern. On a macro-economic basis, the current trade imbalances in the world and particularly the imbalances of trade with the US and the resulting pressure on the US dollar versus other global currencies is a concern,” Thain explains.
Despite the risks, he does not believe the US or its financial markets are in danger of losing their leadership position in the world economy.
“On the New York Stock Exchange alone, the market value of the companies
traded is over 20 trillion dollars. The US financial markets offer the largest pool of capital in the world. We continue to see a significant flow of companies accessing the US markets – Chinese companies, Indian companies, Brazilian companies, European companies. That does not mean that other markets aren’t also very attractive – but still I think those global companies who want access to the largest investor base in the world will continue to come into the US market.”
With a value proposition that offers “the best prices, the most liquidity, the lowest volatility, and the lowest transaction costs in the trading of our stocks,” the NYSE should clearly remain the world’s leading stock exchange, Thain affirms.
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