Speech by SEC Chairman:
Remarks at the Practising Law Institute - SEC Speaks
Chairman William H. Donaldson
U.S. Securities and Exchange Commission
February 28, 2003
I would like to thank Paul Roye and Annette Nazareth of the SEC, as well as the Practising Law Institute, for all the work they have done to put together what promises to be another great SEC Speaks conference.
To say that there has been a lot going on at the SEC over the past year is a gross understatement. The SEC Division Directors, Office heads and their staffs have done an outstanding job. Judging from the agenda put out in advance of this year's conference, there is no shortage of issues to cover, and there will be lots of time to discuss ideas over the next two days.
When I heard about the SEC Speaks conference, I was truly impressed by the concept of a government agency opening its doors to talk to the public about what it does. It seemed like the appropriate venue to make my first public address as Chairman. I wanted to speak first to the SEC community that has diligently served the investing public - most importantly the SEC staff, but also SEC alumnae who helped make the agency what it is today, as well as those who follow the activities of the agency closely and whose day to day work is affected by what we do.
Because the next two days are going to be filled with policy discussion and updates from the people who know the issues best, I'd rather answer a more fundamental question that some of you may have been asking yourselves and each other: "Where is Bill Donaldson coming from and where is he taking us?"
When I was presented with the prospect of becoming Chairman of the Securities and Exchange Commission, I must admit, it seemed like a daunting task. In my opinion, we are in the midst of one of the most challenging times for the corporate and financial community since the events that led to the bust of 1929, which gave way to the reforms of 1933 and 1934 and the very establishment of the agency.
As I considered more thoroughly the tasks facing a new SEC Chairman, I realized that this was a challenge I wanted to take on. Throughout my career I have known the SEC to be an outstanding organization of intelligent, committed and fair regulators. I saw an opportunity for the SEC to build upon the great work it's been doing for decades and become an even better organization.
I'm sure that many of you have heard a little bit about what I've done over the course of my career. I don't want to bore you with a recitation of my CV, but much of my motivation for taking on this challenge can be found in the experiences I've had.
To start with, I've had a varied career over the course of nearly 50 years (ugh!). I sometimes wonder if that wasn't one of the reasons that President Bush chose me for this position - I've been around almost as long as the SEC has!
I started my career in the U.S. Marine Corps where I learned the values of service, loyalty and integrity. I went on to earn an MBA and went to work on Wall Street where after several years, I struck out with two partners and founded an investment banking firm which I helped lead for over 14 years.
After having an exciting experience on Wall Street, I was called again to public service. I did a tour in the Department of State under Henry Kissinger and then in the White House for Vice President Rockefeller. I was a founder and Dean of a graduate school of management where we believed our duty was not only to teach business models, but also to instill in our students the importance of ethics and integrity in the marketplace. I became Chief Executive of the New York Stock Exchange and later went on to the Chairmanship of one of the largest publicly held insurance companies where effective management was at the core of my mission. And finally, I served as Chairman of a major Washington policy think tank where my attention was focused on public policy and its effects on people's lives.
Along the way I have taken a company public on the New York Stock Exchange, managed corporate buyouts, and established investment operations around the globe. I have served as a director for quite a number of public corporations, and have chaired audit committees, governance committees and finance committees.
You might think that my point is that I can't seem to hold down a steady job. But there's more to it. Over the course of my career as an investment banker, a businessman, a public servant, an academic and a regulator, I have learned many lessons that I hope will be valuable to me as Chairman at this most challenging time. And, I have focused on many of the issues that are central to the SEC's mission from many different perspectives. I have been in the fray, on the floor, in the boardroom and in the front office. I have been both the regulator and the regulated. I have seen the markets go through ups and downs. I have seen great growth and innovation in America's industrial and financial sectors. After all these experiences, I have seen first hand and become convinced that America's markets and our entrepreneurial spirit are two of the things that make this country great.
But, with all I've seen and all I've experienced, I must say that what I've seen develop over the past decade and the consequences that have emerged in the past two years have made me alternately very sad and very angry. This is where I'm coming from and this is why I am here.
It goes without saying that over the past year and a half, confidence in the U.S. corporate and financial industries has been seriously eroded. The incredible growth of the 1990's made the stock market an attractive option for millions of Americans who had never invested before. Many people were given the impression that the stock market was just a game that if played right, guaranteed tremendous returns. Many people on the inside became obsessed with share price rather than sound operations and good corporate governance, which seemed irrelevant for the short-term success of their stock.
As the bull market of the nineties began to subside, we were hit by two unexpected events. The attacks of September 11 made the entire country, including the markets, take notice of our own vulnerability. Then, beginning with the revelations of wrongdoing at Enron, the weaknesses in corporate America that had been overlooked or ignored came to light. We witnessed startling revelations of corporate fraud and corruption as well as failures in our systems of disclosure and corporate governance. As the markets reacted, many investors, and sadly, particularly small investors, saw their savings disappear, along with their dreams for the future.
As we move forward, restoring the confidence of investors and the integrity of the markets is the responsibility of us all. As you know, this is no simple task, and it cannot be achieved overnight. Investor confidence is intangible. There is no statistic that can accurately tabulate it, no measuring stick to keep track of its growth. There is no single piece of legislation or rule that can send the signal to America that all the problems have been fixed, and it's completely safe to get back in the market.
But, a good combination of thoughtful legislation and careful rulemaking has helped us move in the right direction. Corporate America and Wall Street have been given a wake up call and told that things must change. The Sarbanes-Oxley Act laid the groundwork for sweeping reform, and the SEC has vigorously lived up to its obligation to interpret the legislation with new rules.
As you know, this undertaking has challenged the staff like never before. But they have met the challenge head on, proving once again why the agency deserves its stellar reputation. Despite their outstanding performance, it's no secret that additional resources could be put to good use and the good news is that reinforcements are on the way.
This leads me to the second of the questions I mentioned earlier. "Where is Donaldson taking us?"
As Chairman, I see two parts of my mission - the internal and the external. This is a critical time for the agency and the way we address the challenges before us will determine not only where we go tomorrow, but for years to come.
I will start with my internal mission. As I mentioned, the SEC has been given tremendous new resources, in fact a near doubling of the agency's budget. One of the greatest challenges before us is to use those resources wisely.
In many ways, it may be time for the SEC to go through a transition, much like the transition that the U.S. military has experienced in recent years. For the sake of the analogy, let me compare the SEC with the Marines - that is the best of the best, ready to tackle whatever comes their way.
The U.S. military, especially the Marines, has been the strongest standing force in the world, ready to react to any crisis, anywhere. But, in recent years, the U.S. military has had to evolve into a much more efficient force - quicker, more agile, and more pro-active. My hope is that the SEC can go develop a similar new approach to our mission -- that we can play offense more often, be more proactive, and anticipate the problems we may face.
We must use the resources that we have been given to build upon, not simply imitate our existing methods. The challenge for the agency will be to use them in a way that promotes effectiveness. To use the military analogy, our troops must be deployed in a way that supports our modern mission. As Chairman, the management of the agency's growth is an integral part of my responsibility. I believe the efficient functioning of the SEC is as much a part of investor protection as ushering in new rules and regulations. I have already started working with the staff at the agency to seek their input and I look forward to pursuing this as a team. I know that those at the agency know best how we can operate better.
The second half of my mission is external. As Chairman, I hope to challenge corporate America to look beyond rules, regulations and laws and look to the principles upon which sound business is based. In order to restore their trust, American investors must see businesses shift from constantly searching for loopholes and skating up to the line of legally acceptable behavior. They must see a new respect for honesty, integrity, transparency, accountability, and for the good of shareholders, not only an obsession with the bottom line at any cost.
In order to do this, those at the helm will have to make a conscious decision that ethics and integrity should be at the heart of every business decision. They will have to decide that the limits of the law are not the only way to determine what's right and wrong. By making this decision and demonstrating their commitment to good governance, they will set a tone that will filter down through their entire organizations. At the same time, this spirit should emanate from the bottom up. In effect, every layer of a company and its advisors must hold the others to this high standard. But, each individual will have to make this decision to go beyond the law on his or her own. We cannot legislate it or promulgate rules to enforce it.
While there seems to be no shortage of headlines about corporate misdeeds and greed, we must remember that there are many good and honest people in American business who have consistently tried to make decisions for the benefit of their employees and their shareholders. Unfortunately, this environment has made them hesitant to speak out. As Chairman, I will encourage them to stand up and join the call for a reinvigoration of ethics and integrity in the business world. We need others to follow their example.
These may seem like basic principles, but I've always believed that you have to start with the basics. In this case, the foundation on which investor confidence will be built is the fundamentals.
The bottom line remains that we all have a lot of work left to do. Some of you may have heard me use my mother's words to sum it all up. It was time to pull up my socks, she'd say to me when I maybe hadn't done so well at school, and she was letting me know loud and clear that it was time to get my act together.
Until recently, I didn't realize that there was any historical background to the saying, and to be honest, I doubt that she did either. But after learning of the expression's history, I've come to realize that its use is even more appropriate in this situation.
To give a brief history, the expression comes from a very old theatrical tradition. In ancient Greece, plays were typically performed in pairs - first a comedy and then a tragedy. To signify the change in tone, actors would change from short shoes to boots that would come up to their knees. By the time this tradition made it to England, the actors no longer changed shoes. Instead, they simply pulled up their socks to signal that the stage was set for a serious tone.
And so, now I repeat my mother's expression, "It's time for us all to pull up our socks." To be sure, what happened in the past year as a result of corporate scandals, particularly to small investors, is a tragedy and in no way a comedy, but the stage is now set for the serious pursuit of corporate reform. I look forward to working with each of you to usher in this new era of responsibility.
As I close, I would like to say how honored I am to have been given the opportunity to lead this organization. The SEC staff has worked very hard over the past year implementing unprecedented reform. I feel great pride at becoming a member of the team.
I'd like to ask all of the SEC staffers present to please stand up. I want people to see who you are. I think you deserve tremendous credit for the work you've done over the past year. It's been a difficult one and, rather than being distracted by headlines and the enormity of the task before you, you demonstrated why the SEC staff is considered the best of the best. This is an incredible time in the SEC's history, and you are part of it. You are in the right place at the right time, and everyone is looking to you, quite literally at the moment. Let's give them all a round of applause.
Thank you very much for having me here today, and for everything you do for the SEC.