Henry Kaufman, the retired Wall Street investment banker and a leading authority on capital markets and interest rates, Thursday called for far-reaching reforms in the way U.S. companies are governed. Mr. Kaufman addressed a forum in Washington.
Mr. Kaufman says the wave of abuses that have stunned American business over the past three years have probably not yet ended. Calling the scandals the worst in the American economy since the excesses of the 1920s boom that ended with the 1929 stock market crash, Mr. Kaufman said corporate boards of directors must be far more active in scrutinizing company management. He said some of America's premier business schools share the blame for the abuses because they failed to teach about previous similar episodes of systematized greed.
"Too many graduates of such programs have contributed to a culture that favors quick profits and financial buccaneering," he said.
Business schools, he said, should require students to have courses in economic and financial history.
Mr. Kaufman, formerly chief economist at Solomon Brothers in New York, has harsh words about mutual funds, the principal investment vehicles for most Americans. The funds, he complains, turn over their portfolios too often and take little interest in the affairs of the companies of the stocks they own. Indeed, says Mr. Kaufman, the current crisis is characterized by a separation between corporate ownership and control.
"Institutional investors [mainly mutual funds] now own a majority of outstanding stocks, but they remain passive for the most part, rarely getting involved in their portfolio companies," he said. "And instead institutional shareholders often are brought together in what I call a marriage of convenience with the highest bidder in a corporate takeover. Thus stockholders are often temporary holders of a certificate that legally meets the definition of equity but does not embody a true vested interest in the affairs of the company."
Mr. Kaufman, now 75, says rapid changes in computer technology mean there should be more not less government supervision of financial markets. However, he said, meaningful reform can't come from the outside. Instead it must come from the top, from the leaders of U.S. corporations.