Sep 08 2003

SPEECH TO ALABAMA SOCIETY OF INTERNATIONAL BUSINESS FELLOWS

Thank you, I appreciate the invitation to participate in this important discussion. It has been a little over a year since the passage of Sarbanes-Oxley. Taking this opportunity to reflect on the environment that made such sweeping securities legislation possible could not be more timely or appropriate.

One of the most important lessons that I have learned in over twenty years in Congress is that it is vitally important to continually review and examine the laws of the land, and to ensure that they are functioning effectively. While most of the provisions and studies mandated by Sarbanes-Oxley are still in their infancy, we can still take a step back and examine why this law was necessary, and how it has changed the tone in boardrooms throughout America. Through this process we can assess what the law set out to do, and begin to navigate our course for the future. We can analyze the conditions that led to rampant manipulation of earnings in the first place, and look at ways to continue to rid corporate America of the pervasive combination of corruption and greed.

While we are still early in the Sarbanes-Oxley era, today I would like to put the law in its proper perspective. I will focus on the journey that brought us to this point, outline my ideas on the key areas this legislation addresses and offer my thoughts on the importance of responsible corporate governance in this country. This is indeed a critical juncture in which we find ourselves.

The enactment of Sarbanes-Oxley was a strong signal of Congressional commitment to fairness and integrity in corporate America. Truly nothing can be more important to the growth and stability of our economy than restoring consumer confidence in our capital markets. A critical component of increasing this confidence is rebuilding the erosion of trust that has created a deep chasm between investors and business. Attempting to identify the roots of recent investor disenchantment begins with the conditions surrounding the economy in the early nineties. As the stock market soared, fueled by the rapid growth of “dot-com” companies and the technology sector, investors became accustomed to the rapid valuation of their stock. At the same time, companies became accustomed to tremendously profitable IPO’s, which made the management of numerous startup companies into millionaires and in some cases, instant billionaires. This symbiotic relationship depended on a steady stream of cash from investors, and it also depended on optimistic and increasingly unrealistic profit expectations from Wall Street. To meet the demands of these expectations, the management of some of our largest and most well respected companies felt pressured to manipulate earnings to hit their targets and satisfy expectations.

Things sailed along relatively smoothly until the burst of the bubble in the second quarter of 2000, when it soon became apparent that the explosive growth of the stock market had been accompanied by corporate misconduct and an all too often disregard for business principles. Once well-regarded business juggernauts such as MCI Worldcom, Enron, Tyco and even HealthSouth had now become the poster children for mismanagement and accounting fraud. These revelations generated a tremendous backlash from investors, who lost confidence in corporate America and withdrew their money from the markets. While unexpected world events have certainly helped to play a role in the economic conditions that we currently find ourselves, the role that this loss of trust by investors cannot be stressed enough.

The Congressional response to these revelations was the Sarbanes-Oxley Act, signed into law by President Bush on July 30, 2002. It targets four key areas in the effort to deter corporate misconduct and restore investor confidence. First, it focuses on increasing the accountability of corporate actors. Secondly, it seeks to improve the transparency regarding certain financial disclosures and other financial information. Third, it establishes the Public Company Accounting Board, critical for auditor oversight. Lastly, in what may be the hardest task of all, it endeavors to strengthen overall corporate governance. These components collectively form the foundation of the Sarbanes-Oxley Act, but they resonate on a deeper level as guiding principles behind my efforts to restore investor confidence on the Senate Banking Committee. A more thorough discussion of them will facilitate a clearer understanding of the importance of each element.

Accountability should be inherent in the job description of any leadership position. With new requirements regarding financial statement certifications, auditor independence and lawyer reporting, the Act ensures that corporate actors are accountable for their decisions. The Act recognizes the respective roles that principal executive officers, lawyers and accounting firms play in the operation and oversight of a public company. Sarbanes-Oxley assigns new responsibilities to these corporate actors to ensure that they are accountable for the operation of the companies with which they work By requiring these participants to stand behind their decisions and determinations, a chain of command with accountability at the top creates a clear path to any suspected malfeasance.

Heightened transparency in a public company’s operation is another critical component towards restoring investor confidence and improving overall corporate governance. If an investor is willing to place both their faith and savings in the future of a company, they are entitled to the highest level of certainty that the information the company is providing is not only accurate on paper, but infallible to the closest of scrutiny. Aware that they are being held to this greater standard, management has an increased incentive to create an environment where manipulation is simply not tolerated. By requiring greater transparency, Sarbanes-Oxley will mandate compliance. It seeks to improve transparency by requiring a range of new disclosures, including whether there is a financial expert on the audit committee and additional information regarding certain financial disclosures. It also mandates that companies disclose their corporate Code of Ethics for certain officers, or if they do not have one, to explain why.

The initiation of auditor oversight is another important aspect of Sarbanes-Oxley. Through the creation of the Public Company Accounting Oversight Board, the Act aims to restore confidence in the accounting profession. I was pleased with the selection of William McDonough to head the PCAOB. With a long career in both the public and private sector, he will provide the board with a great deal of knowledge and experience. He should provide the leadership that is necessary to a Board that will play such a critical role in restoring investor confidence to our capital markets.

Lastly, the Act seeks to strengthen corporate governance by changing the “tone at the top.” For too long, boards of directors have operated in a “county-club” culture in which directors were more focused on resumes and networking rather than the difficult task fo objectively and critically analyzing management’s performance. The Act recognizes that the board of directors, which is held accountable by a company’s shareholders, is the focal point of the governance system. By mandating fully independent audit committees with the authority to hire and fire auditors and engage outside advisors, the Act takes an important step towards separating the board from management and restoring confidence in corporate governance and financial reporting.

Reflecting on the developments of the past few years, I can say that we have made a tremendous amount of progress on laying the foundation for enhanced corporate governance. The passage of Sarbanes-Oxley sent a strong signal to corporate America. It also sent a strong signal to investors that the behavior that was permitted in the past belongs in the history books. However, the final chapter in the struggle to restore investor confidence has yet to written. When the fundamental principles laid out in Sarbanes-Oxley are internalized in the behavior of the boardrooms of businesses throughout the county, we will usher in a new era of responsibility that will manifest itself in a renewed faith in American business. Continually taking the opportunity to measure our progress will ensure that we get there. Thank you.