NEW YORK (CNN/Money) -
In the last six months, much has been made of the need for Wall Street reform. Companies, CEOs, analysts, brokerage firms, and entire government entities have been pilloried, and rightfully so.
In a speech last week, Henry Paulson, the CEO of Goldman Sachs (GS: up $0.40 to $72.50, Research, Estimates), put the situation in perspective. "In my lifetime, American business has never been under such scrutiny," he said. "To be blunt, much of it is deserved."
At the end of the day, however, all the hubbub might result simply in greater scrutiny, with few tangible reforms. Already, lobbying efforts have killed attempts to introduce legislation that would both rework the way options are accounted for and revamp the accounting profession. But what Wall Street needs to reconsider are the tools it uses to measure success.
During the boom years of the 1990s, it wasn't uncommon for technology companies such as Cisco (CSCO: up $0.30 to $15.29, Research, Estimates), Oracle (ORCL: up $0.23 to $8.26, Research, Estimates), and Sun (SUNW: down $0.06 to $6.31, Research, Estimates) to return solid double-digit growth, quarter after quarter after quarter. When the U.S. economy hit the capital-spending wall two years ago, investors felt the slam as the value of their tech shares plummeted. If corporations stop buying technology, corporate technology providers are going to take a hit, right? Investors now understand that it's unrealistic to expect tech stocks like Yahoo! (YHOO: down $0.03 to $15.83, Research, Estimates) to jump $30 or more on a single day for no real reason.
Unfortunately, Wall Street never got the memo. Paulson discussed this folly in his speech. The overwhelming pressure to create steady earnings forces companies to "defy gravity in an attempt to produce earnings increases quarter after quarter," even though this is impossible for most businesses, he said. The result is an atmosphere that encourages the kind of chicanery that got us into this mess in the first place: If you can't meet the Street, you gotta cheat.
Changing this prevailing mind-set will be a gargantuan task: We're talking about fundamentally rewiring Wall Street's brain. Now, before some of you start firing off angry missives, I'm not calling for the adoption of socialism. Instead, it's simply time to adjust expectations. In short, Wall Street needs to swallow the same bitter pill of lowered expectations that investors took a couple of years ago when the Nasdaq tanked.
Thankfully, a few people outside the Beltway are assembling some guidelines that, if implemented, will tackle this problem from the ground up. And as Washington outsiders, they probably have a better shot at succeeding.
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One of the most startling proposals has been put forward by none other than the New York Stock Exchange, in a white paper released last week. (Note to investors: When the NYSE starts cranking out white papers, things are getting serious. The exchange has issued just three of them in the last 25 years.)
The paper calls for some tough measures. The prickliest, and likely the most difficult to implement, proposes a reorganization of corporate boards. The NYSE wants the board of every listed company to have a majority composed of independent members -- people without any financial interest in the corporation or ties to the company's management.
Former Clinton administration chief of staff Leon Panetta, who is now director of the Panetta Institute and chairman of public policy and review committees for the NYSE, says corporate boards are at the root of many of the market's current problems. "Companies like to appoint people that they know from the inside," he says. "They're going to have to search for the right kind of people now. That'll take time and effort, [and it's] not going to be easy."
Panetta says the NYSE will solicit comments on these proposals for two months. He has already received quite a bit of informal feedback. "They're tough proposals," he says, "and some groups are concerned that we went too far." But Panetta doesn't expect to make many revisions, and he hopes the changes, pending approval by the Securities and Exchange Commission, will be in place "by the end of the year."
Perhaps wise from his tenure making sausage in the nation's capital, Panetta understands that despite the current outcry and calls for blood, it takes time to change the way business is done in the United States. "No one thinks there's a silver bullet here," he says, "but you've got to start someplace. In the absence of some congressional action, the private sector has to set the example."
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