Speech by SEC Commissioner:
Remarks at Commission Open Meeting
Commissioner Paul S. Atkins
U.S. Securities & Exchange Commission
January 15, 2003
I do not have many questions regarding this final version of the rule, but I do have a few comments that color my view of the rule and its overall pertinence and efficacy. First, I would like to thank the staff for your hard work and long, late hours in putting this together. I want to emphasize that I am particularly grateful for the staff's effort in responding to my concerns and those raised by the commenter. Your work is well done because this rule is significantly more flexible than what we originally proposed. We have greatly expanded the number of persons that will satisfy the new criteria without sacrificing the substance of what they will add to the effort of a board looking out for the best interests of stockholders. That was the intent of Congress and luckily Congress left us with flexibility in this section of the statute.
As currently drafted, our rule is no longer, as I first feared at the proposal stage, what amounted to a full-employment act for retired accountants. My concern was borne out of anecdotes of retired accountants coming out of the woodwork in the last few months to solicit boards for jobs. It is an unassailable principle supported by at least one study by financial economists that boards, and especially audit committees, should be financially literate and knowledgeable.
This flexibility is critical to the 17,000 issuers registered with us. We are not a merit regulator and ultimately this is a disclosure provision. Whether or not financial expertise should be ensconced on the board is something that the market and corporations are best placed to decide, depending on the circumstances. A one-size-fits-all rule just never works. I am concerned that our efforts to strengthen corporate governance will have an unintended consequence: we may dissuade qualified and competent individuals from agreeing to serve on corporate boards. Directors are not full-time employees of companies and the best director is provocative and questioning not necessarily a financial nerd.
In that vein, although I support the staff's overall recommendation, I am deeply troubled by three aspects of this rule - all of which are inherent in the statutory language and none of which is completely resolved by our rule. First, you all know that I remain concerned about labeling this person an "expert." What is in a name? Unfortunately, quite a bit. The basic problem here is that Congress used this term in a layman's sense, not as a term of art as used by the priestly class of securities lawyers in securities law parlance. We never intended to "expertize" this person.
As I pointed out from our first discussions of implementing this statute, calling this person an "expert" creates unnecessary confusion. I recognize that the staff has tried to play with the wording and tried all sorts of permutations and combinations. Luckily, for the benefit of taxpayers and generations of corporate and securities lawyers to come, you did not succumb to current corporate fashion and did not hire a multi-million-dollar corporate-naming consultant to convene focus groups on made-up names like "DIREXFIN" (director with expertise in finance) or funky, out-of-the-blue names like "Wednesday" or "Walrus" that Alan Beller has jokingly referred to.
My preference from the beginning would have been to ditch the term "expert" with its connotations and use a term like "financial specialist" or "financial reporting designee." But this change should have been made at the drafting stage of the statute. Regardless of what we call this person in our rule, people can still trace it back to the statute, of course. My hope is that today's discussion and the rule's safe harbor will defuse this unfortunate appellation.
Again, what is in a name? This unfortunate labeling leads to my second concern. We live in a litigious society and there is every sign that litigants are going to seize upon this term and attach great significance to it. I hope they do not. Your solution of a safe harbor in the rule is certainly very helpful in this regard, but we have no control or jurisdiction over State courts or juries that might run with this title and go places we don't want them to go. A noted plaintiff's attorney has recently stated publicly that audit committee members are "significantly more exposed to liability than in the past." That is a good warning shot across the bow.
I am reminded of a wonderful cartoon by my favorite cartoonist - a FAR SIDE drawing by Gary Larson. It shows two well-antlered deer talking to each other. One says to the other, "Bummer of a birthmark, Hal." The deer he is addressing has a bull's-eye on his chest.
Every member of the board will look at the newly titled audit committee member and say, "Bummer of a title." The title alone attracts undue attention, especially when the person is agreeing to be singled out in the company's proxy statement, and the title inherently creates the bull's-eye. Is this person now a sitting duck? How will insurance companies price this designation in the O&D context? Will companies have to pay this expert more than other directors? Might we one day see instances where greater payment for such a person will raise questions about his independence as a director? That would be ironic symmetry to our efforts.
Last, the statute and our rule do not take into account basic human nature. Would you want to be the designated "expert" on an audit committee? Despite any attempt we make in the safe harbor to shelter or protect this expert from greater responsibility than the other members of the audit committee, that cannot be guaranteed. Basic human nature will lead many people to decline this designation. In that case, we fall back on the marketplace. I have talked to many companies that are already talking about just saying "no" - they do not have one of these experts and don't intend to designate one, but the board has taken steps to arrange for such expertise to be available through a consulting relationship or other second opinion in cases of technical, complicated accounting questions. That might be a rational and reasonable response and is really no different from a board that has no lawyer on it and takes steps to get separate legal advice. The marketplace can then decide in pricing the company's stock whether this is sufficient.