Speech by SEC Chairman:
'Plain Language and Good Business'
Keynote Address to the Center for Plain Language Symposium
Chairman Christopher Cox
U.S. Securities and Exchange Commission
October 12, 2007
Thank you, Bill [Lutz, Board Member of the Center for Plain Language], for that generous introduction. You’ve had an exciting day here thus far, and I'm very pleased to be included in your program.
I'll get right to the point, because after all, this is a plain language conference. I've been asked to “discuss the need for plain language in promoting transparency.” Well, the need is rather obvious. If the promoters of something called a "plain language" conference can't think of a better word than "transparency," we all need help. I think the basic idea is to make things clear. So right off the bat, I'm going to chuck out the $10 Latinized words with four or more syllables, if there is a good old Anglo-Saxon one with just one or two syllables that's handy.
Disclosures intended for retail investors should be concise and clearly written. In prospectus and proxy writing as in other areas of life, it's usually the case that the more profound something is, the fewer words it takes to say it. The most important thing I ever said was just four words — and my own wife beat that record by a mile. I said, "Will you marry me?" and she said, "Yes."
So, the fact that I'm scheduled to speak for 20 long minutes pretty much destroys my chance at being profound. But I do promise that, before I'm finished, I will say something very important to all of you.
Making investor communications easier to read and understand is going to be a big job. If this effort is to succeed, we're going to have to change a lot of ingrained bad habits. It's going to have to be a sustained national effort — and it's going to need real leaders. Bill Lutz, the Center for Plain Language, and all of the people in this room fit that description. With the prototype executive compensation section of a proxy statement that Bill, Peggy [Foran of Pfizer], and Gordon [Akwera of Addison] have unveiled today, you've helped provide a concrete example of what a little bit of creativity and a lot of elbow grease can produce. And Bill, along with Madeleine [Yates of Merrill Lynch] and Max [Dietshe of Addison], have done an outstanding job this morning of demonstrating how plain English and the visual presentation of information can improve life for investors.
Just now, Thia Reggio of Siegal+Gale told us how good intentions can block the road to clear communication. Possibly one way to overcome those roadblocks is to ask ourselves: how would one of America's plain-spoken cowboy heroes say it — John Wayne, for example, or Clint Eastwood? Imagine one of them behind your desk. Their paperwork would be just like their speech: clear and simple. It may be hard to keep that vision in mind when you're responding to government rules and regulations written by thousands of pen-pushers at some 60 federal agencies, issuing more than 1,800 rules a year, in so many billions of words that the Code of Federal Regulations is now more than 130,000 pages thick. But let's stick with this idea for a minute.
Remember Clint Eastwood's classic role in Dirty Harry? For those of you here who are too young to have seen every rerun from the 1970's on AMC, suffice to say that Inspector Harry Callahan didn't waste words.
One of the most famous scenes from the movie has the wounded bad guy trying to decide if he should draw his gun on Callahan, or if Callahan might have one shot left. Harry Callahan just squints at him, steely-eyed, and says:
"I know what you're thinking. Did he fire six shots or only five? Well, to tell you the truth, in all this excitement, I've kind of lost track myself. But being as this is a 44 Magnum, the most powerful handgun in the world, and would blow your head clear off, you've got to ask yourself one question: Do I feel lucky?"
Not much question that Dirty Harry got his point across. One of the reasons that all of us, as moviegoers, admire Harry's delivery is that we know it's actually difficult to speak that directly. In fact, if those same lines of dialogue were to appear in your average prospectus or proxy statement, they'd probably sound more like this:
"I imagine that you are harboring significant uncertainty concerning the precise number of times that the hammer of this particular multishot firearm was cocked, its cylinder was advanced, the hammer was then released at the rear of its travel, the round in the chamber was fired, and the cylinder was then advanced once again — and specifically whether the exact figure is six, or possibly only five. Indeed, given the ambient commotion, my preoccupation with the need to make multiple, simultaneous and consequential decisions with alacrity, the surrounding high-decibel acoustic percussion, and the substantial ramifications of the firearm having already been discharged multiple times, I myself am experiencing difficulty in quantifying the discharges with exactitude. But inasmuch as the instrument in question, having been manufactured by NASDAQ-listed Smith & Wesson (stock symbol SWHC) with a horizontal barrel dimension of 8 3/8" to propel a projectile with a diameter of nearly 1/2" at a velocity of over 1,000 feet per second and an energy of more than 1,400 joules, is arguably the most powerful firearm in the world (the uncertainty being a function of the particular metric that one might choose, such as overall terminal ballistics, external ballistics, or some combination of other factors), you should be advised that were the projectile from this instrument to strike you in the region between the apex of the cranium and the base of the lower mandible, it would completely sever this entire portion of your anatomy, and in addition transport it a considerable distance from its original location. As a result, it is appropriate that you pursue a specific and directed line of inquiry and self-examination: viz., in view of all the facts and circumstances, and giving due weight to the relevant risk factors, is it your considered judgment that you are more likely than not to be relatively fortunate?”
Sadly, it was all too easy for me to write that ... the words seemed to flow quite naturally. Too many years of 10-K writing, I guess. The truth is, we've all got some distance to travel — so let's get started, with alacrity.
First, let’s recap the bidding on the subject of why we’re here. Why is cutting the fat out of investor communications important? Well, for starters, none of us likes to have our time wasted. And that's what verbose and hyper-technical writing does — it wastes our time. Since investors in particular tend to search for rational economic tradeoffs, rather quickly they decide they won't put up with impenetrable disclosure documents. So as the legal jargon spreads across investor communications like weeds in a garden, increasingly the investors just stop reading it.
Of course, even the chore of discarding unwanted documents that come to you via the Postal Service or your email can be time consuming. That’s one of the reasons that our investor protection mission includes stamping out financial spam that’s clogging your inboxes. We’ve started an aggressive program of shutting down trading in companies whose stocks are being touted through spam. And the results have been impressive. Not only have monthly complaints to the SEC about stock spamming fallen from over 220,000 per month as of last December to less than 70,000 last month, but an independent assessment by Symantec, the Internet software and services company, has credited the SEC with cutting financial spam nationally by 30%. Since time is money, we’re committed to giving investors their money back.
In addition to helping investors quickly focus on what’s important, and treating their time like the precious asset that it truly is, putting disclosures for retail investors into plain English is important for another reason. It exposes the truth about a company to the light of day.
George Orwell made the point best: muddled language is both the result and the cause of muddled thought. And sometimes, kicking a lot of dust up in the air is exactly what cover-up artists intend to do. One need look no further than the most notorious corporate scandal of our time, Enron, to find an example of legalese and jargon being used to hide wrongdoing in plain sight.
Most importantly, when investors and analysts can use their time more productively and when information is presented clearly, every market participant will be able to make better decisions. Overall, price discovery will be more efficient. The more direct sunlight that shines on every public company, the more honest our markets will be, and the stronger will be investor confidence.
These are all good reasons to promote plain English. That's why the SEC has plain English initiatives underway across the board — in mutual fund disclosure; in offering documents and periodic reporting; and even in Sarbanes-Oxley compliance, where in the next few days you can expect to see a user-friendly plain English brochure for small businesses that introduces the subject of how to conduct management's assessment of internal controls under the new, streamlined guidance from the SEC.
I want to point out that this is not a "do as I say, not as I do" SEC campaign. We at the agency have to step up as well. We have a responsibility to purge our rules of bad writing. And since we’re all in this together, we don't need the SEC to be our national nanny when it comes to good English. But we do need the SEC, and every public company in America, to work together to produce annual reports and proxy statements that investors actually want to read.
If we were to look at the SEC as a company, one of its most important product lines would be disclosure documents. After all, it's our rules that result in proxy statements and annual reports getting mailed to investors across the country. The reason we are in this business is that we firmly believe informed investors will make better choices. But in order for investors to make better choices based on disclosure, they have to read it. If investors don't read the disclosure documents — if instead, they just throw out the proxy statement or the annual report when it comes in the mail — then the entire purpose is defeated.
We have some empirical evidence that in fact, most retail investors are throwing away the disclosure documents that the SEC requires, rather than reading them. When your customers routinely throw your product away, you’ve got a problem. There can be many reasons that our customers might be dissatisfied, but the most obvious is that investors are busy people. Wading through dense legalese isn't their day job, and they ordinarily just don't have time for it. Once again, if time is money, then poorly written proxy statements are wasting one of investors' most important assets.
At the SEC, we're doing everything in our power to correct that. We want to make sure that public companies take the same care in making their investor materials readable that they apply to sprucing up their catalogs and sales materials so customers will be interested in buying their products.
This is one area where the SEC will be able to measure the effects of our efforts. Under the leadership of Kristi Kaepplein, the Director of the Office of Investor Education and Advocacy, the SEC will soon conduct a baseline survey of America's investors to find out whether they find proxy statements, 10-Ks, and other SEC-required disclosure documents to be useful. One of the questions we will ask is this: when your proxy statement comes in the mail, do you spend more than three minutes reading it? Or do you just throw it away? Periodically, we will go back into the field and ask that question again. Over time, we will want to see a decline in the percentage of investors who routinely put SEC documents in the trash.
So, how did it get this bad? Well, it didn’t happen overnight. It took decades. Years ago, annual reports and proxy statements were a lot less cumbersome than they are today.
When securities lawyers first drafted these documents in the 1930s, they started with essentially blank slates. Today, they have seven decades of judicial common law, regulatory interpretation, congressional enactments and industry statements to ponder. Increasingly in recent years, the threat of litigation — which can instill a healthy fear into managers of other people's money when conscience is lacking — has also had an unhealthy influence when it comes to the way companies and their lawyers write disclosure. That's because slowly but surely, they have shifted the purpose of their drafting from informing investors to insuring against liability, writing for the plaintiff's lawyer instead of the shareholder. In the process, the jargon of lawyers has taken over.
The lawyers' understandable concern, of course, extends not only to the full disclosure of all material facts — in that the SEC wholly concurs — but equally if not more strongly to the recital of magic words from court opinions, rules, and regulations that have definitively addressed some topic or other. I think we've all observed that there is a near-religious scrupulousness in this adherence to "legally correct" boilerplate language. If a competitor in the same industry has faced a disclosure issue that has survived a court test, by all means someone in the company's legal department will want to mimic the very phrases.
While it’s certainly true that securities market participants can realize substantial benefits from computer and information technology, some of the people who draft disclosure documents are over-using one particular feature of their word processors: the cut and paste.
Choosing words to describe the company's business that no other company has used in exactly the same way might seem indefensibly risky to some securities lawyers. But isn't it also risky to be a slave to boilerplate disclosure? While undoubtedly the model language used by others may have served at one time as a sturdy defense in court, that same language might not be the best way to describe another company in a different situation. Each company's circumstances are different, and the cut-and-paste strategy can easily backfire — for example, where it causes the drafter to omit material information.
The truth is, companies can better control their litigation risk if they present material information to their investors in plain English.
And while I’m exhorting public companies to do a better job of writing in plain English, let me quickly add that we at the SEC have a responsibility to make our rules and explanations clear and understandable. That’s why, from the forms issuers file to the accounting standards they use, the SEC is working to be a plain-English leader. Across the board, we're waging an all-out war on complexity. Just as companies are beginning to work to ensure their periodic reports and proxy statements are more clearly written, we too are dedicated to making disclosure more useful to investors.
An outstanding example of this is our new executive compensation disclosure regime, and the staff's ongoing review of how companies are faring with it. In the past, executive compensation was among the most complicated subjects for investors to sort out, and it presented some of the biggest challenges when it came to analyzing and comparing data. We enacted our new rules to address this problem, so that investors could see clearly how the executives who work for them are paid.
When we unanimously approved the new rules, each of my fellow Commissioners and I expressed high hopes that companies would provide investors with more useful disclosure. The most dramatic change in the new rules was that there would be one number — a single figure — reflecting the total compensation that the top executives earned in the prior year. The number captures not just salary but also the many forms of non-cash compensation including perquisites, retirement benefits, and contingent rewards such as options that make up each executive’s pay. This new total figure, which makes comparisons far easier than ever before, is accompanied by comprehensive tables that clearly display each element of the total pay package.
Another important feature is the new narrative discussion of the company’s compensation policies. The Compensation Discussion and Analysis offers an opportunity for the company to cast aside the boilerplate, and explain to the shareholders the how and why of its approach to executive pay. The new rules explicitly require that this be written in plain English to provide the necessary overview and context for the numbers in the tables that follow it.
At the SEC, we knew that this year's executive compensation disclosure would look different from past years, and we were confident it would be better. We also recognized that writing it for the first time might not be easy, since there was no pattern to follow. This, of course, also represented an enormous opportunity to introduce genuinely plain English disclosure, since the lack of precedent would give companies an opportunity to start from scratch. There's simply no boilerplate available.
To make sure that we seize this opportunity for investors, and that legalese and jargon do not find their way into the new disclosure, we decided to undertake an across-the-board review of the first year's experience under the new rules. This has also offered a way to provide companies with the feedback they deserve as we all work together to implement these sweeping changes to the disclosure of executive compensation.
In the spring of this year, Commission staff from the Division of Corporation Finance began a systematic review of the executive compensation disclosure of 350 public companies. Their aim was to evaluate compliance with the new rules, and provide guidance to companies on how they might improve their disclosure. Over the past two months, the staff issued individual comment letters to each company in the sample.
Reviewing 350 proxy statements for compliance with a new set of rules is a big job, of course. Over a dozen staff members worked full time on this project for many months, and the reviews are still ongoing. But we thought it was a valuable use of the agency's time and resources, because making this disclosure truly useful is very important to investors. Many of the staff members who performed the reviews are here today, and I want to publicly and personally thank each of them for their important work.
The report from the staff on their findings is overall very positive. They've found that in the very first year, most companies have met or exceeded the Commission's high hopes for better disclosure. They have provided investors with the most informative executive compensation disclosure ever. For the first time, investors can quickly see what each executive's total compensation is, and they can compare these figures from company to company. The disclosure of perquisites, which has been so spotty in the past, is clear and robust. Stock options, restricted stock awards, and other forms of equity compensation are finally understandable. Director compensation, about which investors used to know very little, is now far more detailed and complete. The new and improved tabular form has made the presentation easy to understand and quickly readable. Even such previously obscure features of potential executive pay as termination and change-in-control arrangements are now being clearly described, with many companies presenting this information in tabular or other more readable formats.
I understand that many companies have had to expend more time and resources this first year to comply with the new rules. It is a credit to these companies, and a great service to investors, that most firms have taken the new rules very seriously. The staff review has found clear evidence of this high level of effort in many of this year's proxy statements. These overall very positive findings provide an opportunity for me to thank our nation's public companies and their advisers for their hard work.
Still, although the learning curve will certainly flatten as we go forward, this year it was steep. And as the staff noted in its comment letters, there are specific disclosure areas where many companies can do better. These comments are summarized in a report that the Division of Corporation Finance posted this past Tuesday on the SEC's website. For the practitioners in the audience, I recommend that you read the report if you haven't already. Meanwhile, I want to discuss it very briefly and note a few of the staff's observations.
There were two principal themes to the comments. One is substantive, and the other concerns the manner of presentation.
First, the substance. The staff found that in many cases the Compensation Discussion and Analysis could do a better job of explaining how particular levels and forms of compensation were determined. There is also need for clearer explanation of why companies pay what they pay. This doesn’t necessarily mean we need longer narratives. A company can provide more informative analysis while at the same time shortening the disclosure, as our Inspector Callahan example illustrates. Brevity and clarity are hardly mutually exclusive aims, as Mark Twain so wryly observed when he apologized for the length of one of his own pieces of correspondence by saying, "I'm sorry this letter is so long, but I did not have time to make it shorter." What's needed in the Compensation Disclosure and Analysis is incisive disclosure of the key facts and figures, and genuine analysis of the how and why. That will make what the investor gets both educational and succinct.
Just using plain English would shorten many companies' CD&As. That's why, when the Commission approved the new executive compensation rules, we made it a point to include new plain English rules that specifically apply to these disclosures. I recommend to the practitioners here that you read the full text of those rules when you get a chance. And while a talk on the subject of plain English shouldn't get bogged down in legal citations, this one is important enough for me to identify: Our plain English requirements for executive compensation can be found in Exchange Act Rule 13a-20. While this rule doesn’t specifically apply to other disclosures, the preparers among us should also consider applying its principles in any document you draft.
A shorter CD&A being the happy result of writing in plain English, it's important quickly to add that brevity alone is not the full measure of quality or usefulness to investors. Substance matters. A shorter narrative that lacks important information and qualitative analysis isn't better than a slightly longer one that's more complete and written in plain English. If your compensation policies are highly complex, or your decision-making process is truly Byzantine, then it's going to take a few more paragraphs, tables, or charts to provide a satisfactory explanation. In the end, while keeping it short is important to the overall goal of getting investors' attention focused on what truly matters, it's not the number of pages that counts — ultimately it’s the quality, readability, and usefulness of the disclosure.
Which leads us directly to the second theme, the manner of presentation. Presentation matters, too. The first and most essential ingredient of presentation is the subject we're focused on here today, plain English. But beyond that, the visual presentation of quantitative information is also enormously important in getting the compensation message across to investors clearly and understandably. By organizing data in tables, graphs, and pictures, companies can help the reader to more easily grasp the key aspects of what might otherwise be just a jumble of numbers. In the best examples of doing this well, companies used a layered approach, with the CD&A providing the top layer of context for the progressively more detailed tabular information that follows. This layered approach is particularly suitable for Web-based disclosure, which will be increasingly important as companies use the new e-proxy rules. It will enable investors to click through to the level of detail that suits them.
In its report, the staff noted that many companies made good use of graphics to explain their particular executive compensation programs. The staff found these graphics to be, most often, quite helpful. They issued comments on the graphics and the more creative approaches, including additional tables, only in limited circumstances — such as asking companies to make clear that their custom presentations aren't substitutes for the information the rules require.
It's precisely because the visual presentation of information is such a key element of making disclosure understandable to investors that what Peggy Foran, Bill Lutz and Gordon Akwera have done with their prototype disclosure based on a re-working of Pfizer's proxy statement is so important. You’ve shown us some truly creative ways that a company might use graphics to present executive compensation information more clearly and understandably. Your imaginative approach has challenged every company, and all of us at the SEC, to be more creative in using innovative design formats to emphasize and explain the information the rules require.
I should make it clear that the staff at the SEC have not formally commented on the prototype disclosure. But they have had a chance to see it, and they've told me they really like the way the authors have used tables to present change-in-control and termination payments. They like the overall look and feel of the tables, and the use of techniques such as color shading, and the crisp look of the presentation. They like the use of bar graphs, and especially the break-out of the talking points in the CD&A that appear in teal print. And they found it very creative to think of using “pictures” of disclosure such as, for example, the boxes showing the elements of compensation. Overall, they found your efforts to be an excellent way of highlighting the fact that our rules don't describe the upper bound of what a company can do to inform investors, but rather just the baseline. The rules don't prohibit custom presentations — they only require that the more creative elements not be featured more prominently than the required information.
To sum up: Plain English and investor-friendly graphics, solid substance and creative presentation, all are important to improving investor understanding of executive compensation — and beyond that, every aspect of public company disclosure. This is a vitally important effort for the good of investors and the health of our markets, and I'm thrilled to have the kind of enthusiastic support and energy behind the effort that is here in this room.
So I'll return to my office with renewed inspiration for the effort, because your enthusiasm is so contagious. I want to thank you for what you do every day — since without your private sector leadership, the federal government leading the charge for clear writing and plain English might be greeted with more than a little skepticism. After all, the gobbledygook in laws and regulations has been a major headache for many years. And we all know how the Congress, where I served for many years, likes its legalese.
But every once in a while, there's a maverick in Congress who leads the battle for clearly written legal rules. In fact, the very first reported appearance of the word "gobbledygook" was in 1944, when it was coined by a Congressman actually named Maverick. U.S. Rep. Maury Maverick was a Texas Democrat who wrote a memo that banned all "gobbledygook language" from his office. He said he made up the word to imitate the noise a turkey makes. And to show you just how serious he was about plain English, he added in his memo, “Anyone using the words 'activation' or 'implementation' will be shot."
At the SEC, we have more modest penalties in store for both staff and public offenders. But we’re dead serious about plain English. And I couldn’t be happier that so too are all of you. Every one of us at the SEC is proud to be your partner.
And now, for my promise that I'd say something very important, and of great interest to all of you. Just two words: The End.