Speech by SEC Chairman:
Videotaped Remarks at Corporate Directors Forum
Chairman Christopher Cox
U.S. Securities and Exchange Commission
University of San Diego
January 31, 2006
Good morning. It’s a pleasure to join you in San Diego—even if my presence is only virtual. I’m always anxious for an opportunity to return to Southern California, and if I have to settle for sending just my electrons, so be it.
I particularly wanted to join you because of your specific focus on the key role of corporate directors in protecting investors. As the investor’s advocate, the SEC stands ready to assist you in doing everything you can to vindicate the interests of shareholders.
As you tackle the pressing issues of corporate governance over the next two days, keep in mind that the news isn’t all bleak. In fact, the very good news is that there has been a powerful rededication to ethical governance in boardrooms across America. Companies large and small have internalized many of the changes that Congress and federal regulators first introduced several years ago. Directors and managers are focused on the integrity of their controls and their public reporting as never before.
Now, that doesn’t mean that there won’t be any more Enrons or Worldcoms in our future. There will always be corrupt people—and no advance in DNA technology is likely to rid us of that problem. But we can make it more difficult for them to operate. For our part at the SEC, we can use our rules and our enforcement to make it increasingly likely that fraud, when it occurs, will be uncovered and punished.
While enforcement actions concerning boards of directors are probably alien to the personal experience of those in this room, I’m sure you all know that the Commission is constantly looking hard at the responsibility of directors. We bring actions whenever we find that a director fails to live up to his or her role as guardian of the shareholders’ interests.
For example, we sued former Tyco Director Frank Walsh, who was chairman of Tyco’s compensation committee, for collecting a secret $20 million payment in connection with a Tyco acquisition. Today, Mr. Walsh lives under a permanent injunction against committing violations of the securities laws, and he is barred from serving as an officer or director of any public company for the rest of his life. He was also ordered to pay $20 million in restitution.
In another recent action, the Commission sued an outside director of Chancellor Corporation for financial fraud. Rudolph Peselman’s case is significant because it marks the first time the SEC has moved against an outside director for failing to take reasonable steps, as opposed to actually committing affirmative bad acts.
The Commission found that Peselman failed to do what was necessary to educate himself on the question of whether his company’s accounting for an acquisition was proper, even though he knew that there was an accounting dispute. Like Mr. Walsh, Mr. Peselman today lives under a permanent injunction and will never again be allowed to serve as an officer or director of a public company.
Through enforcement actions such as these, the SEC will continue to police the ranks of directors—both independent directors, and those who actively manage the company. And more generally, the Commission’s leadership will continue to join with all of you in speaking publicly about the need for integrity in the boardroom and the executive suite. Working together, all of us can help foster an atmosphere where ethical standards are seen as desirable and rewarding.
At that point, however, the SEC reaches the water’s edge—where we’ve got to rely on you to do the rest. Because while we do supervise some elements of corporate governance, and even mandate standards in limited areas, the Commission does not, by charter or inclination, micromanage management. The federal government does not run corporations, or direct their governance, by remote control.
That part is up to all of you in this room. The SEC doesn’t set strategic goals for public companies or tell them how to make the best use of their assets. We don’t dictate what financial profile they should adopt. This is left to the interplay between the shareholders, the board of directors, and management. All three groups are well represented in this audience today.
The best interests of all three groups are one and the same, by the way. When properly understood, their relationship is not adversarial, it is complementary. For example, if a corporation is considering whether to go into a given line of business, or to divest itself of a subsidiary, the board should do its utmost to reflect the views and the best interests of the shareholders of the company. The managers of the company must in turn respond to the board.
It is for this reason that the SEC’s main powers of oversight bear most significantly on the board. From our beginning in 1934, Congress assigned regulation of the proxy process to the Commission. This is because the right of shareholders to elect directors is a basic property right that is essential to the corporate form, and is so recognized in our law.
Sarbanes-Oxley has brought renewed attention to corporate governance and the role of the director. It mandated that boards include on their audit committees at least one member who is a financial expert. It also directed companies to make public their codes of ethics for senior management. And it required the delisting of the securities of any company that doesn’t comply with its audit committee’s standards.
These Sarbanes-Oxley mandates followed on a long tradition of congressional decisions to grant the SEC regulatory power over proxy solicitations. For decades, the Commission has focused on enhancing the level of information available to investors so that, in selecting directors for their company, they can successfully vindicate their financial interests.
Our most recent action in this area was to propose new rules to require that proxy statements be written in plain English. That requirement will extend to our updated disclosures on executive compensation. Beyond more straightforward numbers, investors would get a plain-English narrative of the reasons that the board structured the compensation packages for senior executives as it did.
Once again, that takes us to the water’s edge of the Commission’s authority. We can lead investors to information, but we can’t make them think. Nor will the federal government substitute its judgment for that of the board of directors. We can and we will require that boards justify their decisions, and plainly disclose that information to shareholders. Armed with that information, investors are then free to draw their own conclusions and make their decisions accordingly.
The SEC is moving simultaneously on other fronts to empower shareholders in the director selection process. We recently proposed rules to permit the use of the Internet as an alternative means of proxy distribution—which will direct individual investors to the most useful source of information about their company, where proxy statements can be electronically searched, and where data can be cut, pasted, sliced, and diced.
Giving investors better tools to understand their company’s disclosures cannot fail to have a positive impact on their ability to evaluate current management, candidates for the board of directors, and their own decision to invest.
The responsibilities of corporate directors are at the center of other recent Commission actions, as well. Last month, the SEC announced the unanimous agreement of our Commission on guidelines for the imposition of penalties on corporations. This clear statement of policy is intended to make it as clear as possible to those responsible for corporate governance what the rules are, and what is expected of them when trouble is discovered.
Finally, I want you to know that the SEC’s commitment to foster interactive data is aimed squarely at helping the directors of public companies and the shareholders they represent to exercise stronger oversight of their company’s financial performance.
Interactive data will make it easier for directors and shareholders to analyze the numbers in financial statements. Interactive data will make the world of investment more democratic, and it will complement our collective efforts to constantly improve corporate governance.
I want to congratulate and thank each of you for the commitment that you’ve shown to improving the management of America’s public companies. The Corporate Directors Forum is a splendid opportunity to bring together all sides for a dialogue on these vital issues.
Some of what you are discussing is necessarily technical, but I hope you will never forget the big picture, and what you are really achieving: the improvement of the economic lives of millions of our fellow citizens. Always remember that your neighbor’s life savings, your community’s pensions, and your children’s futures are dependent on your success in these efforts. You have chosen a noble vocation. Thank you for what you do: the SEC is proud to be your partner.