Il Duce is clearly vulnerable on the issue of corporate misdeeds. Even his own party is setting their positions separate from his.
On the day after Il Duce delivered a carefully crafted speech on corporate responsibility which has generally been panned as being not much more than pablum, and at a time that there is a growing chorus for a Special Prosecutor to investigate Il Duce's business dealings and those of defacto President Cheney, Senator John McCain delivered a speech on the same subject as Il Duce's Tuesday speech in New york.
It included all the good GOP corporate stroking as is required by a Republican. But it set McCain as a much tougher reformer than Il Duce -- needed to reach the people who think the GOP are simply in bed with corporate America.
The following is that speech, from which I have removed some sections to shorten it for this Board. I've noted where I "snipped" pieces out. If you want the full speech, then you can go to http://www.straighttalkamerica.com/News/News.cfm?ID=418&c=5
By Senator John McCain
July 11, 2002
National Press Club
Patriotism in this country is not nor should it ever be merely a sentimental attachment to blood and soil. Our love of country is a love of ideals. The values of freedom inspire our patriotism: government derived from the consent of the governed; an economic system that is an open market for creativity, innovation, competition, and self-improvement.
Americans have proved beyond a shadow of a doubt that a nation conceived in liberty will always be stronger, wealthier, more just, and happier than any nation that rations liberty to exalt the few at the expense of the many. We are the greatest nation in history because we trust in freedom. We trust that a people who are free to act in their self-interest will perceive their interest in an enlightened way, and use their wealth and power to create a civilization in which all people can share in the opportunities and responsibilities of freedom.
Threats to our greatness come not just from foreign enemies and alien ideologies that hold our ideals in contempt. They also come from those few among us who perceive their self-interest as separate from the interests of our society, who in their selfish pursuits abjure the values of honesty, fairness and patriotism, and threaten to damage the very trust that makes freedom work.
I am a supporter of the free enterprise system to the marrow of my bones. I marvel at the American entrepreneurial genius, and at the innovation of corporations that effectively harness that genius to create greater prosperity for more and more people. Thanks to free enterprise, our society has constantly evaded the inertia and historical insignificance that are the inevitable fate of economies that merely distribute poverty more equally or sustain a rigid class system. The advent of the information age did not just create riches for the lucky few in the corner suites of corporate America, but swelled the tide of economic opportunity for many people of less influence and more modest means. These advances are a tribute to the American worker, and to the corporations that have invested in, encouraged and directed their productivity.
But the current threat to our prosperity comes not from over-regulation. The culprits are corporate executives who exploited regulatory loopholes and diffident oversight -- from boards of directors, analysts, auditors and government -- to enrich themselves at the expense of their companies' health, and the millions of investors who entrusted to these new "malefactors of great wealth" their American Dream of a college education for their children, secure employment and a comfortable retirement for themselves. The corporate scandals that dominate headlines today have already claimed millions of victims. Investors who have lost their life savings. Employees who lost their jobs and their pensions after being pressured by their employers to invest the bulk of their savings in company stock.
Over the past ten years, the system of checks and balances that protects the investor has seriously deteriorated. It must be restored, if we are to restore the public's confidence in our financial markets, and reinvigorate their faith that there is room in our markets for THEIR dreams as well as the ambitions of executives who profit so handsomely from them.
The first principles of free markets - transparency and trust - have been the first victims of crony capitalism, evidenced most dramatically in the scandals involving Enron, Arthur Anderson, Global Crossing, WorldCom, Tyco, and others. Trust was sacrificed in too many corporate boardrooms on the altar of quick and illusory profits intended to generate astonishingly inappropriate levels of executive compensation. Corporations established off-balance sheet partnerships to mask liabilities and inflate profits. Executives maximized their compensation with stock option plans that burdened their companies with huge hidden costs. Companies gave massive loans as sweetheart loans to CEOs. Venerable accounting firms, having looked the other way as companies cooked the books, shredded documents to hide their misdeeds. Although American tax policy encouraged them to do so, corporations that move their legal headquarters off-shore to avoid taxes give the appearance of ingratitude to the country whose sons and daughters are risking their lives today to defend them.
I agree with the President's observation that those responsible for these unfolding scandals are relatively few. Or, at least, the visible abuses are relatively few, though we have ample evidence that pressures resulting from avaricious self-interest and weakened checks and balances are systemic and serious, and may portend more scandals. Nevertheless, the vast majority of the 17,000 public corporations in this country are run honestly, by men and women of sound character, who, along with their shareholders, have been harmed by the recent scandals caused by their less scrupulous peers. But those corporations run by unethical, self-serving executives that seize our attention today are some of the largest companies in the land, and their collapse into scandal has rocked the markets, handicapped our recovery from recession and scared the heck out of average investors. A just released study found that nine out of ten public companies determined "to have accounting irregularities received a clean bill of health from auditors." This negligence or worse resulted in a loss of shareholder value at thirty-three companies of well over a trillion dollars.
Should these current scandals pass without another single disclosure of corruption, who can be certain that in the years ahead, we won't suffer just as profoundly from similarly corrupt practices unless corporate leaders find the regulatory hurdles to misconduct more daunting than they are today.
We should make it easier to prosecute and impose penalties for securities fraud that will severely afflict the corporate wrongdoer. But stronger sanctions alone will not be enough to deter new incidents of corporate misconduct. Neither will pleas for character building in corporate suites discourage the reckless greed that threatens our prosperity. Unless we require responsible management with sensible regulation, we will suffer future scandals. Freedom provides opportunities to do good and ill, and we must restrain the corruption of our cherished values with more than appeals, however eloquent and appropriate, to the better angels of our nature.
The circle of culprits, witting and unwitting, include not only morally challenged executives, compromised auditors, negligent institutional investors and securities analysts, and uninformed or indifferent directors, but inattentive government leaders, of both parties, and business journalists that have grown too comfortable on their beat to look beyond a corporations' annual report to discern the soundness of management practices. Those who claim to defend morality in business and politics must not only condemn the malfeasance that has spooked investor confidence, but take all necessary steps to prevent other executives, auditors and boardrooms from emulating the practices of their selfish peers.
Given the damage caused by the ethical lapses of too many corporate leaders and the breakdown in checks and balances that were supposed to safeguard the public against those kinds of abuses, we must make fundamental changes in corporate oversight that will securely place the interests of the shareholding public above the private interests of the few who are entrusted to manage or advise those companies. To remove the conflicts and strengthen checks and balances we should not rely on halfway measures and then resort later to another set of regulations to prevent the re-emergence of abuses. Over time, the pressures of remaining conflicts of interest will erode any initial effectiveness of incompletely addressing these abuses now.
A range of proposals to reform corporate governance and government oversight are now before Congress. Others will be considered in the weeks ahead. Many of their provisions are commendable. Some fall short of doing all that is necessary.
Senator Sarbanes' bill, which I support, requires accounting firms to refrain from providing non-auditing services to the companies they have been engaged to audit. But the bill does allow some exemptions to the prohibition, which I believe should be removed.
Investors will no longer trust the audits of public companies if they perceive an apparent conflict of interest when accounting firms provide either simultaneously or at some future date consulting services to the same client. Only a complete and permanent separation of auditing and consulting services will safeguard the integrity of audits. Any firm that serves as the auditor of a company should be prohibited from providing any consulting service to that company ever.
The Sarbanes bill also establishes an accounting oversight board to establish and enforce the standards for audits of publicly traded companies. But this oversight board should be completely independent from the industry. The bill provides that two of the five members of the board come from the profession. It's appropriate to have a minority of board members with professional expertise in the industry they regulate. But they should be at least five years removed from the practice of accounting to completely guard against conflicts of interest. Also, the board should be financed as an independent agency or, if as part of the SEC, it should possess considerable autonomy.
We should also require that disciplinary hearings before the auditing oversight board be public. Exposing the misdeeds of registered public accountants and corporations is essential to reinvigorating our system of checks and balances, discouraging misbehavior and restoring public confidence.
Top executives should be precluded from selling their holdings of company stock while serving in that company. They can be allowed to exercise their options, but their net gain after tax should be held in company stock until ninety days after they leave the company. In the past, this measure might be viewed as intruding on the right of executives to manage their personal finances as they see fit. But it's time to recognize that with privileges and power come important obligations to the public. Stock option grants awarded to top executives by corporate directors who represent the public are intended to align the interests of corporate leaders with the interests of public shareholders. Diversification of investments is a good idea for the investing public. But it's not a good idea to allow those responsible for the stock prices of publicly owned companies to reduce their financial exposure to the performance of their companies at a time of their choosing. As long as they retain their great responsibilities and attendant privileges, they should retain their full exposure to the consequences of their management decisions.
With the exception of the CEO, all members of corporate boards of directors should have no material stake in the company. The purpose of the board is to represent the shareholders, not themselves and not the management. Management needs no more than one representative on the board to represent its views. In many cases, the top management owns no more than a few percent of the company's stock. With more than one director on board, its interests are over-represented. In those cases where management owns a larger percentage they can vote their shares for director candidates of their choice, as can all other shareholders, and will have appropriate influence in determining the makeup of the board.
A large percentage of public companies is owned by corporate pension funds. The funds are controlled by the top management of those companies. These executives have no incentive to scrutinize the performance of each other's companies or vote their shares against the recommendations of other companies' managements. Because corporate executives control the pension funds of their companies, unscrupulous executives are in a position to manipulate the amounts and valuation of those funds, disguise actual operating earnings and jeopardize the fund's capacity to meet future obligations to employees. Corporate pension fund committees, and the funds they manage, should function independently of management and be appointed in the same manner as directors of mutual funds.
I agree with the President that corporate executives should be required to return all compensation directly received from proven misconduct. I agree that top corporate officers should be required to certify personally to the SEC that the company's financial reports are accurate and that all information material to the health of the company has been disclosed. Executives who intentionally misstate their companies' financial reports should go to jail. But to enable the SEC to determine whether there has been intentional wrongdoing, executives should be required to provide with the certification a narrative statement of the factual basis for the correctness of the statements, and disclose any "close calls" management made with respect to accounting treatment.
The responsibility of investment advisors, including stockbrokers, is to put their clients' interests first. The responsibility of an investment banker is to represent the interests of issuers by selling corporate securities on the terms expected by their corporate clients. The interests of investors and issuers are, and should be, in conflict. It is the function of the market to resolve that conflict by finding prices and other terms that best balance the interests of both. The right balance can best be found by the market, not by "full service" financial companies that house both investment and issuing services. Even the best managements of full service firms face intense pressure from time to time to take more of the securities offered by their investment banking clients than the brokers might otherwise place in their clients' portfolios. Research analysts of full service firms confront the conflicts most fully. Their principal role should be advising investors. But the power of their influence with investors is highly prized by corporate issuers and can be decisive in the awarding of underwriting contracts to the investment banking arms of full service firms.
We've seen ample evidence that combining issuing, investing and research services leads to abuse of investors' interests and severely undermines public confidence in the investment advice of full service firms. The President made reference to this when he chastised investment advice that urges investors to buy when they should sell. The best solution is to place analysts where they belong - with the investment groups advising and serving the public - and to house investment services in companies separate from those conducting investment banking and securities trading. The overriding public interest demands that we legislate that separation so that the most egregious of those conflicts is eliminated.
Moreover, strengthening public confidence in government oversight requires that those public officials charged with the greatest responsibility for that oversight will impress the American people with their unshakeable resolve to protect the country from corporate abuses and conflicts of interest. Obviously, that will also require that those officials not be the object of any reasonable public doubt that they might be influenced by their own conflicts of interest. Regrettably, the chairman of the SEC fails on both counts. I am sure Harvey Pitt is a fine man, motivated by good intentions. But he began his tenure with an assurance that under his leadership the SEC would offer "kinder and gentler" oversight. Initially, he seemed to prefer industry self-policing to address corporate misconduct rather than necessary lawmaking to prevent future abuses. Not exactly what is called for in this environment. His past association with leading accounting firms has obliged his recusal from twenty-nine SEC decision in less than a year. Moreover, given his past association, it is unlikely that the public will have confidence in his decisions when his period of recusal ends next month. Aggravating public doubts were his decision to meet with former clients while they were under investigation. Simply put, fine man though he may be, the circumstances today require a new leader of the SEC whose background and record leave no question that he or she will proactively assert the independence and authority of the SEC to protect the integrity of our markets. I hope that Mr. Pitt will continue to serve our country in another capacity.
Let me emphasize again: the purpose of these suggestions and others is not to hobble the free market with excessive regulation, but to restore the efficacy of the checks and balances on which the market has always depended, which have been weakened because of the growing interdependence among the "checkers and the checkees." Much like the federal government is now the world's most successful because of a strongly defended separation of powers, we must have equally strong independence between each of the market's checks and balances.
Some will counsel that this crisis in corporate governance is not so grave that it requires decisive government intervention. I disagree. What is at risk in this series of unfolding corporate scandals is the trust that investors, employees and all Americans have in our markets, and by extension, in the country's future. To love the free market is to loathe the scandalous behavior of those who have betrayed the values of transparency, trust, contract and faith that lie at the heart of a healthy and prosperous free enterprise system, and the patriotism that sustains an aspiring and confident free society.