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March 20, 2003

PNC chairman discusses corporate ethics

According to James E. Rohr, his company, PNC Financial Services Group, has no ethical or corporate accountability problems. Unlike some corporations that focus only on shareholders’ profits, PNC’s “core mission” is to serve four interwoven constituencies: shareholders, customers, employees and the community, Rohr said, a goal that helps ensure accountability checks and balances.

“If you don’t serve all four of those constituencies, you don’t have a good long-term future, especially in a bank.”

Rohr, who has been at PNC since 1972 in a number of capacities before rising to chief executive officer in 2000 and chairman in 2001, spoke March 13 on “Corporate Accountability and Social Responsibility” as part of the Graduate School of Public and International Affairs ethics and accountability lecture series.

Rohr said upfront he would not talk in detail about the trouble PNC was in with federal regulators in 2001, when the company underwent a forced external review of its accounting procedures.

Rohr said, “We had an accounting issue where we did what our accountants told us, and the regulators didn’t agree. All I can tell you is you should agree with your regulators instead of your accountants. I can’t talk about that any more. That was 2001 and it’s in the past. And it won’t happen again.”

He said there were several reasons for the perceived inadequacies of corporate accountability: a “few bad apples” at the top of the corporate ladder, slanted media coverage that overemphasized scandals and CEO compensation, and especially the stock market climate that “encouraged a lot of funny behavior in the ’90s.”

“Over a long period of time, usually, the stock market values companies based on a series of different things: growth, return, capital, risk, perception of brand — and stock prices will reach a level as a result,” Rohr said. “In the ’90s that didn’t happen. Eight-five percent of the value of the company was driven by what people perceived as revenue growth.”

He cited Yahoo! and as examples of stock being influenced by revenue growth instead of actual profits. “Neither company had made one penny; they never earned a penny. But with that massive revenue growth, in the market they had massive value: net income really didn’t matter.”

Contrast that, he said, with PNC, which earned $1.2 billion in after-taxes profits in 2002 — more than any company in the state — and a 19 percent return on capital, despite a wobbly economy.

Rohr praised recent federal corporate accountability legislation, but said that the new requirements were already in effect at PNC prior to the legislation. “For example, a lot has been made of the CEO taking accountability by signing an affidavit that says they aren’t aware of any fraud. I’ve been signing off on [large dollar amounts] every quarter, and I wouldn’t sign anything if I was aware of fraud.”

Similarly, new legislation requires independent directors on companies’ compensation and audit committees and financial experts on the board and on the auditing committee, something PNC has had for years, he said.

PNC also has voluntarily initiated its own reforms, he said. For example, the corporation has a new set of “internal governance procedures” to track investments and financial consolidations, Rohr said.

He said the biggest factor in PNC’s success was that 80 percent of PNC’s 24,000 employees referred new customers last year.

He also praised PNC employees for their 1 million hours of volunteer service in 2002, which, he said, demonstrated the workers’ commitment to social responsibility. “We’re a bank. If we don’t give back to our community, our community won’t prosper, and we won’t do very well either.”

Rohr downplayed recent corporate scandals, which he said have unfairly demonized corporate leaders as a class. While there have been a few bad apples, he said, other problems stem from gray areas only recently clarified by legislation and enforced procedures, and a highly competitive corporate culture that pressures companies into primarily benefiting stockholders.

Rohr acknowledged that some CEOs’ paychecks were out-of-line in relation to the health of their companies. “There’s been a lot of focus on compensation and a lot of publicity on that. For the most part corporate America and boards of directors are pretty conscientious about compensation. Our company, for example, employs two non-salaried independent services to make sure the executives are well-placed [financially].”

Rohr added that a biased media will focus on certain non-representative examples. Often a CEO needs a hefty compensation package to be lured away to help a struggling company, he said, because CEOs have to sacrifice deferred benefits and other perks from their former company. “So it looks like [the person] made a lot of money in the new contract, but for the most part there’s an explanation for it,” Rohr maintained. “It’s important to be able to recruit the top people.”

—Peter Hart

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