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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Remarks at the Directors' Education Institute,
Duke University

by

Chairman Harvey L. Pitt

U.S. Securities and Exchange Commission

Durham, North Carolina
October 22, 2002

These remarks reflect solely the personal views of Mr. Pitt, and do not necessarily reflect the views of the Commission, the individual members of the Commission, or its Staff.

Thank you, President Keohane.

James Duke's founding Indenture for Duke University directed the members of the University to "provide real leadership in the educational world" by choosing individuals of "outstanding character, ability and vision" to serve as its officers, trustees and faculty; by carefully selecting students of "character, determination and application;" and by pursuing those areas of teaching and scholarship that would "most help to develop our resources, increase our wisdom, and promote human happiness."1

To these ends, Duke mission is to provide a superior education to its students. It also has a pretty good basketball team. (I think that's the implementation of the "promote human happiness" part of Duke's founding indenture.) Anyway, with this understanding of Duke's mission, it was easy for me to see why the University initiated this intensive two-day program to address recent governance failures by corporate America.

By now, we're all painfully familiar with the spate of high-profile corporate failures. These failures - on the part of securities professionals, accountants, lawyers and senior corporate executives - eroded confidence in our capital markets and in the honesty and integrity of those who serve them. These scandals are a sad reflection of the "feel good" culture of the '90s that we are now struggling to eliminate.

The scandals underscore what we already knew - confidence in our capital markets is critical to economic stability, but confidence cannot be maintained if the public believes that corporate leaders, their advisors or their cohorts are "gaming" the system and focusing principally, if not exclusively, on their own personal gains. We must reassure investors that such abuses of the system are not, and will not be allowed to become, the norm in American business.

There are at least three ways to achieve this goal. First, Congress can legislate new legal standards, as it has done in Sarbanes-Oxley. Second, government can engage in regulatory reform and strong enforcement, as we've done with unprecedented vigor over the last year. And finally, those charged with providing checks and balances in our corporate system - directors, audit committees, outside auditors, legal advisors, analysts, and others - can ensure they meet the highest standards for professional conduct.

No set of rules can stop venal actors determined to put personal interests ahead of those of the companies they manage; but there are a number of ways corporate governance can be improved to strengthen the resolve of honest managers and the directors who oversee management's actions. This Institute, an initiative I strongly applaud, falls in the third category.

At this Institute, you are gaining insight into how you best can meet your fiduciary, legal, ethical and corporate governance responsibilities. I commend your initiative. Your role as corporate directors is extremely important to the prosperity of our market-based economy. Corporate directors represent the shareholders of public companies. Public investors put their faith into you. Without honest, wise, and experienced directors, public investors would not trust their funds to the managers. Your very decision to participate in this intensive two-day course demonstrates that you take your responsibilities seriously. Undoubtedly, the innovative techniques in this institute will help you develop a best practices framework for making informed board decisions and exercising sound business judgment. It's in this context that I'd like to offer some of my own thoughts.

To paraphrase Socrates, "The unexamined [corporate boardroom] life is not worth living."2 This advice works on many levels. Recent cases, like those against officers of Enron, ImClone, WorldCom, Adelphia, and Rite Aid, unquestionably send an important deterrent message to public company officials. These senior executives are paying for their misconduct and malfeasance. They have lost their livelihoods and their reputations. They also may pay for their misdeeds with penalties, disgorgement and in some cases jail time. For them, the unexamined life was not worth living.

But what about honest managers? Why for them is the unexamined boardroom life not worth living? For the same reasons Socrates argued at his trial. It is your social responsibility to be independent, critical thinkers. It is your duty to raise and discuss challenging issues. This activity, in Socrates' words, "is really the very best thing that a man (or woman) can do, and life without this sort of examination is not worth living."3

For Socrates, the search for truth and wisdom was essential for nurturing the growth of the soul. It also was essential to the health and welfare of the state. So it is for corporations. Good corporate governance - meaning independence, critical thinking and reflection - is essential to the health and welfare of a corporation. If you don't believe me, believe the markets. They punish corporations that do not exercise good corporate governance. My mother was no philosopher, but she used to put it this way, "It's good to be smart but it's smart to be good." Corporate America thinks it's been stung by criticism already, but if she were still alive, they would really get an earful from my Mom!

Speaking of down-to-earth people who have moved on from this world to the next, I wanted to talk for a few minutes about Dave Thomas, the founder of Wendy's Restaurants. A strong believer in education, Mr. Thomas established the Thomas Center here at Duke - which houses the Fuqua School of Business's Executive Education programs. Mr. Thomas was a hard-working, honorable person, and I think we would do well to remember his approach to life this evening, especially in the context of aspirational behavior.

Mr. Thomas was dealt a difficult hand in life. He was orphaned as an infant. His adoptive mother died when he was five, and he spent the next ten years of his life moving around the country as his adoptive father sought employment. A high-school dropout, he started work at 15 as a restaurant busboy.

As you know, Mr. Thomas revolutionized the hamburger by redesigning it as a square. In a Wall Street Journal article that paid tribute to Mr. Thomas after he died last January, Dave Shifflet explained how Mr. Thomas's square hamburger epitomized his solid approach to good business. He wrote:

As every great chef knows, presentation is crucial. It sends a message. What message was Mr. Thomas sending? Advice from an elder: Don't cut corners. And so, when one ate at Wendy's one ingested not only food but philosophy. Similarly, Mr. Thomas's books and speeches promoted faith, family, and hard work - vital ingredients for success, especially for those whose lives are not served to them on a silver platter. His policies found strong marketplace endorsement: Mr. Thomas became a millionaire at 35 and his businesses, which include the Tim Hortons chain, now boast sales above $8 billion.4

Mr. Thomas often said he was lucky to have been born in America. "Only in America," he said, "would a guy like me, from humble beginnings and without a high school diploma become successful. America gave me a chance to live the life I want and work to make my dreams come true. We should never take our freedoms for granted, and we should seize every opportunity presented to us."

Mr. Thomas's life is inspirational for everyone, and for so many situations. The way he lived his life also has an application for those of you attending this Institute. If you approach your jobs as Mr. Thomas did, with the attitude of not cutting corners, of working hard, of staying humble, of taking nothing for granted, and of seizing opportunities, then you will be well served and you will serve public investors well. As independent directors, what it really comes down to is having the courage to ask "where's the beef?"

Again, if you don't believe me, believe the markets. After all, Mr. Thomas created a multi-billion dollar business. There is also support for this approach in academia. Jim Collins, the author of the national bestseller Good to Great: Why Some Companies Make the Leap and Others Don't, studied the phenomenon of what separates great companies from good companies. I'm sure many of you have read the book and can recognize that Mr. Thomas's leadership of Wendy's International falls squarely - so to speak - in the framework of great companies. Jim Collins describes great leaders as "[s]elf-effacing, quiet, reserved, even shy - these leaders are a paradoxical blend of personal humility and professional will."5

Whether in government or the private sector, we all should strive to make our organizations great. So now I want to turn inward and talk about how the SEC is striving to meet these same high standards, with the goal of helping to restore public confidence in our corporate system.

Last fall, we launched the most aggressive reform agenda in our history. The corporate scandals and collapses were a catalyst that spurred us to accelerate and broaden our efforts. We recognized that the system of self-regulation of the accounting profession was broken beyond repair. We embarked on long-needed disclosure reforms to improve the quality and increase the timeliness of disclosure. We called on the New York Stock Exchange and Nasdaq to improve corporate accountability and corporate governance through strengthened listing standards. We initiated our unprecedented program of "real time enforcement," pursuing wrongdoing with increased vigor.

The President and Congress also responded forcefully. In March, the President announced his "Ten-Point Plan," embodying three core principles: accurate and accessible information, management accountability, and auditor independence. In April, the House of Representatives passed important legislation addressing oversight of the accounting profession and the weaknesses in corporate governance and disclosure.

The final product of these efforts was the Sarbanes-Oxley Act of 2002, which President Bush signed into law on July 30th. Its reforms are broad ranging, including provisions affecting the governance of the accounting profession, disclosures by public companies, corporate governance and enhanced criminal penalties for securities fraud. I am personally pleased that the ultimate legislation adopted the substance of many of our recommendations for solving these crises.

We've undertaken numerous initiatives in the areas of enforcement, corporate governance and disclosure, regulation of market participants, and accounting reform in the last year. I'm enormously proud of our accomplishments, our regulatory reforms and our enforcement program. They have been aggressive, creative, well focused and effective, and I'd like to recap some of them.

One initiative is "Real Time Enforcement." This policy aims to improve our protection of investors by moving faster, or in real time, to bring enforcement actions. We seek to learn of violations quickly and, where investor interests are being disserved or abused, take immediate action to undo or halt the effects of misconduct. Faster enforcement can help prevent continued fleecing of public investors and dissipation of assets, and promotes investor confidence in the integrity of our markets. The staff of the Enforcement Division has embraced this concept in a way that makes me very proud, and led us to our most impressive enforcement record ever.

Some of the milestones we met as a result of the work of the Enforcement Division for fiscal year 2002, which ended September 30th, include that:

  • We filed a record 163 actions for financial reporting and issuer disclosure violations, approximately 46% higher than we filed in fiscal year 2001 and 58% higher than in fiscal year 2000. Overall, we filed a record 598 enforcement actions, approximately 24% more than in fiscal year 2001, and 19% more than in fiscal year 2000.
     
  • We sought to throw 126 unfit officers and directors out of corporate boardrooms for good. That is approximately 147% more than we sought in fiscal year 2001 and 232% more than in fiscal year 2000. As the President stated in his Ten-Point Plan, corporate officers and directors, and especially CEOs and CFOs, must personally assume responsibility for compliance with our full disclosure laws. The ouster of unfit officers and directors is a critical tool to ensure that officers and directors "get it," that their mission is to safeguard the interests of shareholders. It is also vitally important to prevent any corporate wrongdoers from getting a second chance to injure investors.
     
  • The Commission filed 48 Temporary Restraining Orders, seeking immediate relief to prevent irreparable harm to investors - up approximately 55% from fiscal year 2001 and 45% from fiscal year 2000.
     
  • And, we have brought more subpoena enforcement actions than in previous years and supported an extraordinary number of criminal prosecutions.

We've also come up with some creative approaches to old problems. Using our long-existing authority to obtain affirmative statements from companies under investigation, we've required public companies to provide the public on a "real time" basis with critical information on the nature of financial frauds or other difficulties. We invoked this authority informally last October, to press Enron to report publicly and quickly the circumstances that led to its restatement, and we formally issued an order requiring the same thing when WorldCom's fraudulent financial reports became known.

The heaviest hammer against financial fraud, of course, is criminal prosecution and serious jail time. As you know, the SEC can't bring criminal cases itself. But, the new Corporate Fraud Task Force, established by the President, is the latest step in what has been a remarkable run of coordinated enforcement efforts between the SEC and federal criminal authorities. This year, even before the Task Force was put in place, approximately 75 criminal actions by 17 different U.S. Attorney's Offices and the Department of Justice were taken with our assistance for securities related offenses or obstruction of justice in our investigations. By the end of the fiscal year, these figures had grown to 259 and 30, respectively.

We've also led meaningful reforms in corporate governance, disclosure, and accounting. I am attaching to this speech, which is available on the SEC's Web site, a summary of numerous achievements by the Commission over the past year, including accelerated filing of periodic reports, timely disclosure of insider transactions, and the required CEO/CFO certification of companies' quarterly and annual reports, to name a few. We've also launched investigations into the performance of rating agencies and the implications of hedge fund growth. And, next week, we commence "interactive" market structure hearings.

These are but a few of our initiatives and accomplishments. I'll end there because I know that Game Three of the World Series is on tonight, and I'm sure many of you would rather watch the game than listen to me talk inside baseball. But let me just say, in closing, that we are doing everything we can to help restore investor confidence in our markets.

And now, unless you have any questions, I'll let you get to Game Three.

 

Additional Materials

 SEC Accomplishments - Fiscal Year 2002
 Record of Enforcement: FY 2000 - FY2002

Footnotes

1 The Mission of Duke University, approved by the Duke University Board of Trustees on October 1, 1994, and revised February 23, 2001.
2 Plato, The Last Days of Socrates, translated by Hugh Tredennick 71-72 (1961).
3 Id.
4 Dave Shiflett, All-American Burgher, The Wall Street Journal at A10 (Jan. 11, 2002).
5 Jim Collins, Good to Great at 12 (2001).

 

http://www.sec.gov/news/speech/spch594.htm


Modified: 10/22/2002