Speech by SEC Staff:
|The SEC, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or the staff of the Commission.|
Thanks very much. The question of the moment is whether you could possibly bear hearing someone else pontificate about the lessons of Enron. To put it another way, could I possibly have anything new to say on the subject? The answer to both questions is "probably not," but, foolishly perhaps, I'm going to volunteer us all for the job and see what happens. What I'd like to do is look at things from a slightly different angle, not to deny the validity of anything we've heard so far, but just to see if there is any value to what perhaps may be a somewhat contrarian view about what we've been hearing for so many months now. Given the task I've set for myself, it will come as no surprise that the views I'm expressing here are mine alone and not necessarily those of the Commission, any Commissioner, or anyone else at the Securities and Exchange Commission.
I have three basic points:
Let's get the bad guys - the people who lied, cheated, and stole from the investing public. Let's get those who sold out their professional integrity. Let's get any cheerleaders for the New Economy who really were practitioners of the world's oldest profession. I'm all for that. I truly believe that nothing drives home a message of reform like a smack on the head. And I'm all for a large dose of justice for those people who deserve it. We at the Commission are bringing every resource we have to bear on quickly bringing and concluding more and more financial fraud cases.
But let's not confuse blame and responsibility. While we go after the crooks, let's not forget the climate that allows disclosure dipsy-doodles to flourish. A huge risk in the current climate, I believe, is that we affix the black hats on those who surely deserve them, pat ourselves on the back for our zeal and our toughness, and then pack up and call it a day. While we pore over the conduct of others with a magnifying glass, let's not forget the mirror. Let's identify the bad guys but let's neither caricature as villains those whose principal fault is human imperfection nor discharge from responsibility those of us - and that's a lot of us - who should have done better.
How can we all not feel seriously chastened? Over the past two years we have learned just how much bull was in the biggest bull market in our lifetimes. How could we have been so stupid that we didn't tell the difference between hype and reality, that we really believed that the bull market would last forever, untethered to any realistic notions of value, that we believed that we could retain our good judgment in the face of conflicts of interest, that we believed that the virtues of hard work and thrift could be replaced by speculation on black boxes, that as regulators we believed we were adequately provisioned to prevent potential disasters, that we believed ourselves to be discriminating and discerning reporters? I'm an employee of an independent regulatory agency, so I'll leave out any comment on our political leaders, but come see me on Wednesday, after I've left the Commission.
As investors, over the past decade, we've paid too much attention to our hopes and not enough to our brains. For fraud to succeed, as it does too often, it needs the unwitting complicity of those of us who, despite knowing better, pay too little attention to our eyes, ears, and noses, and too much to the hopes of our hearts. Emily Dickinson described hope as a " thing with feathers." So, dare I point out to investors, is a pigeon.
In short, if we are all so smart, how come we're not still rich? If we were duped, how could we have let that happen? Our examination of shortcomings of our financial markets must be unsparing. We must be brutally honest about our shortcomings and relentless in our pursuit of reform. We have not done well enough. We must do better. But we can't do better if we divert ourselves from serious examination by just looking for scapegoats at whom we can direct paroxysms of manufactured outrage. To anyone who tells you that it's all someone else's fault, you should say "look again."
As we are skeptical of the simple diagnosis, we should be equally skeptical of magic bullets. In truth, we are not talking about one single problem, we are talking of a variety of forces that came together to create, as many have noted, the financial perfect storm. Each of these forces starts with an idea, and to change the forces that produce the problems, we have to affect how people think. When we talk about a mentality that says investors, like mushrooms, are best preserved in the dark, it's about how people think. When we talk about co-opted professionals, it's about how people think. When we talk about a "check the box" mentality, it's about how people think. When we talk about a get-rich quick mentality, it's about how people think. When we talk about a lack of vigilance on the part of boards of directors and audit committees, it's about how people think.
I mean no disparagement of any the measures that have been proposed to deal with our problems. Many of these are wonderful ideas, and they should be put into place quickly. But the quick answers will not be the enduring ones.
People are not merely the sum of their incentives. We are independent agents capable of independent choice. This means that while we should certainly juggle incentives and move organizational boxes to promote behavior in the interests of shareholders and burden behavior that is not, we should not limit ourselves to these efforts. One can't change minds simply by twisting arms.
While those of us involved in making and enforcing laws have a lot of work to do - and we should do it promptly - the principal task is harder and more subtle. By all means, lets devise rules that make conflicts of interests harder; let's devise structures that allow for better enforcement of the rules; and lets have better rules. But let's also not kid ourselves. If we want to change our markets, we need to change how people think.
Over the years, I've become increasingly convinced that the most powerful force in our lives is ideas. How we think determines how we act. People work with each other, play with each other, do for each other, do to each other, all in thrall to ideas. Alas, bad ideas are as powerful as good ones. People kill each other over ideas; they blow themselves up over ideas. They act unspeakably in the service of ideas; but also they act with unbelievable nobility in the service of ideas.
The trick is to have the right ideas, and to teach and propagate them. This is quite a task, but over the long term, it is how we effect change.
We have to remind ourselves that the law sets forth only our minimum obligations to each other. We have to remind our managers service to investors is more than a legal obligation; it is their personal one. We have to remind managers that, whatever their legal obligations, when they make millions and millions in compensation while investors are left holding an empty bag, something is deeply and terribly wrong. We have to remind our broker-dealers that making money on transaction charges is fine, but that if these gatekeepers get rich on tolls while they guide investors through the gates to get-rich-quick fantasies, something is deeply and terribly wrong. We have to teach shareholders to invest wisely, critically, and for the long term. We have to teach them to demand absolute integrity on the part of their managers. We have to teach boards of directors that the buck stops with them and that, as guardians of the fortunes of investors, they must be more demanding, probing, insightful, and vigilant with the shareholders' money than they would be with their own. We have to teach professionals that, while there are always arguments, creative solutions, estimates, and ranges, there is also always independence and integrity.
How do we do this? We substitute bad ideas with better ones; we sound the alarm on complacency; and we remind people of their better natures.
Let's start with ourselves, the lawyers.
Not to put too fine a point on it, but what the hell is going on? Have we adequately served the public while serving our clients? How is it that we have all these laws, rules, interpretations, and advice but that we may advise our clients that there is still room for behavior that can only be described as shameful? How is it that so many of us regard the law as infinitely elastic, easily twisted to conform to political, ideological, or economic agendas? And how is it that too many lawyers feel trapped in their jobs? Do too many lawyers feel as if business imperatives had caused them to lose touch with their better professional selves? And if you think I'm overstating the number of lawyers who feel trapped, get a government job and find out how many new friends call.
I don't pretend that any of this is new, and I can't measure how much has changed over the years since I got out of law school, but, like the passage of years, it seems to be accelerating and more urgent. I don't really know how this all came about. But somehow, I believe, lawyers have become too accepting of a view of ourselves as purely economic actors. We have become too wary of non-economic motivations. This came about slowly, I think, and from a variety of sources.
There are of course broad social forces that are not unique to lawyers. Over the past 25 years we have become wary - rightly - of notions of professionalism that are just justifications for inefficiency, disguised forms of economic protectionism, or noble words for practices that were used to restrict the profession to the "right" kind of people. But we may have learned this lesson too well and become too dismissive of professional attitudes that are not just projections of economic interest.
We may also have swallowed without enough critical analysis the idea that the marketplace is the principle arbiter of right and wrong. The debate about whether law is a business or a profession seems to be largely over; but it is always a good time to ask what kind of business will it be? There may also be the related phenomenon in some quarters of transmuting theories of law and economics from an extremely useful mode of analysis into a dogma of economic determinism.
We also can't overlook that there is enormous - and beneficial - competition among lawyers. There is a vast oversupply of lawyers: there are so many of us chasing a finite supply of work. Probably the only fix to Enron that one hasn't heard is for huge increases in the number of lawyers. But the concern, of course, is that bracing competition among lawyers puts buyers - clients - in the position to demand services at the lowest cost. And who is to say that, in choosing among lawyers, clients don't look just to the cost of getting advice but to the cost of the advice itself. And let's be frank: the right solution may not always be the cheapest. It is indeed a tough world out there.
And finally, there is the most persistent and pervasive influence - the silent calcification of minds that comes from years of insulation from other points of view. All of us spend decades of our careers working among colleagues who think basically as we do. We sit around year after year breathing the same intellectual air and passing it back and forth to one another and to and from our clients. It's not, as some charge, that we lose our independence or our integrity; it's that we lose our perspective. We come to think that we view the world in a vast panorama and forget that we are just some more blind persons groping our way around the elephant. I must tell you that, in my own experience, a simple change of scenery produced many changes of mind. There are a lot of arguments that I used to make with great conviction and serene certainty that I now regard as utter claptrap.
So, how to improve all this?
First, we all have to cast aside the comforts of empty moralism and thank our stars that we haven't gotten caught up in this mess. I read about some of the judgments lawyers make that find their way into the newspapers. Sometimes I think I'd never do something so stupid, and sometimes I'm not so sure. Arguments are seductive things. And our capacity to churn out arguments sometimes is more crippling than we know. While it is certainly a great comfort to distance ourselves emotionally from those whose professional conduct is being publicly derided, it's more useful to remind ourselves that it could easily have been us. It's all well and good to moralize about lawyers' duties, but until we've been there, we cannot be certain how we would - and should - act where professional choices are not broadly thematic but fraught with the confusion of the particular.
Second, we need to take in from time to time some professional fresh air. We should resolve to take seriously ideas that we've gotten used to dismissing out of hand. We need to use our professional activities to expose ourselves to different points of view and not just the views of those who agree with us. The bar needs to open up a bit and encourage participation from the plaintiff's side and from government lawyers as something more than foils for right thinking people. On all sides, we need to think about not just who gets helped by our advice but also who gets hurt when our clients follow it.
Third, we need to remember that there are no solutions, only improvements. We are, after all, dealing with shaping human conduct. Until they come out with a better model of human, we will be stuck with doing better, not doing perfectly. So let's be appropriately skeptical of utopian solutions.
Fourth, we need, in the professional sense, to teach our children well. Older lawyers need to remember why we went to law school in the first place. It wasn't just because we didn't know what else to do and thought that law school would defer the hard choices, though it was that. It wasn't just to enable ourselves to make money, though it was that. It wasn't just that we liked to watch and think rather than do, though it was that. It wasn't just because we wanted the status as experts, though it was that in part. And it certainly wasn't just to turn ourselves into efficient legal services delivery units, though it has become that. There was another piece; we became lawyers in the hope that in some small way we would become instruments of justice, that our training would give us the means to do something useful and, from time to time in our careers, even something fine. And as we remind ourselves of our better professional natures, we need to reinforce these values for younger lawyers, and harness and enhance their natural idealism.
Finally, we need to avoid complacency about these issues. Forget about "don't worry, be happy." Worry. Worry a lot. We can't let ourselves off the hook with solutions designed just to improve the behavior of others while closing ourselves to improvements in our own behavior. Worry, worry a lot. I guarantee that anyone who doesn't worry about whether he's getting it right needn't worry because he can be certain he's gotten something wrong. Worry, worry a lot. Each of us needs what the poet Richard Wilbur called "a mind blest by doubt."
As we do our work, we need to worry about getting it right. At the same time, we need to worry about whether we are doing the right thing. It's true, as we're wont to point out, that lots of times that right thing is very hard to discern. But that hardly frees us from our obligation to do right, it just means that we need to worry about it all the more. We need to worry about whether we are overstepping our roles as lawyers. It is our clients, after all, who discern their own interests, and it is our professional obligation to advance those interests zealously, within the bounds of the law. We should not burden our clients with what may be merely an outsider's fussy fastidiousness. But we should also worry about whether we've defined our role too narrowly. We rightly delimit our assignments to avoid exposure to risks we do not intend to undertake. But we cannot afford to blind ourselves to the larger picture. We are just instruments, all right, but to what ends?
In the final analysis, our response to convulsions like Enron is deeply personal, because our lives, our problems, and our professional choices are intensely particular. We do only what we can. But what we can do is keep our minds open and our defenses up. That's a lot, and it, along with a stubborn insistence on personal honor, will guide us to the best path through the thicket.
Thanks very much.
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