Speech by SEC Commissioner:
|1)||an effective corporate governance process;|
|2)||punishment of bad behavior - by the company, by civil and criminal law enforcement and by the market; and|
|3)||an ethical corporate culture.|
We cannot legislate the third factor - an ethical corporate culture, so our efforts have been directed at the first two: rules to incent good procedures and behavior, and enforcement actions to disincent bad behavior. Taken as a whole, I believe that our new rules reflect a thoughtful and measured approach. They make clear that management and the board of directors have ultimate responsibility for a company's governance program, but that gatekeepers also play an important role.
Our difficult task has been, and continues to be, to ensure that we do not create an environment in which the markets cannot allocate resources efficiently. One way I have come to evaluate our proposals is through what I call the "Goldilocks" approach to regulation: If the media and critics of the Commission say we are too lenient, and the entities we regulate say we are too harsh, chances are we got it just right.
By any measure, we promulgated an ambitious regulatory agenda in the area of corporate governance, and it is becoming clear that some time is necessary for companies to absorb and implement the barrage of new regulations. This is not to imply that the Commission will shy away - even in the slightest - from our obligations under Sarbanes-Oxley or our mission of investor protection. However, we have to acknowledge that regulatory risk is part of running a business and that the uncertainty caused by perpetual rulemaking can have a chilling effect on legitimate business decisions, including the decision to commit capital. I think we need to take some time to monitor how the new rules operate in practice, to provide guidance and clarification where necessary, to get a better measure of costs and unintended consequences, particularly for small business, and to assess whether we are accomplishing what we intended.
I am encouraged by evidence that the market is driving reform. We read that companies are being more selective in choosing directors - and directors are also being more selective in choosing companies. We've heard that some director nominees now hire consultants to review the company and assess the rigor of its governance procedures, the quality of its reporting and its overall risk profile. In the current environment, companies have a strong incentive to adopt rigorous governance procedures because those that fail to do so will be unable to attract top quality directors and will pay a risk premium in terms of both director compensation and possibly officer and director liability insurance.
Now that most of the rules have been adopted, I come back to my initial questions.
The objectives of the Sarbanes-Oxley rules seem clear: to restore investor confidence in our companies and our markets and to enhance investor protection by improving corporate governance and transparency. My impression is that our rules meet our objectives. Although we will never be able to eliminate fraud, the good corporate citizens - and that includes most companies - are taking our rules seriously. Equally important, the market seems to value companies that display good corporate governance and make clear disclosures.
Regarding the spirit, I believe we did. Regarding the letter, I also think we did. But on at least one point - our proposal that lawyers make "noisy withdrawals" -- there was much discussion of whether we had overstepped our mandate. We did approve a rule that requires lawyers - both in-house attorneys and outside counsel - to report securities law violations "up the ladder" to the chief legal officer or chief executive officer of the corporation. Where the CLO or CEO fails to respond appropriately, the attorney is required to report the evidence to the audit committee, another committee of independent directors or the full board.
The much more controversial part of our proposal was that, where the board of directors fails to respond appropriately, the attorney would have to withdraw from representation of the corporation and make a public filing with the SEC - a so-called "noisy withdrawal." Because of the strong opposition to the "noisy withdrawal" in the legal community, we split out that part of the rule and went back out for comment with an alternative proposal that the corporation - rather than the attorney -- disclose the attorney's withdrawal. Stay tuned.
In at least one instance, we have been criticized for not going far enough -- namely, in not prohibiting auditors from providing abusive tax shelters to their audit clients. To be perfectly frank, I would have supported such a provision if we could have defined it. But since neither Congress, the Treasury nor the IRS could define an abusive tax shelter, we didn't think we could, especially given the short deadlines we had to put out the rules. So we did the next best thing - we put the burden on the audit committee to scrutinize carefully any tax shelter services proposed by the auditor. I assume that no audit committee in its collective right mind would approve any tax service by its auditors that could be construed as abusive - and I hope that the audit firms won't offer them.
Clearly, our proposed rule on financial experts went too far. As originally proposed, it appeared that luminaries like Alan Greenspan and Warren Buffet would not have met our criteria, so we got more realistic in our final rule.
I have heard some grumbling about our certification requirements -- that CEOs are spending days with the auditors reviewing the accounting treatment of every aspect of the firm's operations. That is certainly not what I had in mind. If they are doing that, they are missing the forest for the trees. What CEOs should be focusing on are the critical assumptions and judgments that could have a material impact on the financials - revenue recognition, impairments and pension funding. These are judgments that CEOs and CFOs should have been making even before Sarbanes-Oxley, and they certainly are judgments they need to understand before they can certify that their financials present a true picture of the company.
I think overall the rules do make sense - but I have begun to hear about some unintended consequences. For example, I have heard that to avoid our pension blackout rule, companies will be less likely to change plan administrators. I have also heard that firms are finding it more difficult to get independent directors - although if that's because the candidates are doing more due diligence and think the risk is too high in a particular company, then the market is working.
This one worries me. As I said earlier, we cannot prevent all fraud nor legislate ethics. And, importantly, our requirements do not address - nor should they - bad business strategies. So companies will still perform badly and even fail for a variety of reasons not under our control. It is important that investors understand that - which is why I am such a strong proponent of investor education. The goal of all of our new rules is to restore investor confidence and trust in the markets. Yet the ultimate effectiveness of the new corporate governance rules will be determined by the "tone at the top." Adopting a code of ethics means little if the company's chief executive officer or its directors make clear, by conduct or otherwise, that the code's provisions do not apply to them. Designating a financial expert means little if the person designated, while technically qualified, does not possess the personal qualities required to do the job effectively by asking the tough questions and insisting on clear answers. More than any regulatory body, corporate officers and directors have it within their power to restore public trust. Trust depends not just upon putting new rules on the books, but more importantly, on whether there is a widespread consensus that those rules are accepted and will be implemented effectively and in good faith. Corporate officers and directors hold the ultimate power and responsibility for restoring public trust by conducting themselves in a manner that is worthy of the trust that is placed in them.
Thank you. I'd be happy to take questions.
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