Two years ago, Roel C. Campos made history when he became the first Hispanic to serve as a commissioner on the Securities and Exchange Commission.
As a rule-maker for the financial markets, Mr. Campos holds a key position in assessing and addressing capital market issues and corporate regulations. And in his role, Mr. Campos – a Harvard-educated former Los Angeles attorney specializing in corporate transactions and securities law, and former principal of El Dorado Communications – holds a unique perspective on how to tackle the "capital gap" that exists for Hispanic companies seeking to grow.
In a recent telephone interview from his office in Washington, D.C., Mr. Campos talked with Hispanic Business Senior Editor Joel Russell about the challenges to increasing deal flows that would allow the market to fully advance – and the changes that are needed. Following are excerpts:
Hispanic Business: As you know, the financial industry is perceived by minorities as tough to crack. What are your thoughts on that, and what do you the think the SEC's role should be?
Mr. Campos: Wall Street has traditionally been fairly clubby and dominated by white males, as a lot of U.S. industries have been. I don't think there's any inherent barriers or reasons why Hispanics or other minorities can't flourish on Wall Street. Clearly members of the Hispanic community and other minority communities have talent, and they have education. We have graduates from all the major graduate and professional schools – Harvard Business School, Kellogg School [of Management], Wharton [School of the University of Pennsylvania], etc. So we have a pool, although not a huge one.
But what we don't have is long-time individuals in the industry. Therefore, we don't have mentors. One of my Wall Street friends says one of the first questions they asked him was "Who's your rabbi?" They weren't asking if he were Jewish, but rather who was his mentor. Who can show you the ropes? That's what it takes in all these hard-to-figure-out professions. It applies to corporate law, the major auditing firms, and investment banking. Therein lies why we have difficulty in entering and sustaining a career. We don't have a pipeline, a safety zone and a support mechanism in those firms.
So we have that problem. I believe that has to change. It's essentially the rationale for why diversity matters, why diversity is good. It's not a matter of political correctness; it's not a matter of charity. Companies simply cannot afford to not access the talent that exists. Look at baseball when it was segregated. You had great talent available in the African-American community that was not utilized. The same principle applies [in financial services]. So it's incumbent as a matter of survival and success for Wall Street firms and investment firms to find talent in our community.
HB: How about minority companies trying to access capital?
Mr. Campos: A very difficult problem. First of all, it's difficult for any start-up company to find capital. Most start-ups are done with the entrepreneur's own resources – credit cards and family. You go off on a shoestring and hope for the best. Difficult to find sources, difficult for minorities because we don't have the networks and we don't have people looking in that space. So when it comes to start-ups, we definitely need private equity and sources of capital.
I have a general belief that the successful Hispanics in this country, for the most part, are still working on their own personal net worth. In that pursuit, there isn't a lot of time or energy to work on someone else's behalf, even if there's a business opportunity. We need our Hispanic business leaders to commit to creating a private equity pool. It could be venture capital, limited partnerships – there are a number of business approaches. But there's a compelling story about the growth of Hispanics in America, and there is a business proposition to be made.
Hispanics show a huge amount of entrepreneurial activity … across almost all business sectors. Many of those start-ups are successful, but they don't get to the second stage or third stage because they don't have the capital, or maybe the know-how to access [capital]. So I see no reason why people who have stature couldn't come together and essentially raise capital the way the majority population does. You go to pension plans and present the story of how to make money, you hire professional management, and you create a deal flow. You'd fish in places that aren't being fished in right now.
For example, BBVA [Banco Bilbao Vizcaya Argentaria], a large Spanish bank that owns Bancomer [in Mexico] announced that they had bought a small bank in California with the idea of cultivating the U.S. Hispanic market. My question is: Why does it take a Spanish bank from the outside to realize this business opportunity? Some of our large banks have programs [to reach Hispanics], but not like this. That's just one example.
HB: Although public markets are considered the prerogative of big companies, the SEC has a Web page for small businesses [www.sec.gov/info/smallbus/qasbsec.htm]. So there is some outreach to small companies that want to go public as their eventual goal. What advice would you give to Hispanic entrepreneurs who would like to go public some day?
Mr. Campos: If you're an entrepreneur, one of the great liquidity events [in your career] is going public. You need to think about it early. Once you decide to position a company to go public, you are accessing public monies, which means you have huge responsibilities to the public in terms of disclosure and following federal securities laws.
So you should prepare your company as much as possible before the event. Have a professional board. Have a board with a majority of independent directors. Put at least one person with financial expertise on the audit committee. Then, first, you become more attractive and a lower risk for outside capital, and second, you won't have a huge [challenge] in changing your culture when you go public. Because these are the rules you'll have to live by.
We now have listing standards that require a majority of outside directors. Our rules directly require the audit committee be composed of independent directors. If you start early, these things won't be as painful or expensive to implement later. Besides, they make a lot of sense.
HB: I know [the SEC] handles the stock markets; does the SEC also handle the bond market?
Mr. Campos: We oversee all securities, which include fixed-income instruments such as bonds and guaranteed loans. The word "security" is interpreted very broadly. If it provides returns, either equity or fixed-income, it's deemed a security subject to our federal laws.
HB: Hispanic Business held a CEO Roundtable in New York on June 10. Several of the participants mentioned the idea of securitizing business loans for small or medium-size companies. They used the example of the home-mortgage lending market. Is that viable?
Mr. Campos: It's a very viable idea. But there are difficulties inherent with business loans. They don't share as many common features as mortgage loans – a property as collateral, and terms and interest rates that have become standardized. With the wide range of businesses, they have a wide range of assets. And some businesses, such as software and developmental businesses, don't have any assets for collateral. So there is a challenge to create a risk assessment for these particular loans. It's not insurmountable. What's happened, you have a few large syndications by finance companies that have sold [loan] pools. And you also see it in credit card debt, for example, where you have personal assets [for collateral].
But I think it's a worthwhile idea. Somebody has to come up with a business plan and get it funded, undertake a small portfolio to begin with, and show it can be done. What I think we really need – and this would apply to the other minority communities as well, but I see it being done a little more successfully by the African-American community – is our leadership going to the sources and pitching the business plan of raising capital. I'm talking about CEOs and people who have some celebrity from government service. And they should bring a few deals with them. I know that advocacy groups like NCLR [National Council of La Raza] and others in the last 12 months have gone to various corporations and received significant contributions to their building fund, for example. That's terrific. But if that can be raised for a specific advocacy group, why can't we raise equity money that would have a return? That has to happen.
The New American Alliance and HACR [Hispanic Association for Corporate Responsibility] are interested in creating equity funds. Once that happens, I think we'll show much better progress. Also, there's nothing wrong having major backers interested in a specific area. [Large banks] for example, could support their areas of expertise. We have huge companies that "harvest" the Hispanic community, like Univision. They live and die selling advertising in Spanish for the Hispanic community. They should look to invest and support other ventures, because, after all, that increases their advertising base.
HB: Another issue is representation on corporate boards. Here the SEC has weighed in, not necessarily in terms of ethnic diversity, but the Sarbanes-Oxley law has changed the rules for board. What do you see happening in the boardroom, and how might the Hispanic community increase its presence?
Mr. Campos: I see an opportunity here. Sarbanes-Oxley was the landmark reform that occurred two years ago. Through Sarbanes-Oxley, the SEC implemented Congress' direction to change corporate governance. The SEC now requires the audit committee of a public company must be composed of independent directors, and the audit committee must manage the relationship with the outside auditor. The auditor [firm] doesn't report to - nor is it hired by - the CEO or CFO anymore. The relationship is with the audit committee. It's an important reform. So there's opportunity there for individuals with an accounting, auditing, and financial background to serve on these boards.
Also, the SROs, or self-regulating organizations – the most famous being the stock exchanges – the rules now require that companies listed on the NYSE [New York Stock Exchange] and the Nasdaq [National Association of Securities Dealers Automated Quote exchange] have a majority of independent directors. "Independent" essentially means someone who doesn't work for the company or have a familial relationship with management. This [rule] means that many boards must be reconstituted. I maintain this is an opportunity for diversity on boards. Companies can bring onto their boards people such as Hispanics with expertise to contribute.
Many companies in retail sales, or [those that] sell products or services, have to deal in large measure with the Hispanic community. It seems crazy not to have expertise on the board on how to reach Hispanics. In many large Southwest cities, the Hispanic population is 30 to 40 percent. So I don't see how companies there can afford not to have expertise. Even if it's 15 percent, that could be the difference between success or not. This provides an opportunity – a business reason – for companies to look for people with expertise in marketing to the Hispanic community. It's a perfect storm to allow for companies to increase diversity and reach out to qualified Hispanics who can benefit the companies.
HB: The theory of "imperfect information" says the financial markets don't have a realistic understanding about minority business markets, and may still see them as mom-and-pop shops in inner cities. Any ideas on how to change that perception?
Mr. Campos: I believe the business case for the Hispanic community is compelling. The demographics are growing. Part of the demographic has Spanish-language needs. The demographic is young. Estimates vary but if you include Puerto Rico there are 42 million Hispanics [in the U.S.] with a fast growth rate. Clearly in the future, a large segment of the work force will be Hispanic. There are huge needs for training. We have a huge youth market, so all the companies that market to the youth demographic will have to market to Hispanics.
The bottom line is that this case needs better presentation. Many companies are getting it sort of, but I'm not sure the case has been made completely. Again, our advocacy groups need to be involved in making the presentation – HACR, NCLR, and others. They do have presentations, but we need a systemitized approach. We need to bring in the think tanks and college research centers – UT [University of Texas], Tomas Rivera [Policy Institute], the University of Georgia's Selig Center. Many have demographic studies. All of those use viable Census data. I would look for companies like Univision and others to fund that kind of research. Our U.S. Census data has not been fully utilized and interpreted either, in my opinion. We need to organize and make clear presentations to Corporate America in an organized and systematic way.
HB: How many times do you have to repeat a message like this before it gains momentum?
Mr. Campos: What happens in investment banking is everyone has a short-term focus. Everyone is interested in low-hanging fruit. Few have the patience to look at longer-developing projects. That's one of the disadvantages for our community. The people at Goldman [Sachs] want to be stars in two years. So we have that impatience and somehow we have to interest sources of capital. The business case is there, but we need people with a longer-term perspective to get involved.
HB: Do you have anything else you'd like to share?
Mr. Campos: Yes. We take diversity seriously here [at the SEC]. Our agency compares favorably with other agencies, but it's not enough –- I'm not satisfied. So I'm heading up a diversity task force to try to bring more Hispanics and minorities to the SEC.
HB: Who do you hire – mostly lawyers or accountants?
Mr. Campos: Mostly lawyers. We're a very lawyer-focused agency. But we also hire accountants, and we're looking for MBAs to help analyze companies. It's a great opportunity to learn the securities laws of this country, which can prove advantageous for people who later want to return to the private sector.
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