(00:00:00) It is my privilege today to introduce our speaker the chairman and chief executive officer of the New York Stock Exchange. Mr. William Donaldson. Mr. Donaldson will share his views on capitalism entrepreneurship and the qualities that he thinks are necessary for business and financial success. Mr. Donaldson is highly qualified to discuss these issues drawing on his broad background in business Academia and government service his distinguished business career began in 1959, when he co-founded and was Chief Executive Officer of the International Investment Banking firm Donaldson, Lufkin & Jenrette under his leadership Donaldson Lufkin & jenrette made history in 1969 when it became the first New York Stock Exchange firm to sell its shares to the public in 1972. Mr. Donaldson was elected to the New York Stock Exchange board of directors. He also served as under Secretary of State under dr. Henry Kissinger. Sure, just prior to becoming NYSE chairman. Mr. Donaldson was Chief Executive Officer of Donaldson Enterprises Incorporated a private investment company. He founded in 1980. He also serves on the boards of directors of Aetna Life and Casualty Company Honeywell and Philip Morris companies and is a member of the association for investment management and research and of the New York Society of security analysts following his presentation. Mr. Donaldson will be taking questions from the audience Kim darling and Gloria McClanahan of the Minnesota meeting will be circulating among you to collect the questions. There are some slips of paper on each of your tables if you'd like to use them for jotting down questions for the discussion now, please help me welcome. Mr. William Donaldson. (00:02:01) Thank you very much Karen. That is a great pleasure for me to be back here at the Minnesota meeting with the Minneapolis Chamber of Commerce. This time I'm here to celebrate the 200th anniversary of the New York Stock Exchange. Stock-exchange was founded according to the lore and 1792 by a group of people who got together around a Buttonwood tree and decided to establish some principles of trade the opportunity of the 200th birthday of the stock exchange has given me a chance to travel across this country and to travel (00:02:40) abroad to do (00:02:41) a couple of things number one is to talk a little bit (00:02:44) about the New York Stock Exchange. A lot of people know the name not too many people know exactly what (00:02:50) it does and to (00:02:52) help celebrate our birthday by tying in our anniversary with our interest in education and in particularly public. (00:03:01) As I visited (00:03:02) cities across the country. I've had an opportunity to (00:03:05) visit a number of inner-city schools and then to use our birthday as an excuse to Rally some people in different (00:03:13) cities across the country to sponsor and raise some money for an (00:03:17) educational effort in that city as our idea (00:03:19) that we want to try and leave something behind if you will and appreciation (00:03:24) for the New York Stock Exchange in Our member firms and are listed companies having existed in these communities across the country. I (00:03:31) spoke to some 900 high school students this morning this afternoon. I'm going to have an opportunity to talk at the University (00:03:38) of Minnesota business school and tonight we're going to have a reception which will honor the Junior Achievement of upper Minnesota and the business economic Education Foundation. For those of you that had the courage to be here a little over two years ago. I guess what I just become chairman of the New York Stock Exchange. I made (00:03:59) note of the fact that one of the (00:04:01) Facial hazards of being chairman of the stock (00:04:03) exchange that some people think that I might have something (00:04:06) intelligent or wise to say about the condition of the marketplace and its direction in the next week or month or (00:04:14) our and as I said then and I say again, I used to make a living doing that and sometimes got paid for it and was always just thrilled when people forgot what I had to say, however this morning with with (00:04:28) just a view toward some thoughts with a slightly longer shelf life than that. (00:04:34) It strikes me that we have a number (00:04:36) of extremely (00:04:37) important changes taking place (00:04:39) in our society today among those changes are course the end of the Cold War's we've known it as well as the growing (00:04:46) presence of capitalism in many (00:04:48) parts of the world. Not just those countries (00:04:50) that are coming out from underneath the (00:04:52) Communist domination, but many other areas previously under a very heavy load of State ownership and directed economy. (00:05:01) Here at home. (00:05:02) Clearly the change most currently in our minds (00:05:05) is the change in (00:05:05) administration's with a new directions, whatever new directions that will bring but since we are a nation where a change of leadership seldom brings a radical turn in some of our basic beliefs the more important change that I'd like to focus on transcends the temporal political leadership and goes to the more fundamental underlying movements in our society and in our economic activity, I certainly wouldn't (00:05:32) pretend to have any particular expertise in that full range of movements, but I do want to offer just a few thoughts involving business its leadership and the role of the US economy in the next stage of the evolving global environment more specifically. I'd like to identify some possible (00:05:51) lessons from the 1980s and what I believe are very different set of Standards required to reach our full potential (00:05:59) as a nation in the (00:06:01) These (00:06:02) These are standards that in my view involve no less than the moral and ethical underpinnings of the word capitalism. Now most of the time we use the word capitalism and free enterprise to describe our political and economic system. We seldom (00:06:19) acknowledge. However, the (00:06:21) radically different ways that individuals and organizations (00:06:25) use or abuse the freedoms inherent in this system. (00:06:30) We don't often attempt to Define capitalism in (00:06:33) moral or ethical terms. This is maybe rightly so given the varied interpretations values and prejudices and so forth associated with a range of religious or secular connotations attributed to the words moral and (00:06:49) ethical today. What I like to try and do is Define those words without all of that baggage and to do so, I went back to Webster's Dictionary and his effort was too Find ethical and I quote as relating to moral action or motive and then they go on to the Fine moral is characterized by excellence in what pertains to practice or conduct. What is right and proper I would paraphrase all of that by saying that the morality that I'd like to apply to capitalism today has to do with a concept of right Behavior while the ethics modifier has to do with Conformity to an acceptable professional standard of conduct. Let me Begin by just stating my (00:07:35) thesis, which is it that there is a close connection between (00:07:39) moral and ethical capitalism and the issue of (00:07:42) short versus long term behavior and Professional Standards in business the state it in (00:07:49) more practical terms. There's an important difference between a transaction based mentality and a business mentality (00:07:57) that Fosters long-term relationships (00:08:00) beneficial. Not only (00:08:01) to clients or customers put the to the others involved with and dependent upon a corporate (00:08:08) Enterprise and out of that thesis comes three points that I'd like to (00:08:13) discuss in a little more detail first (00:08:16) that business in the 1980s was too often in my view transaction driven subverting to some extent (00:08:23) the proper goals of the ethical capitalism. We've defined and (00:08:28) second the technology Revolution May pose an entirely new (00:08:33) challenge as we work toward re-establishing what we might call a (00:08:37) relationship driven economy and third that it is absolutely vital that we understand practice and teach (00:08:47) moral and ethical capitalism. If we are ever to unlock (00:08:50) all that Innovative and entrepreneurial (00:08:53) spirit that it has been the Hallmark of American society right from the beginning. (00:08:58) In my view free markets in order to Prevail and last over the long term must have a profound moral Dimension (00:09:07) Michael Novak the writer suggested that the purpose of a democratic capitalist Society is to bring greater well-being to the (00:09:15) world's people and that fundamentally is a (00:09:17) moral purpose (00:09:19) free markets consists of individual transactions freely entered into yet inherent and most of those individual transactions (00:09:27) has got to be a longer term goal of building relationships that benefit all parties in a transaction over an extended period of time that describes what (00:09:38) is or certainly should be the accepted Professional Standards of capitalism the discipline of that ethic involves a choice between behavior that leads to long-term Advantage for everyone and behavior that produces only short-term gain for a very few. I want to emphasize that I don't think I'm talking about simple altruism here. I'm think I'm talking about enlightened self-interest of the long-term variety when businesses lose sight of those standards. There are more likely to adopt short-term experience that contradict the moral purpose Relationships by Nature are personal face-to-face long-term and essentially based on Mutual trust. Some of you may have seen the recent movie Glengarry Glen Ross in it. One of the film's real estate salesman reminisced about his early career selling cars, and he said he didn't just sell a fellow of car you sold him five cars over 15 years what you saw in that statement is a pretty raw form of capitalism. Nevertheless that comment isn't a bad description of the difference between a transaction and a continuing relationship. (00:10:54) For (00:10:55) some time now, it seems to me that our economy has been growing more and more transaction transaction driven. And as a direct consequence our structural economic problems have worsened. Just think about our low level of savings and investment in relation to our difficulty and competing with foreign manufactured goods reflect on our high rate of current consumer consumption and our present (00:11:22) neglect of children (00:11:24) and their education and Ponder our massive over-borrowing at all levels and its relevance to our unwillingness to Bear responsibility for future Generations had we been wiser. I think we might have acted differently in business what we might have come closer to matching the performance of our foreign competition. I'm speaking a foreign competitors that are controlled by long-term investors their business strategies have relied on developing long-term. Ships with employees (00:11:56) suppliers and customers (00:11:58) in short ensuring themselves a position in their markets for the long term and long term Returns, the best-managed US companies have done the same. Of course those that haven't of often suffered the consequences that we are now seeing (00:12:13) today one carryover from the 1980s that causes me considerable concern is the current effort (00:12:21) going into downsizing of many companies across the nation building (00:12:25) efficiency and keeping down costs is an obvious and necessary step toward long-term Health, (00:12:33) but I am very concerned that too many Management's see simple cost-cutting is the total answer to long-term competitiveness without paying heed to product quality and that implicit contract to enhance consumer and constituent satisfaction a steady March toward cost reduction. And a simple attention to the return ratios that are so important to most Management's in this country at some point have got to impact and impair quality some of our foreign competitors Japanese in particular are willing to accept lower rates of return today for more market growth tomorrow yet here in the United States. The motivation too often is to maximize those immediate returns benefiting current shareholders and as an aside current management (00:13:26) a broader (00:13:27) concept, which is still quite (00:13:29) controversial in this country is that a business (00:13:31) should be run with consideration for the benefit of a full range of (00:13:36) stakeholders employees suppliers communities of course customers and as well as stockholders (00:13:43) maximizing only today's Financial returns way meant May well be (00:13:48) creating too wide a spread in terms of who among the stakeholders benefits. And who suffers such a tilted trade-off decision can result in fact in reduction of the future growth potential as a long-term relationships with suppliers and all of those stakeholders are poorly served. Let me (00:14:08) just talk for a second about the business that I know best the (00:14:12) investment and securities business. It (00:14:14) has a long history of ups and downs and if you look at that history it offers I think an excellent case study of what I'm talking about. (00:14:25) A few years ago the sociologist David riesman (00:14:28) coined the term transaction mentality to describe an apparent breakdown in business ethics and he was talking primarily about Wall Street Wall Street once was a very Clubby place relationships were everything and if you weren't in one Loop or another the doors were closed. Those are not the kind of healthy business relationships. I'm talking about there is a constant and a normal healthy pushing and pulling between short-term and long-term forces in (00:14:58) Securities markets when in Balance those forces build liquidity and stability and generally provide an excellent stimulus for long-term growth in the economy in (00:15:08) broader terms markets are healthiest when they're operated for the benefit of the greatest number and diversity of people when the clients long-term interests are Paramount during the 1980s. We saw some of those relationships in the Elected in favor of strategies and activities that (00:15:28) often were more geared to the interests of the firm's supposedly serving those clients some security firms began in effect competing with their own (00:15:38) customers becoming increasingly principles (00:15:42) in transactions rather than serving exclusively or at least primarily in their traditional advisory intermediary and in many cases fiduciary role the expediency of a (00:15:54) short-term profit opportunity. I (00:15:56) suspect was permitted to outweigh whatever long-term damage might be done to important relationships. It certainly is not unfair in my view to call the 1980s the transaction decade (00:16:10) looking at the economy as a whole the 80s remember began with an outbreak of near runaway inflation that discourages savings and long-term investment. I think people recognized a long time ago that one of the most Imaging effects of high inflation is to corrode good business judgment certainly inflation raises the value of current cash (00:16:33) versus future cash, (00:16:35) the get-rich-quick deal-making that inflation help promote was probably inevitable under those circumstances now in the 1990s with inflation under control at least for the moment and the hubris of some of the more aggressive (00:16:52) dealmakers curbed the (00:16:55) financial markets have begun (00:16:56) to return to their proper role instead of driving industry by deals Wall Street (00:17:02) can and perhaps may have (00:17:04) already begun to pay more attention to fostering business growth through long-term relationships and the return of the traditional agency role and capital raising functions with such relationships (00:17:17) comes an opportunity for the growth of a mutual respect between Wall Street and American Mystery and I hope the resulting emergence of an ethical capitalism that promotes the long-term growth that we need. So desperately in this economy. We can't expect those benefits to come swiftly nor can we be certain that the transition will continue (00:17:40) but I fervently hope so (00:17:42) certainly our commitment at the New York Stock Exchange is to (00:17:46) put our full weight behind trying to encourage that (00:17:49) Trend this year as I mentioned. We're celebrating our bicentennial The lessons that we've learned over 200 years of led to the development in our industry of a self regulatory (00:18:00) system, which is really unparalleled in the world (00:18:04) with the New York Stock Exchange serving as its Chief practitioner. (00:18:08) It's a system (00:18:09) that permits some six (00:18:11) billion dollars in business to be transacted every day on the floor of the New York Stock Exchange alone without written contracts and with a remarkably tiny incidents of the dispute (00:18:23) the New York Stock Exchange stands at a Crossroads where some 51 million Americans who own stock in a company or mutual fund can come together with 10,000 institutions and more than 2,000 listed companies. The total market value of these companies is some three point eight trillion dollars and that's a figure that represents 86% of the capitalization of all the publicly traded companies in the United States. The driving principle of our auction market system is that everybody plays on an open and a level field with strictly enforced rules of the game and nobody profits unfairly at the expense of another it's a system that permits investor orders to congregate and compete openly to produce the best price. It seeks to satisfy not just Securities dealers, but also the listed companies the broker intermediaries investors and The Regulators (00:19:22) all of these conflicting (00:19:24) interests responsible to and involved in an ethical Market with a view toward building long-term growth and the benefit of all the (00:19:32) players currently we're watching and making an effort to (00:19:38) explain public e some troubling trends that if they were to continue could (00:19:43) damage the reality of our Marketplace. (00:19:46) We see some people who are choosing to execute transactions and less regulated. Markets here and abroad out of the sunshine of public disclosure in systems and at prices and on terms that may or may not benefit customers but are almost certain to benefit dealer intermediaries that in my view is putting transactions above relationships. It may be profitable short-term by failing to place the customers interests first in the long term. It could threaten to fragment our Market to divide it into tears of most favored and less favored customers in a road and weaken the New York Stock Exchange in particular, which is our largest the world's largest and most liquid Capital Market, like other (00:20:32) strategies per shoe pursued for short-term Advantage. It could have serious long-term consequences (00:20:39) for our Capital markets and our economy. Our vision of the future (00:20:43) is different from that. It's a vision of markets that stimulate the investment process by encouraging the broadest possible investor. Patient in open transparent and fair systems the fundamental ethical questions facing our industry are really no different from those that confront the rest of the American economy. (00:21:04) With a moral and ethical commitment to serving long-term interests to creating and strengthening relationships in my view many of our structural economic problems will begin to disappear. I want to take just a minute to inject a note about technology because there's some misunderstanding my view about its role in our business as well as others and I thought as I'm concerned it has the potential to influence relationships (00:21:31) if there is anything (00:21:33) further remove from a personal relationship than a computer (00:21:36) screen. It doesn't come readily to (00:21:38) mind yet. The computer screen has become the emblem in the (00:21:43) engine of transaction motivated business number of people whose paths have crossed recently have remarked on the destructive connection between technology and human relationships. (00:21:55) In my business, sometimes you see the problem illustrated by the widespread fascination with technology that allows traders (00:22:03) to move blocks of (00:22:05) stock and almost no time flat, but nobody asks or seldom is it asked what are the customer gets a fair price or how technology can and some cases does inhibit the ethical relationship driven Enterprise that I've been discussing the personal one-on-one relationships. I participated in a panel discussion recently. And one of the subjects was how in an age when business is conducted by such advanced technology lacking personal relationships. You could teach ethics to Young business people and try to ensure that dimension in the marketplace one answer and one quick flip answer is that you don't teach ethics in any case that ethics is caught and not taught as somebody once put it (00:22:53) it's caught at home. It's caught very early early in (00:22:56) school. And though it may be defined in somewhat more (00:23:00) sophisticated terms and a Graduate School of Business their law basically ethics or something We Gather very early in (00:23:06) life our educational system in my view ought to make it possible for students to understand the ethos of capitalism its moral and ethical character and I'm not talking about indoctrination because capitalism as far as I'm concerned is not an ideologies. It's rather a creative process which requires understanding at the same time (00:23:29) in my experience with institutions of all kinds (00:23:32) top management (00:23:33) must set the ethical tone. It must Foster a climate where ethical behavior is valued applauded and rewarded lest. I be accused of some sort of trickle down ethics concept here. Let me add this very emphatically that I am a true believer that efforts to direct and shape our Ins inspired solely from the top are unlikely to succeed without a complementary force that Springs from the bottom of force that arises from those dedicated to having an impact on ethical actions from whatever place they occupy in the organization chart such as ethical (00:24:13) conduct mandates coming from the (00:24:15) top strictly from above will more often than not fail ethical leadership at the (00:24:21) top and emanating from the bottom creates a (00:24:24) total environment and encourages ethical initiatives at every level of an organization. (00:24:31) And this brings me to my final point the importance of conveying an (00:24:36) understanding of the real meaning of capitalism. The cynics view (00:24:41) which the 1980s may (00:24:42) have nurtured in which too often may be communicated in the (00:24:46) classrooms and in the schools and (00:24:49) certainly on a TV screen is that capitalism has something to do or maybe everything to do with greed (00:24:57) those who equate capitalism with (00:24:59) greed is good lack in my view and understanding of three things greed good and capitalism. I said at the outset that capitalism has a (00:25:11) strong moral purpose. (00:25:13) I also believe that there's a (00:25:14) strong connection between that moral purpose (00:25:18) and what I like to term entrepreneurship entrepreneurs both in the public and a private sector in new organizations and in Old organizations start out by defining a need that others have and the needs to be filled and then they proceed to fill it. They've got a vision a longer view that doesn't spring instantly life that has to be nurtured and cultivated over the long term to realize the dream the entrepreneur is willing to accept short-term sacrifice for long-term benefit and (00:25:49) that brings me full circle to the opening thesis that there's a close connection between this moral and ethical capitalism (00:25:56) concept and the long-term health of our economy and our society. Nearly a century and a half ago. My favorite philosopher (00:26:06) Henry David Thoreau (00:26:08) describe this relationship when he wrote it's truly enough said that a corporation has no conscience (00:26:15) but a corporation (00:26:17) of conscientious men is a corporation with a conscience is in that spirit that I (00:26:23) exhort everyone in this room. Not just the business people in this room, but the (00:26:28) professionals and Educators people active in any sort of Enterprise in all fields to Foster the understanding of the real meaning of capitalism. It's particularly paradoxical (00:26:40) it seems to me that as (00:26:41) capitalism is breaking out (00:26:43) all over the world how the (00:26:46) United States may represent a country that has lost that meeting when the rest of the world is try to replicate it. We've got to realize that it's within our power each of us in this room to unlock the full force in capacity of our free economy. And in so doing the build for the future. Thank you. (00:27:20) Thank you very much. Mr. Donaldson. Did you have a final comment you wanted to make no, I'd be delighted to see if I can answer any questions or take any suggestions. That's (00:27:29) exactly what we're going to do for our radio audience. We are listening to William Donaldson the chairman and CEO of the New York Stock Exchange. He is speaking to the Minnesota meeting and Downtown Minneapolis, (00:27:39) and you are listening to him on the station's of (00:27:41) Minnesota Public Radio (00:27:43) the broadcast of Minnesota of Minnesota meeting are sponsored by Oppenheimer wolf and Donnelly a (00:27:48) Minneapolis Law (00:27:49) Firm. Our first question is from David Andreas the president of National City (00:27:54) Bank. (00:27:57) I agree that you've come a long way from bunch of men's circling a Buttonwood tree. The question I have is regarding the global economy a global Marketplace 24-hour day trading and equal access by an individual through their computer screens and otherwise says since you have seemingly an aversion to computer screens, how do you think that the New York Stock Exchange can adjust to the future if it restricts access by individuals through their computers on a 24-hour day basis such as other smaller markets to in the United States. It's a good question. It's a several (00:28:36) questions. Let me see if I can take them one by one number (00:28:40) one is the issue of electronic access if you will to stock trading and and I'll take it one step further the Feeling by many that why do you need people involved in trading stocks? Why can't it all be done by computer? Our Approach at the stock exchange is to basically have mounted for 200 years what we call an auction Market what the auction Market does in over simplified terms is allow natural buyers and natural sellers to get together through their agent on the floor of the stock exchange in discover a price without any intermediary our approach to that is that we have spent some six hundred million dollars in the last 10 years over a billion dollars in the last 14 years improving the electronics and computerization of delivering those orders to the floor of the stock exchange. You can place an order through a machine and California. It goes to the floor of the stock exchange is executed and comes back in 20 seconds turnaround time. However, the part of the process that we haven't automated is at the point of sale at the point of transaction and what we're saying here. Is that there has not yet. Been devised a computer that can take a market risk that can make a commitment to commit its capital as our Specialists do and more importantly that that can negotiate and what happens 200 million shares a day is a negotiation that goes on between two agents fighting to get the best price whether it be a large block of stock or a single hundred share block of stock on the floor of the stock exchange that is not the way markets are being organized. In other parts of the world. In other parts of the world we have by and large what are known as dealer markets and this is where instead of a natural buyer meeting a natural seller an investment dealer makes a market in a stock stands ready to buy at a bid price stands ready to offer stock at an offer price and stands ready to collect a spread in between that bid and offer a natural buyer and a natural seller. Cannot meet each other in a dealer market and therefore they deal to the dealer on the bid side to the dealer on the offer side in an auction Market. They can split that spread by dealing with each other and providing their own liquidity as far as the 24-hour trading aspect of your question. Clearly. We are most anxious to remain the largest Exchange in the world to truly be a global exchange this implies too many particularly the press the idea that we need to be open or we should be open 24 hours a day. What I would say at the present moment is that it's more than just a matter of opening up the New York Stock Exchange at three o'clock in the morning in order to have a market we'd have to wake up the investors in America Across America for anybody to want a deal in that market and I don't think we're quite ready for that. Now we don't have enough interest in American Securities by Warren is either in the Eastern or Western European time zones, or in Japan to justify a liquid enough market for them to want to do it at three o'clock in the morning. Therefore. They're willing to wait until we're open having said that if we're successful in our efforts to list foreign Securities in our Marketplace, and we only have a limited number of them, and I explained that if you're interested, we will then begin to have a market that's competing with European markets in foreign Securities and will gradually have the kind of volume and are high volume stocks and European and Japanese Securities that will justify longer hours. So my promise to you is that we're not embedded in some concept that we're always going to operate on Eastern Standard time. But really this is going to be a gradual elongation of the trading day, and it's not going to come come overnight. (00:32:52) Thank you. Mr. Donaldson. We have a question over here. Now. First of all, I want to explain we have a number Students with us today middle school and high school students who participated in the stack exchange game last year. We have some representatives from Eden Prairie High School who were the high school level winners in last spring and Jill shuang call from Eden Prairie. It's going to explain a little bit about the game and then she has a question for you. Last year in the spring. We were the winners of the stock market game. Our stocks were Harley-Davidson Autodesk Circus Circus and Disney and we had an imaginary one hundred thousand dollars to invest in stocks and we had ten weeks to do this and each week we get a sheet and we'd buy stocks and get an update and holler stocks were doing and we were the winners last spring and my question for you is if you would ever consider taking a position in the Clinton administration. I didn't catch (00:33:48) that. Let's see. How do we get that? I want to congratulate you on playing the stock market game. I actually while we're on the subject of the stock market game that's been up for those of you that are not familiar with it. It's been a very interesting practical real-world way of involving mathematics and awareness of what goes on in the business world. And in the market world for students across the country. I've had the pleasure of visiting a lot of high schools and in across the country and watching the results of this this game and I congratulate you not only for playing it for ruining it. I haven't heard from Bill recently and I'm very happy doing what I'm doing. Thanks. (00:34:48) Thank you. Thank you. Mr. Donaldson. We're on this side of the room now and we have a question from Austin Sullivan. (00:34:55) Thank you. Mr. Donaldson. It seems to me that the transaction frenzy of the 80s died down because the financial advantage disappeared from the game not because of Any Resurgence of Ethics given that Why should issuers believe that the street will behave any differently if financial advantage returns to that game? Why should we trust people? Good question. I think that the I called the age of the 80s the the transaction decade. I think I went on could also call it the the decline of the fiduciary or the decline of the agent agency role and you're quite right that the economic Times in the 80s made it a lot more profitable for a number of firms and entities and people to act as principal as opposed to acting as agents part of that was a result of the total freeing up of commission rates and so forth and and the the dominance of institutional investors who drove down the compensation for transactions in the institutional market and made it a rather unprofitable business. So you had the traditional agency business become less and less profitable and you had the principal business or getting in there and becoming a dealer or becoming a merchant Banker as opposed to a Investment banker looked quite (00:36:31) profitable. I think what we're seeing now is (00:36:34) a reversal and you may say that the reversal is strictly because of economic factors. The reversal we're seeing is that we've had there was some 600 billion dollars worth of equity taken out of the stock market in the 1980s from 85 to 90 in leveraged buyouts and the (00:36:54) borrowing and going private movement (00:36:56) were now seeing a reversal of that. We're seeing the real liquification of Corporation the raising of equity Capital some sixty billion dollars ten percent of the way back has been raised in the last year and a half and I think that the the agency role at people play in that refinancing project is is healthy. It's healthy for American Business. I think is also has started at least some of the leadership and Wall Street thinking about the way they're running their businesses and again, I have no problem with businesses that are run on a principle basis. I have a problem when it gets confused and in the gray Zone when you try to be an agents and a principal at one time. I don't think that we're ever going to change human nature, but I do think that increasingly Management's and increasingly young Management's are thinking about the competitive position. They're in and the long-term growth of their business. And I think that that does extend to Wall Street East extends to certain parts of it. I hope I'm right and that this is the beginning of a trend but I can't guarantee it. (00:38:10) Mr. Donaldson, thank you. We have a question now from mr. George Pillsbury. Bill about 20 years ago. I read a book called the two Factor Theory by Kelso and Adler and became introduct introduced to the Employee Stock ownership plan. And in fact, even in the state of Minnesota, we passed a law in the middle 70s that put the state of Minnesota on record in favoring employee ownership plans were expanded ownership plans (00:38:38) for the question to you is (00:38:39) where do you stand on the concept of Employee Stock ownership plans or expanded ownership plans? And isn't it? Really one of the best ways we can make more capitalists and this country and more people to understand capitalism and support a ethical Moral Moral capitalistic system. (00:38:59) Sure, Georgia, the the I'm totally on board in terms of Employee Stock ownership plans. I'm also totally on board in doing everything that we can do at the stock exchange in terms of our system. To encourage individual stock ownership in his country. The figures are rather startling in 1950 only 8% of the stock in this country was owned by institutions and today almost 50% depending on whose numbers you use our own by institutions and two-thirds of the trading that goes on every day is done by institutional clients. So that 50 it's going from eight to fifty and headed upwards can across soon. If not this year. I believe that the one of the unique parts of the American capitalistic system is this interface between individual and institutional ownership there 51 million individuals out there curiously enough, although the percentage ownership is going down the actual numbers. The the absolute numbers are going up our latest survey indicates that there are some 6 million new individual shareholders that have come in the marketplace in the last five years. Very to intuitive thought clearly the ESOP and stock ownership plans are part and parcel with that. I believe that the the liquidity of our Marketplace is vastly enhanced by having a diversity of share ownership. And I think that one of the things that were running into as a result of this institutionalization of money is a growing tension if you will between ownership and management in Corporate America, I mean, basically you have more and more stock owned by fewer and fewer institutions. The institutions are moving more and more into not just (00:40:57) private Pension funds but public Pension funds and you have a tension growing between the (00:41:03) rights of ownership and the prerogative of management. I think this is a Battleground if you will that that is the battleground of the next decade in terms of how that's resolved management wanted. To obviously keep its prerogatives and to keep itself competitive institutional owners some on the far left-hand side of the scale (00:41:24) wanting to introduce (00:41:26) ideas into management that that are in some cases politically motivated some cases Pension funds that are run by by politically elected people who wish to see their ideas and thoughts and a lot of areas inculcate it in the corporate America. I think one of the greatest offsets to that is what you talked about which is employee ownership as a third or fourth leg on the stool. There are some drawbacks as you can well appreciate they all all eggs in one basket people who've take their life savings Pension funds and so forth and and invest them in an ESOP kind of plans. We're not only is their day-to-day livelihood but their retirement depend upon a single entity. That's a problem. I (00:42:12) think to a degree the ESOP. (00:42:15) Movement was slightly perverted in the 1980s and used as a (00:42:20) vehicle and a weapon in the Takeover (00:42:22) movement, which was a setback for the ESOP movement. But basically I think it's a very healthy healthy Enterprise. Thank you very much. Mr. Donaldson. We're back over here now and we have a question (00:42:36) from Lawrence wine back. (00:42:40) Mr. Donaldson, we talked a lot about the global Marketplace and certainly the New York Stock Exchange is the dominant and Premier Exchange in the world. But we also see an awful lot of European companies today that are registering and Amsterdam registering and other exchanges in Ephrata come to the United States because of financial disclosure requirements. How do you see the New York Stock Exchange and the United States remaining the dominant force in the global Marketplace as we see the reluctance if you will of many of these companies to want to come here. I didn't plant that question, but I'm glad to answer it you're touching on what is a very high priority for the New York Stock Exchange. And that is the listing of international companies. Let me just give you a quick background roughly a third of the world's gross national product or earning power comes from Europe a third comes from the North and South American continents. The third comes from Japan and a Pacific Basin and yet most American portfolios have probably less than 2% foreign Securities in the portfolio Pension funds have slightly higher than that. But the average American investor has just begun to discover the fact that there's a big world out there the 10 largest banks in the world are non us the 9 largest (00:44:01) electronics companies the eighth largest chemical companies three chemical companies in Germany are all each one of them larger than Dupont and so forth and so on there. (00:44:11) Huge opportunity out there. We estimate that there are (00:44:14) some 2,500 to 3,000 non us companies that would (00:44:19) qualify for listing on the New York Stock Exchange. (00:44:22) Why don't we listen? Why do we only have a hundred and nineteen because (00:44:26) currently our Securities and Exchange Commission insists that you conform to us gaap accounting standards in order to be listed or traded in this country the problem with that and then that's done in the name of complete disclosure that Aunt many isn't going to understand German accounting and therefore we must protect her the problem. Is that Aunt Minnie or her (00:44:51) agent a mutual fund (00:44:52) has to two choices. They're buying foreign Securities anyway, and they're either (00:44:59) going through many intermediaries in order (00:45:02) to get to Frankfurt or London or Tokyo and when they arrived in Frankfurt or London or Tokyo, they have to buy and in a much less. Related Market with much wider spreads. We estimate it cost them 8 to 10 times to go through all those those intermediaries to buy and those markets. So we're damaging Aunt Minnie by forcing you to do that or it's possible to buy foreign Securities in this country in something called the electronic pink sheets. And this is a sort of a second cousin of the nasd over-the-counter market and these are these are trading opportunities run by dealers where they can only quote a stock twice a day and where the spreads between the bid and the ask are some 8 to 10% It's an unregulated Market. It's possible if you dare to go into it to buy a foreign security, but you really pay the price so we are most anxious to have some sort of a compromise here that gets us (00:46:05) started listing foreign companies. I mean, it's (00:46:07) absolutely ridiculous in my view that that an Investor is preempted from buying the Deutsche Bank. Let's say one of the largest banks in the world and yet it can go out under reggae requirements and buy a little startup operation with practically no disclosure. We have to change that. We've got a lot of ideas about how to change that and maintain investor safeguards were working with the SEC on it. And I hope that we are going to be able to convince them that we are in effect threatening the long-term Global dominance of the central Marketplace in this country for surely if we don't list those companies the markets are going to move to London or some place at the detriment of the u.s. Capital raising (00:46:52) mechanism. Thank you. Mr. Donaldson. We have another question now from a student from Roosevelt High School. This is Sonya Duncan. First. I'd like to say that right now I'm participating in the stock market game two and two of the companies that we have bought into as McDonnell Douglas and Disney and my question to you is can you give us as young people any advice on global involvements? (00:47:16) Well, (00:47:18) I think as you know, if your you're going to move on from from from playing the stock market game to graduating from high school and I hope college and and you know our become either an active participant or indirect participant in the investment world and in investing, I would think that your generation of people are going to have a lot greater opportunity to understand that we are in a world and global environment and that there's lots of opportunity out there in terms of investment and in terms of employment with companies that are not US based or us manage. So my my suggestion would be to think globally to take every opportunity you get to learn about what's going on in different countries around the world if I just came back from being out in the Far East and we you know, I was preceded that trip with a trip to Europe. Everybody's very depressed and Europe economies of Western Europe are behind us. But heading into a recession if they're not already there. Japan is having its problems and yet if you go one step further out into the Pacific Rim you see a whole series of countries that are enjoying growth rates five to six times. What our growth rate is really exciting things going on out there and we know very little about that in this country. So I would encourage you to study up on it and learn and think globally. Thank you very much. Mr. Donaldson, you're listening to William Donaldson, the chairman and CEO of the New York Stock Exchange speaking to the Minnesota meeting at the Minneapolis (00:49:02) Radisson Hotel. We have a question now from Don Connelly. (00:49:07) Mr. Donaldson, your message is a very hopeful one but I'm sure you know that the difference between the philosophy and the implementation of that philosophy can be a large gap. I'd be curious to know what if anything you're doing within the exchange itself to try to direct the implementation of that philosophy of higher ethics. well a number of things first of all (00:49:36) fundamentally the New York Stock (00:49:39) Exchange is organized to protect the small investor. In other words, the whole system is designed to make sure that investors of all sizes and particularly small investors rank equally with large investors. This system was severely tested in 1987 when we had tremendous volume tremendous volatility in the marketplace. We learn some lessons from that. We've installed a number of new systems designed to address the problems caused by new methods of trading electronic trading program trading and so forth. We have a system now that that allows the individual investor the hundred share order if you will to go to the head of the line on a day when there's busy activity so that the individual investor who (00:50:34) He or she was getting muscled (00:50:36) out of the way by the big guy is not their order goes to the head of the line and is executed with the first hundred shares of a million share order. We done that to relieve some of the anxiety and some of the bottlenecks that were there the system of trading itself in that auction Market. It's impossible according to our rules and regulations for our specialist dealers to put themselves ahead of either individual or institutional investors with their own bids. In other words any public bid or offer takes precedent over the market makers and in our system and that again is designed to have a long-term effect in terms of the confidence in a Marketplace.