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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Remarks Before the Committee for Economic Development


Chairman Christopher Cox

U.S. Securities and Exchange Commission

Washington, DC
March 21, 2006

Thank you, Rod, for your kind words. And let me take a moment to add my own about former SEC Chairman Hills. During your tenure as the head of the agency, you dealt with many of the issues that are still front and center today — from the pricing of derivatives to the independence of directors. I just want you know that, three decades on, we're still benefiting from the outstanding leadership you provided.

And thank you for inviting me to be part of this conference. The Committee for Economic Development is non-profit, non-partisan and non-political, so it is one of the few groups in Washington I can speak to these days. Thank you for making sure I am not too lonely.

Of course, in my capacity as the Chairman of the SEC, I cannot endorse — and I am not endorsing — either the release of the CED's policy statement today, or the contents of that statement.

But I do look forward to reading all 56 pages of it. I know already that it deals largely with a subject that's of vital importance to the SEC's mission of investor protection — and that is corporate governance.

If all companies applied the tenets of good corporate governance, we at the SEC would be like the Maytag repairman in that old commercial — lonely and bored. We'd have more free time to enjoy the great weather this spring. Alas, we are, in fact, very busy.

Leo Tolstoy famously said that "happy families are all alike, but every unhappy family is unhappy in its own way." The same might be said about companies.

Happy companies have robust growth in revenues, strong balance sheets, and healthy profits that reflect genuine business success, not phony bookkeeping.

And they share other important traits as well.

They abide by high ethical standards, which is a key to their solid success. They don't obstruct the flow of information to shareholders, but rather view the shareholder as the ultimate owner and the ultimate boss.

They choose directors on the strength of their abilities, character, and capacity for independent judgment.

And their internal controls work well, so that the company's executives can take immediate corrective action when something goes wrong.

In all of these respects, what Tolstoy might call happy companies are all alike.

But the Anna Karenina principle also applies in reverse. In companies where things go awry, the desperate attempts to cut corners or hide reality can be made in unendingly unique and devious ways.

What they all have in common, of course, is that they first chip away, and ultimately demolish the tenets of good corporate governance.

I needn't tell you that the vast majority of Americans are people of integrity who work for companies that are dedicated to doing things right. Our country's astonishing record of economic growth, job creation, and ever-improving goods and services for the consumer isn't built on sand.

But if the majority of men and women in business are law-abiding citizens who realize that success in business requires honesty and integrity, it's the job of the SEC to see to it that the long arm of the law catches up with those who don't quite view things that way.

Of course, we'd much rather prevent bad things from happening than mete out justice after the fact. That's why efforts such as yours play such an important role.

There is now a powerful rededication to ethical governance underway in boardrooms across America. Companies large and small are working to see to it that the legislative and regulatory changes mandated by Sarbanes-Oxley become routine.

Even more importantly, directors and management are taking the lead on insuring the integrity of their controls and their financial reporting.

Of course, that doesn't mean we've seen the end of financial scandals and wrongdoing. There will always be corrupt people who will try to outwit the system.

It's important to recognize that such people have a corrosive impact far beyond their numbers. Every time one of these scandals comes to light, the public's confidence in our entire system of free enterprise is shaken to its foundations.

That's why the SEC will continue to use its rules and its enforcement power to prevent fraud before it happens, and to improve the chances that when fraud occurs, it will be uncovered and punished.

One way we do this is by shining a spotlight on Boards of Directors. I know that CED likewise pays special attention to the triangular relationship between directors, shareholders, and management.

When it comes to enforcement, the Commission is constantly looking at the responsibility of directors. We bring actions whenever we find examples of serious misconduct.

This focus on corporate governance is anything but new: As early as the 1940s, the Commission recognized the importance of audit committees.

Most recently we have sought to encourage effective and independent audit committees by encouraging U.S. stock exchanges to progressively strengthen their listing standards concerning audit committees.

The goal of sound corporate governance, from the vantage point of the SEC, is to deal wisely with the investment of the shareholder whose capital is at risk. Shareholders should be in a position to punish a company that does not measure up — by dumping its stock, or by reconstituting its board of directors.

We want to help shareholders get all the information they need in order to make their decisions. Several of the SEC's proposed rules over the past few months are aimed at doing just that.

Take our electronic proxy proposal. It is another step we're taking to make the Internet a more efficient forum for communication with shareholders.

By giving investors more, and importantly, more usable information, we can enable increased participation by better informed shareholders.

A postcard-sized notice would apprise shareholders of the availability of their proxy materials on the Web. By going online, they could search the proxy statement for the items they want, and follow links to other, more detailed information. They could do everything they do now with paper proxies, just more of it, and faster and more efficiently. Investors who want paper in addition, or instead, would simply call a toll free number.

With more than 75% of Americans having access to the Internet — and spending an average of 25% of their waking hours online — it's high time to bring this revolutionary technology to the world of shareholder democracy. When progress is about to overtake you, you either ride the wave or get wiped out — or at least that's how it is in Southern California.

I'd like to conclude as I began — by thanking you for your outstanding work on corporate governance. Your dedication to the highest standard of integrity in the boardroom is outstanding — and it's more important now than ever before. To all of you who are the leaders of the Committee on Economic Development, thank you for what you do — and thank you for inviting me to be with you here today.


Modified: 03/21/2006