Keough on Corporate Governance: 'Play Too Close to the Lines Too Often and You Will Lose the Game.'

Former Coke president Don Keough -- now chairman of Allen & Co investment bank -- addresses Fortune Boardroom Forum Oct. 7. Offers insights and suggestions re governance/ethics problems facing business. Notes in opinion polls, "directors and senior officers of corporations today are ranked below used car salesmen." Says "extreme excess can lead to terrible judgment" and notes: "Play too close to the lines too often and you will lose the game." But also declares that American private enterprise system "with all its flaws, still delivers an unequaled combination of rising living standards, attractive opportunities and technological innovation."

Origin of problem. Keough says problem has roots "toward the end of the stagnant 1970's, when (some public companies) tried to get stocks to move up just a little bit." In many cases, companies moved from "managerial capitalism to investor capitalism." Corporate control shifted from "faceless managers" to "charismatic CEOs and CFOs who focused on increasing share price now, not tomorrow, now."

CFOs. Before "great bull market," says Keough, CFOs were "tough, smart and mean. Their responsibility was to test every dollar ... Bringing good news was not their function." Declares, though he's not offering "diatribe" against CFOs, they need to "get back to counting beans and counting them accurately." In recent years, "CFO" at some companies "began to mean 'Chief Fiddling Officer.'"

Financial reporting. Keough says during "late stock market bubble in 2001, 1500 companies reported pro forma earnings -- what their earnings would have been if bad things had not happened ... Many, many people (wanted) to hear those wonderful pro forma scores ... People didn't want reasons not to buy ... They wanted to believe." Notes mood "spawned" by bull market created "culture of fraud."

Ahead. Keough declares, "trust must be restored." Cites some reform steps now under way. 'Funeral.' Adds, "I personally propose we hold a funeral ... We should bury EBITDA once and for all." Says days of "rock-star CEOs and CFOs" are over. "I don't think you'll find too many directors voting for things they don't understand." Concludes: "Capitalism is the hope of the world, and if parts of the system need fixing ... (those) who run or help govern good companies (are) the ones who are going to fix it."