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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Introductory Remarks Before the Executive Compensation Disclosure Conference


Chairman Christopher Cox

U.S. Securities and Exchange Commission

Washington, DC
April 3, 2006

Good morning, and thanks, Joe. You're a Renaissance man: a lawyer, an economist, a former SEC Commissioner, a former senior adviser to President Reagan's Council of Economic Advisers, and now a professor of Law and Business at Stanford. Is there anything you can't do? I don't know if you can pitch, but I understand the Nationals need all the help they can get this year.

And thank you for planning this conference. Executive compensation—the how, and the how much—has been an increasingly salient topic for several years now.

It's been 10 years since Disney President Michael Ovitz received a severance package worth more than $140 million after holding the job for less than 18 months. The shareholder suit is still going on, with the Delaware court's ruling now on appeal.

It's been three years since NYSE chairman Richard Grasso received a $187.5 million severance package—consisting of a $139.5 million lump sum retirement benefit, an additional $48 million in deferred compensation, plus another $10 million in severance pay—that many people thought was quite a lot for a non-profit chair. The New York Attorney General was certainly one of those. And in 2004 he sued to get $100 million of it back. Everyone is still waiting to see where that one ends up, too.

There are many other stories such as these that have captured the attention of the press and the public—not to mention Congress, and both federal and state regulators.

Perhaps it shouldn't be surprising that these issues generate so much popular attention: after all, exposing details of the "lifestyles of the rich and famous" makes good copy. Many of these tales feature divorce, and even "Desperate Housewives" who are only too happy to spill the beans on some of the more unusual aspects of their former husbands' compensation.

But it's worth pausing and asking ourselves exactly why ordinary Americans want so much to know what the boss is paid. Many sociological explanations have been advanced, but the most important reason is also the most overlooked: they're investors.

It isn't just the detached curiosity of supermarket tabloid readers that drives this need to know. It's the fact that today's investor class truly represents a cross section of the population.

It's a remarkable fact of the early 21st century that more than half of Americans own stock. That means that investors aren't just the coupon clippers of old—a privileged group of high-income elites with chauffeurs named Alfred and their own private bankers.

More and more, when you think "investor," you need to see in your mind's eye Aunt Sally—and her neighbor Jim across the street, who runs the local deli. Millions of investors today come from American households that sit around the kitchen table and make tough choices about their monthly budgets. They expect the companies they invest in to do the same.

For Aunt Sally and her neighbor Jim, one of the claims on their wages is the money they set aside for retirement, for their children's college tuition, or to buy a house. Like most Americans, they do comparison shopping for breakfast cereal, and they don't replace the shower curtain until it has a tear and leaks. So it's not surprising they don't understand how an executive can take from their company as part of his compensation a shower curtain that costs $6,000.

These glimpses of ostentation and extravagance often tell investors more about the mindset of management than a 75-page corporate budget. So if something like that is going to be part of compensation, investors have a right to know. And it's the SEC's job to see to it that they do know.

On the other hand, it's not the Commission's job to substitute our judgment for that of the board about what would be the "best" level of compensation. Surely many executives deserve every penny they're paid, and more. Being a CEO requires a rarefied collection of attributes and skills that are in too short supply. And it's a fact that competition in the market for executive talent can be fierce.

So the federal government won't opine on the proper level of compensation. Nor will we express our preferences as to its form. If a company's directors believe it takes a $6,000 shower curtain, or a $140 million severance package, to get the job done, fine—but at least the shareholders ought to know. They're entitled to information on the specifics of the major perks. And they deserve a clear expression of what the entire compensation package is worth.

Perhaps most important of all, they ought to know the reasoning that leads to the choices a company makes. That's the genesis of our proposed new rules.

We want the company to explain publicly its actions, so we're proposing to replace the Compensation Committee Report and the performance graph, which was often pro forma and written in legalese, with a new Compensation Discussion and Analysis section. The new CD&A will allow the board to have a frank discussion with their bosses, the shareholders. And since the purpose here is to communicate, the new CD&A is to be written in plain English—the new official language of the SEC.

Plain English uses plain words, and among other basic ingredients, the active voice. We want to promote the use of the active voice not just because it makes for punchier sentences, but because it requires a definite subject to go with the predicate. That's the only way that investors will be able to figure out who did what to whom. So it won't cut it to say, "It was decided to give Mr. Smithers a suitable commemorative of his service with the company," when what could be said instead is that "we are giving Mr. Smithers a life-time supply of gold-trimmed paper tissues valued at $1 million. In return, Mr. Smithers agreed to waive his rights to sue the company for breach of contract."

It's an open secret that today's Compensation Committee Report is boilerplate. It's simply a waste of trees and ink. I could probably use an example from the proxy statement of most any public company in America, but to avoid giving offense I've picked one that's going out of business.

Here's what Enron's proxy statement said in 2001:

"The Compensation and Management Development Committee's responsibility is to establish Enron's compensation strategy and to ensure that the senior executives of Enron and its wholly owned subsidiaries are compensated effectively in a manner consistent with the stated compensation strategy of Enron, internal equity considerations, competitive practices, and the requirements of appropriate regulatory bodies."

Of course, notwithstanding the length of that sentence, we actually learned nothing about what Enron's compensation strategy might be—neither there nor anywhere else in the proxy statement.

There's a word for that kind of disclosure: a word that appears as the title of a tightly written 80-page book by Princeton professor Harry Frankfurt. If that allusion is too elliptical, some synonyms are claptrap, hokum, drivel, and balderdash.

In the future, we hope to see less legalese and Dilbert-ese, and more plain speaking. That's because the proxy statement is meant to help investors decide how to vote.

I understand that for the real-life inhabitants of the world that Dilbert satirizes, cutting the Prof. Frankfurt stuff could be a tall order. After all, if you spend the day "touching base," "networking," "workshopping," "impacting," "strategizing," "implementing," and "going forward with your key performance indicators," it's hard to think in clear and precise terms.

But I want you to know we're entirely serious about the plain English piece of this initiative.

So far, the executive compensation rule proposal has been well received. Most of the comments, which you can find on our Web site, are positive. And most of them are in plain English. The very first one you'll find states the matter in exceptionally clear terms:

"It is about time someone did something to let us know how the companies in which we have invested our hard earned money are compensating the executives."

Of course, not every commentator approves of everything we're proposing. And so we'll look at every single suggestion, and use every single one that can in some way improve the proposal. The comment period closes in a week, on April 10. So you can still get your licks in by going to sec.gov and clicking on Proposed Rules. Or you can reach out to me or to John White, our new Director of the Division of Corporation Finance, who is also here today and will address you later.

If you have an idea about how to improve this proposal, by all means we want to hear it. I'd be particularly interested in any help you can give us in writing the rule itself in plain English—all 91 pages of it. After all, for all of its prestige and power, the SEC is just one small part of the same sprawling government bureaucracy that is capable of calling roadkill "vehicle-induced wildlife fatalities." We don't want that kind of nonsense creeping into the SEC's rules, any more than we want it in proxy statements and annual reports.

For your assistance in that regard, the legions of lawyers, accountants, and business people across the country who will have to decipher and comply with this new rule will forever thank you.

I have no doubt that the outstanding panelists we'll be hearing from during this conference will themselves be speaking with crystal clarity. Both you, Joe, and Stanford's Rock Center are to be congratulated for recruiting an absolutely top-flight group of panelists and moderators.

All of us at the SEC are happy to contribute; and you can measure our enthusiasm by the fact that three of our Commissioners will be attending, as well as several members of our staff.

You should all pay special attention to John White's remarks at lunch. Not because his 14 days at the Commission have given him any secret insights or inside information, but because if he were still in the private sector, his detailed advice would have cost you thousands of dollars. Now, since he has joined the SEC, he has to give it away for free. How's that for a deal?

It's excellent advice, both for you and for the investors who benefit from your work. The very useful guidance he'll provide is a great example of why we're so honored, and investors are so fortunate, that Director White is now helping to lead the Commission.

In addition to John's very practical pointers, here's some advice from the Chairman: ask your lawyers to use the SEC's Plain English Handbook—and if you really like them, perhaps you could buy them a copy of Lynne Truss's book, Eats, Shoots & Leaves, just for good measure.

It's been a pleasure to kick off our conference this morning. This is a wonderful event. To the panelists and moderators, I want to thank you for your time and effort. To the Commissioners, staff, and our Rock Center organizers, again thanks to each of you.

Learn a lot, enjoy this unique opportunity for informal exchange between regulators and regulated, and most importantly, keep doing what you do best. You are all part of making our country's capital markets the healthiest, safest and best in the world.

Thank you for what you do.


Modified: 04/03/2006