Speech by SEC Commissioner:
How to be an Effective Board Member
Commissioner Roel C. Campos
U.S. Securities and Exchange Commission
HACR Program on Corporate Responsibility
August 15, 2006
Good evening. I'm honored to be invited to speak to you this evening in my old stomping grounds. A trip to Beantown is always high on my list but particularly when it includes speaking at Harvard. Tonight I'd like to thank Carlos Orta and Rima Matsumoto for that opportunity. HACR has truly been a visionary organization when it has come to the role of Hispanic inclusion in corporate America. As a watchdog of the industry, the regular reports produced by, and conferences hosted by, HACR have been a powerful tool in taking the industry to task for its failure to quickly embrace diversity.
I also wish to give a special thanks to Professor Jay Lorsch, who has been committed to training directors at Harvard's Director School and promoting diversity on boards. And, I commend Harvard Business School for recognizing the importance of providing an avenue for meeting the goal of minority representation. The Executive Education Program on Corporate Governance has created a feeder pool of highly qualified candidates to serve as directors on corporate boards. This has eliminated one more excuse for those who are slow to grasp the benefits of diversity and to open their eyes to the realities of the current socioeconomic evolution. What is that reality? It is that by 2009, nearly one person out of every six in the US will be of Hispanic origin, and that doesn't even speak to the minority population as a whole. So, again, I thank HACR and Harvard Business School for hosting this conference and inviting me to address you.
Before I go any further, I must disclose that the comments I make tonight are my own and do not represent the Commission or my colleagues on the Commission or staff.
Now, I'd like to turn the extremely important topic of "How to be an Effective Board Member." I think Justice Black may have said it best when he said, "The law has no place for dummy directors" and "Directors should direct." These are simple words with powerful messages.
Yet many would argue that Boards of Directors have maintained an unhealthy distance from business decisions of their public companies. Boards and particularly outside directors were conceived of as the shareholders' representative, yet too often, they are dominated by associates and friends of senior management. Moreover, board membership too frequently has been viewed by outsiders as an honor or a perk instead of a substantive job. Many outside directors have lacked expertise in the relevant industry, and in accounting and financial reporting issues. Thus, Boards were too rarely equipped to uncover and derail the determined efforts of management to cook a company's books.
In addition, directors, too often took the approach of keeping themselves distanced from things they "did not want to be aware of." This approach is not acceptable. Directors must ask the tough questions and get involved. And most importantly, when something that should raise an eyebrow comes to the attention of a director, that director must follow up and investigate. The director cannot ignore red flags, or even pink ones. In fulfilling the role of an effective director, an individual must take a proactive approach, going beyond the minimum legal obligations.
But, let's look at those legal obligations first. As fiduciaries, directors must exercise a duty of care and a duty of loyalty. Without going into the legal minutiae, the duty of care generally requires directors to exercise an objective, reasonably prudent standard of skill and care in the discharge of their functions. This obligation includes an oversight responsibility to see that the corporation functions within the law to achieve its purposes. The duty of loyalty binds the director to act in good faith and in the best interests of the corporation, prohibiting the director from placing him or herself in a position in which duties to the corporation and personal interests conflict.
The breadth of these obligations is tempered by the "business judgment" rule. As you know, this rule creates a presumption that in making a business decision, a director acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the corporation so long as the director considered all material information reasonably available and the decision can be attributed to a rational business purpose. The impact of this somewhat wordy presumption is that a court, and, for that matter, the Commission, will not second guess the director's decision if there is a good faith business determination even if the business result was not a good one. If the directors exercise their due diligence and I realize there is room for discussion on what that might include the courts and the Commission traditionally have deferred to the directors' discretion. Let me emphasize that facts and circumstances usually warrant a different outcome to this formula when fraud is involved, but that moves us outside of the business judgment rule.
Within the legal obligations, some have suggested that the expansion of directors' duties and responsibilities following the adoption of Sarbanes Oxley has changed the ballgame, exposing directors to new or increased standards of personal liability. The general concern is that this alleged change will make it very difficult for companies to take calculated business risks that will advance the bottom line. This concern is unwarranted. There have not been any new or different theories or standards of liability imposed on directors in the aftermath of Sarbanes Oxley by Commission or SRO rules. The bottom line is if directors act reasonably and in good faith, they will be protected from liability.
From the perspective of the SEC, let me say again participating in, overlooking, or ignoring red flags indicating possible fraudulent accounting is not a business decision. The situations where directors have to be worried about an SEC action against them are where they act very unreasonably and in bad faith. Where you see SEC actions against directors is where information regarding possible improper accounting practices or possible improper recognition of revenue is actually brought to the attention of a directors and a reasonable director, acting in good faith, would investigate. If the directors do not conduct an independent investigation, they are not acting reasonably or in good faith and should not be protected by the business judgment rule. It is that simple and it is not a different analysis after Sarbanes-Oxley.
Directors need to be involved in order to act in good faith. Directors cannot have a good faith belief that an audit committee of a multi-billion dollar multi-national corporation that meets for an hour quarterly (with some participating by phone) devoted enough time and attention to oversight. In fact, when circumstances indicate possible wrongdoing, the audit committee and the board should have their own independent advisors, investigators, and lawyers. As guided by Sarbanes-Oxley, the board and its committees should "engage independent counsel and other advisors, as it determines necessary to carry out its duties" and should not rely exclusively on the corporation's advisors and lawyers. Frankly, to be an effective board member, directors who are supposed to be independent must have the wherewithal to be an active presence on management's radar and to act independently in the interest of the shareholder. Passivity is not an option.
This ties in to my earlier remark that an effective director is one who is proactive. Beyond his base legal duties, a director must recognize the broad social responsibilities he has to the general public and even to the country. This requires maintaining the necessary state of mind to be involved, engaged and aware. This obligation should not be construed as independent of a director's legal obligations. Instead, it is the fulfillment of his obligations as an effective board member. As I tell my kids, a C- may be passing according to the school, but it is not making the grade in my book. Doing the bare minimum should never be acceptable.
How does this challenge translate into real life for the director? On a regular basis, the director is going to be faced with all types of information. The questions are what should he do and what does he do with that information. In today's environment of heightened scrutiny by the investing public, regulators, media, and legislators, directors will not easily or lightly escape the consequences of failing to satisfy their fiduciary duties. Let's look at two situations where an effective director a director that is intimately involved in representing shareholder interests comes into play.
First, we are all familiar with the recent increase in shareholder activism driven by the high-profile scandals of a few years back and the ascendance of hedge funds. When faced with a direct challenge by shareholders, corporate boards must determine whether to view such a challenge with hostility or with open arms. Obviously, a director's response to shareholder activism will vary on a case-by-case basis. If a director believes that the company has a cogent long-term strategy, it is certainly his or her right to react negatively to what he or she believes is an effort to merely pump up the stock in the short run.
But it seems prudent for directors to have an open mind when confronted by large shareholders. After all, they do own part of the company. Being open to negotiation and, at a minimum, listening to what they have to say, makes sense. Often times, hedge funds have pushed companies to think about the nature of the business and to consider whether the current course is the proper course. It may be that a short-term reform, despite an immediate disruption, will prove beneficial in the long run. Many of the large hedge funds have done extensive research, albeit perhaps in the interest of making a tidy return, and therefore might be mostly correct in their recommendations.
As more hedge funds act like private equity by taking large equity positions in companies and seeking to influence board and corporate behavior, directors must be more involved in evaluating corporate decisions. They must challenge management to explore the activist shareholder's claims before adopting a friend or foe status. Directors should not settle for what is acceptable but should strive for what best benefits the company's shareholders as a whole. Those who don't should be taken to task for their lackluster, albeit possibly legal, conduct.
Majority Voting for Directors
This leads to the second situation I'd like to discuss and in some detail. I think most of you are aware of the recent developments with respect to majority voting for directors. This issue has taken corporations by storm over the last proxy season, and according to one study, as of May 2006, at least 28% of the companies in the S&P 500 had adopted a majority vote policy, bylaw and/or charter provision, as compared to only 16% of companies just three months earlier.1 Let me make my position on majority voting clear: I strongly support it, and I urge all companies to adopt charter or bylaw provisions establishing majority voting for their directors. The reason that I support it and I believe that reason that so many companies are adopting it is that it is really the only way to give shareholders some small ability to actually control who sits on the board of companies in which they invest. Moreover, giving shareholders greater say over who is on the board means that directors will need to be accountable to shareholders. With the threat of accountability hanging over their heads really for the first time I think that directors will have no choice but to engage more in the affairs of the corporation and to take a more active stance, which will lead to directors being more effective in creating value for shareholders. Let me step back a moment and explain in more detail what I mean.
I've emphasized throughout these remarks that directors must be active participants in decision-making, and that directors should retain an attitude of healthy skepticism when analyzing important decisions made by company officers. In fact, based on anecdotal evidence, I think that directors have become increasingly active and engaged in recent years, in large part due to the new regulatory requirements of the last few years, as well as the heightened focus on directors in the wake of the corporate scandals in which directors seemingly abdicated their duties.
One of the most important advances that has occurred in recent years to foster this more activist approach is the establishment of director independence requirements by the SEC and the SROs with respect to the composition of the board and the various important board committees. At the risk of oversimplifying the issue, it difficult for directors to actively question and challenge management when they are either part of management themselves or too enmeshed with or beholden to management. That said, I think there is a limit to what director independence rules can do because I question how truly independent many directors are, even if outside counsel has thoroughly vetted each director to ensure that they don't run afoul of the numerous and detailed independence rules. Why do I think this? Well, it stems from what I believe is the answer to the question: to whom are the directors accountable?
The answer to this question from a legal sense is certainly the company's shareholders. The shareholders own the company, and the directors run the company on behalf of the shareholders. But is the answer the same from a practical sense? I tend to doubt it, and my doubt arises from the way directors are nominated, re-nominated and elected. While I don't pretend to know the internal board dynamics of every company, I think it's safe to say that most directors even most independent directors first get nominated to run for the board through the nominating committee (which is, of course, composed of other directors), which likely has had some input from outside consultants and even management. And although the process differs among companies, I think it's fairly clear that the one group that has relatively little or no power in nominating or selecting director candidates is the shareholders. (As an aside, I recognize that Regulation S-K requires companies to make disclosures in their proxy materials about the nominating committee, including whether such committee has a policy with regard to the consideration of director candidates nominated by shareholders. I think this is good disclosure, but still, I'm not sure that it's led to any significant increase in director candidates being nominated by shareholders.)
Given that shareholders have little direct power to nominate candidates, one would think that at least they would have a real ability to vote "for" or "against" such candidates. But, as many have pointed out, this is simply not the case. The plurality voting system for directors has created a situation in which it is next-to-impossible for shareholders to remove a director from the board. Because the only choices for a shareholder with respect to director elections are to "vote for" a director or to "withhold" one's vote for a director, a director can still be elected even if the votes "withheld" exceed the votes "for" that candidate. In fact, a director could theoretically be elected with less than 1% of the vote. Thus, to sum up, until recently, shareholders have had little power to nominate directors, and they have had even less power to remove directors. To put it another way: directors are supposed to run the company on behalf of the shareholders, but shareholders have no power to chose or remove the directors. It's been said that directors and shareholders have a principal-agent relationship, but what kind of principal has no power over the agent?
In order to bring some semblance of fairness to this process, the SEC introduced a proposal in late 2003 that would have, under certain circumstances, required companies to include in their proxy materials shareholder nominees for election as director. Had they been adopted, these rules would have created a mechanism for nominees of long-term shareholders with significant holdings to be included in company proxy materials where there are indications that shareholders need such access to further an effective proxy process. Unfortunately, however, our proposal was somewhat controversial and the rules have not been finalized.
In the wake of the failure to finalize these proposed rules, however, some large shareholders decided to take matters into their own hands by availing themselves of the proxy process. These shareholders tried two tactics that are worth noting here. The first tactic largely tried to mimic our 2003 proposal by attempting to place on the proxy ballot a proposal that would have created a procedure to include in a company's proxy materials a director candidate nominated by a shareholder meeting certain requirements. In response to these proposals, companies sought no-action relief from our Division of Corporation Finance that would allow them to exclude these proposals from their proxy materials. And, generally speaking, Corp Fin agreed with these companies, and allowed them to exclude proposals of this type. So, companies decided to try another tactic. (Before moving on to this other tactic, I should note that there is a pending case in the Second Circuit, captioned AFSCME v. AIG, which is challenging Corp Fin's analysis on this issue. The Second Circuit asked the Commission to file an amicus brief on this issue, but, notably, the Commission declined to file a formal amicus, instead allowing Corp Fin and our General Counsel's office to submit a letter explaining their position. If the Second Circuit rules against Corp Fin's decision, it could prove very interesting. With that said, let me discuss the other tactic, which, not surprisingly, is majority voting.)
Majority voting proposals have generally taken two forms: (1) precatory requests that companies adopt majority voting policies that call for directors to resign if they fail to receive a majority of the votes cast; and (2) mandatory proposals to amend the bylaws to allow for majority voting in director elections. Of course, many companies initially sought to exclude these proposals, and submitted no-action requests to Corp Fin. In contrast to their determination with respect to the type of proposal I discussed previously, here, with respect to majority voting, Corp Fin has generally not allowed such proposals to be excluded, if properly phrased and timely submitted. By and large, companies have largely accepted that Corp Fin will not allow them to exclude a majority voting proposal from their proxy materials, and have thus been voluntarily adopting them.
I'm not the only one who believes majority voting will become the norm. Indeed, Delaware has recently amended their General Corporation Law to accommodate majority voting. The amendments: (1) make it clearer that a director resignation tied to the failure to receive a majority of the votes cast may be irrevocable and enforceable; and (2) provide that a bylaw amendment adopted by the stockholders requiring a majority vote for director elections may not be repealed or amended by the board. Further, a recent Wachtell Lipton memo notes that "it is clear that the majority voting standard for the election of directors continues to gain momentum and will become universal." Wachtell then suggests that companies, "at a minimum," adopt corporate governance policies that provide for majority voting, and, further, that companies "should also seriously consider adopting a majority voting and director qualification by-law."
I absolutely agree with this, and I urge companies to adopt bylaws or charter amendments that require majority voting. Majority voting provides one small way for investors to have a real ability to remove directors who they believe are not living up to their responsibilities as directors. Of course, these new policies still do not permit shareholders to affirmatively nominate a candidate for election to the board indeed, even if a director is forced to resign due to the failure to receive a majority of the votes cast, the board generally still has the power to fill that vacancy. That said, these policies do allow shareholders to, in effect, vote off board members without having to engage in a full blown proxy contest. As I mentioned earlier, this creates incentives for directors to be more responsive to the shareholders, which I think in many cases means that they will be more engaged in the process of overseeing the corporation's affairs. And if directors are more engaged, more proactive, I think they will be more effective. Given the widespread adoption of majority voting, I would say that most agree with this point.
Application of these Obligations to Director Liability
Having spoken about legal obligations and proactive obligations my shorthand for the duty to do the right thing I'd like to spend a few minutes reviewing the type of conduct that has actually resulted in SEC cases. Typically, this means instances where things have gone dismally wrong i.e., when directors either failed to meet their legal and fiduciary obligations, or when they failed to take the proactive approach that I just described. The reason for this admittedly negative perspective is not because directors, as a group, are bad actors in fact, I know that the vast majority of directors perform their duties and services exceptionally well and with the utmost integrity. However, because the very nature of the SEC's investor protection mission and enforcement work is to identify, prevent, and stop investor harms, we are led more often to evaluate and learn from the "wrongs" conducted by others, rather than the "rights."
Market Timing Cases
Let me begin with market timing. We have successfully prosecuted cases against mutual fund directors who violated their fiduciary duties by creating, permitting or facilitating harmful market timing arrangements with their funds. In fact, just this past June, a federal court jury found Stephen J. Treadway, the former chairman of the board of trustees of the PIMCO equity funds, liable for defrauding PIMCO equity mutual fund investors through an undisclosed market timing arrangement with the now-infamous hedge fund, Canary Capital Partners. The jury in that case upheld a very simple, but important principle for all directors you must carefully safeguard the trust that you are given by your investors. This case made it very clear that that directors who are entrusted with numerous investors' assets, may not betray that trust by allowing a single wealthy investor to engage in a trading strategy that is denied to ordinary investors.
The SEC also has actively pursued directors who engaged in financial frauds. For example, in 2004 we brought a case against several former officers and directors of Del Global Technologies Corp., Inc. alleging that these individuals caused the company to engage in improper revenue recognition (and thereby caused the company to materially overstate its reported revenues). We also alleged that some of these individuals engaged in a cover-up to prevent the company's outside auditors from discovering the fraud. Similarly, in 2003 we brought a case against several former officers and directors of Candies, Inc. for participating in fraudulent revenue recognition accounting practices. In this case, the directors, along with the CEO who was also a director, actively engaged in misconduct by causing the company to prematurely record revenue, recognizing revenues on illusory sales transactions, and then concealing this misconduct by providing false information to the outside accountant. Our aggressive actions in these two cases made it clear to the world that directors who participate in "cooking the books" can not hide behind the business judgment rule, ignorance of red flags, or other excuses to avoid liability they will be held responsible.
Insider Trading Cases
Many of our director cases also involve plain-vanilla insider trading or other self-dealing actions by directors. Now, this certainly is not a problem that is limited to directors we have seen insider trading by grandparents, husbands, wives, and even barbers! However, directors, by virtue of their unique positions of trust and confidence within the corporation, will most certainly come into material, non-public information on a routine basis. As a result, we frequently see directors who have breached their duties by inappropriately trading or otherwise profiting from their positions just look at the following recent insider trading cases that we have brought against directors:
- Worthington Foods, Inc. (July 2006). A Worthington director tipped 4 individuals about material nonpublic information regarding Kellog's proposed acquisition of Worthington.
- Immucor, Inc. (January 2006). An Immucor director purchased Immucor securities while in possession of material nonpublic information regarding the FDA's early approval of a blood analysis system.
- Cell Pathways, Inc. (May 2004). A Cell Pathways director tipped an individual about material nonpublic information regarding negative FDA news for a cancer drug being developed by Cell Pathways.
The sheer number of cases that we see every year involving directors who have betrayed shareholders' trusts in this way is sobering indeed. Your role as fiduciaries makes it incumbent upon all of you to not only refrain from inappropriately gaining from your position, but to also affirmatively and pro-actively protect and guard the trust, information, and confidences with which you are entrusted. Your shareholders deserve no less.
I want to discuss the director liability case in Heartland, for this was a case in which I alone dissented. The facts here showed that the independent directors came to understand and appreciate that the assets of one of the mutual funds that they oversaw had a mispricing and a liquidity problem. They sat back, were very lax, did not follow up, and allowed redemptions to occur at the wrong, mispriced amount allowing individuals who were lucky enough to redeem early and take their money out at the incorrectly high net asset value. Ultimately, that particular fund had to go into receivership, and investors only got a fraction of their original investment. Those directors failed in my view to discharge their duties in protecting the assets of the investors and recklessly allowed redemptions at an inflated price, to the damage of other investors. The Commission held, however, that that action was only negligent and not reckless, and ultimately only imposed a Cease and Desist order on the particular directors and no other sanctions. I felt that the sanctions should have been more severe, but I was the sole minority.
Option Backdating Cases
Finally, let me discuss briefly stock option backdating cases. So far, the SEC has brought two cases, against Brocade and Comverse, and we're likely to bring more in the future. As yet, we have charged only officers in option backdating cases. However, if the facts permit and I want to emphasize that all of our Enforcement cases are very fact specific it wouldn't surprise me to see charges brought against outside directors.
I also think that the backdating cases can provide a few lessons in terms of "do's and don'ts" for directors. In my opinion, the two big "don'ts" are: (1) don't use "as of" dates unless you have carefully thought about the consequences and have explicit approval from legal counsel that it is acceptable to use an "as of" date; and (2) don't assign critical board functions to "committees of one," unless you're extremely careful to adopt procedures to ensure that there are appropriate checks and balances in place. In terms of "do's", let me highlight one: do pay attention to procedures and processes such as properly signing and dating Actions by Unanimous Written Consent because simple logistics can get you into trouble. Let me expand briefly on these.
With respect to "as of" dating, I'm not trying to suggest that there should be a blanket prohibition on this, and I recognize that there can be legitimate situations in which it is acceptable to have a document be "as of" a date different than the signing date. There are, however, situations in which an "as of" date should not be used; or, if it is used, the directors should make sure that it's not being used for an improper purpose. Backdating options is just one example, but there are others. Specifically, it's improper for a company to sign a contract in one quarter; have it dated "as of" a date in the previous quarter; and then attempt to recognize revenue in the previous quarter. I don't want to put anyone to sleep with an accounting discussion, but in general, there must be persuasive evidence that an arrangement exists in order to recognize revenue. And if there was no arrangement in place during a quarter, backdating a contract with an "as of" date doesn't get you there. Now, again, I want to emphasize that there can be legitimate reasons to use "as of" dates, but I think the problem is that using "as of" dates has become so pervasive that few directors question them any more, even in situations where it's not legitimate to use them. Hence my admonition: don't use "as of" dates unless you're sure it's perfectly above-board to do so, after receiving advice from competent counsel.
I think my advice to "don't assign critical decisions to committees of one" is fairly self-explanatory, but apparently it's advice that's also been ignored. Again, I'm not suggesting that committees of one are per se wrong Delaware law permits it, after all. However, at best, it's far from being a "best practice" in good corporate governance. And at worst, it's a signal to the company's officers that directors are not taking their obligations as a director seriously and are willing to let expediency guide their decision-making.
Finally, I think my one "do" do pay attention to processes and procedures simply epitomizes my overall point to ask difficult questions and be engaged with the company. Directors that pay attention to the details the "means" and not just the "ends" are less likely to backdate contracts or board consents, are less likely to set up committees of one, and are less likely to let management run a loose ship. On the flip side, I think one can look at this "do" as a "don't": in other words, "don't be complacent."
I bring all of these cases to your attention to demonstrate that the Commission is very cognizant of the unique role of directors. We look very carefully at what you do, bringing cases only in egregious situations where there has been a clear violation of a director's fiduciary duty to shareholders. But we do bring them. This alone should motivate you to do your job well, not just to do it. An effective director should not find himself the subject of an SEC inquiry.
Opportunities for Minorities
Well, having explored the question of what makes for an effective director, we also must explore who makes for an effective director. Corporate executive management and board rooms, pension trust boards, and the uppermost echelons of this country's largest investment banks remain inaccessible for many Latinos in this country. In fact, the most common correlation between minorities and our capital markets seems to be, in many respects, a negative one minority representation in the financial industry and in our boardrooms has failed to keep pace with the explosive growth of our capital markets.
As I said when I started my remarks tonight, it is no secret that the future of America's success as a global economy and society will depend in significant measure upon the contributions of the American Latino community. The current aggregate purchasing power of Latinos is $768 billion a year, which is expected to grow to $1 trillion by 2010. According to a September 2005 U.S. Census Bureau press release, Latinos currently make up approximately 14% of the nation's total population, making us the largest race or ethnic minority in the country. And these numbers are exploding. By 2025, it is estimated that the Latino-American population will number approximately 61 million people and will represent nearly 1 out of every 5 people living in the U.S. By 2050, this number is expected to mushroom to approximately 102.6 million people and 1 out of every 4 individuals residing in the U.S. Such demographics make it clear that Latinos in this country will be critical to all sides of the economic equation. We do and will continue to comprise a critical and vital component of this country's taxpayer, investor, and consumer bases.
Despite this growth, our community's access to certain sectors in particular, the corporate sector remains incredibly limited. This problem applies not just to us but to all minorities. One study done for Hispanic MBA Magazine estimated that although Latinos account for 10% of the workforce, we number a mere 4.5% of all managers and less than 2% of all Fortune 1000 boards. Although we have seen 186% more companies claim at least one Latino board member since 1993, according to the HACR's 2004 Corporate Governance Report, 83% of Fortune 1000 companies still do not have any Latino representation at all. Much of this dearth is due to the fact that the primary feeder channel to the boardroom executive management is incredibly un-diverse. Less than 1% of all CEOs and executive officers are Latinos.
That's where today's conference and the HACR and Harvard Business School partnership come in. By creating a pool of qualified candidates and challenging corporations to put their money where their mouth is, we move the ball forward. Responsibility falls upon our corporate citizens to hire, promote and enter into wide-ranging business relationships with the Latino community. Doing so not only makes good social sense, it makes good business sense since more and more of our businesses and our human talent will come from the Latino community over time. Failure to adequately access this resource will result in a competitive disadvantage for companies who are facing a huge wave of baby boomer retirements, fierce competition for the best employees, and an increasingly complex and technical business environment. Let's keep the pressure on.
Issues Outside of the Traditional Director Domain
Finally, I would like to say just a few words about something that may not be directly related to the topic at hand today, but does directly affect your professional lives as directors the internal control requirements of Section 404 of Sarbanes-Oxley. As you all know, the Commission has been immersed in trying to find a workable implementation plan for Section 404. For the past several months, we have been hearing everywhere the press, meetings, and in public forums about the extensive costs of Section 404. This has been an extraordinarily complex and difficult policy issue for the Commission since it is quite clear that both the costs and benefits of Section 404 have been enormous.
Therefore, after a series of meetings and a public roundtable on this thorny issue, we issued a "roadmap" last May which outlined the steps that would be taken by the SEC and PCAOB to ease implementation burdens and reduce compliance costs. Much work has already been done we recently issued a concept release to solicit comment for forthcoming practical management guidance. And just a few days ago, we issued two releases that extended compliance dates for the auditor attestation portion of Section 404 compliance for foreign private issuers that are accelerated filers (but not large accelerated filers), and proposed to extend compliance dates for Section 404 compliance for all non-accelerated filers. We also proposed to give newly public companies a transition period to comply with the internal control requirements of Section 404.
What all of this means is that we at the SEC are committed to a strong "tone at the top" culture throughout Corporate America. Notwithstanding the extensive costs of Section 404, we have made the policy determination that the need for strong internal controls and a strong culture of compliance absolutely justify keeping Section 404 around. As a result, you as directors should also commit yourself to encouraging and implementing a pro-active and responsible board culture. You are at the front-line therefore, we will look to you to set and implement the proper tone and compliance environment at your respective companies.
I hope I have shed some light on what I believe makes an effective board member. I thank you for your time and attention and would be happy to answer any questions.