"Strengthening Our Capital Markets -The Role of Investors, Businesses, and Regulators" by Thomas J. Donohue

November 12, 2003
U.S. Chamber of Commerce

Good afternoon, ladies and gentlemen, and welcome to the Chamber of Commerce of the United States.

I'm Tom Donohue, the Chamber's president & CEO, and I'm very pleased to have the opportunity to kick off this important discussion on the state of our capital markets.

Let me begin by thanking our lead sponsor, AIG, and our partners, SpencerStuart and TechCentralStation, for making this event possible.

More than a year after the implementation of Sarbanes-Oxley, the effects of corporate governance and accounting reforms are still shaking out, new issues and challenges have surfaced, and demands to improve the system are rising.

The objective of today's program is to explore ways to make our capital markets and corporate governance system work for everyone involved – investors, management, directors, and regulators.

How do we provide incentives for taking risks? How do we strengthen boards, auditors, and stock exchanges and make sure each player in the system understands its proper role?

We're going to hear from several speakers who are in the trenches everyday shaping, interpreting, analyzing, enforcing, and complying with our accounting and corporate governance systems.

I would like to spend just a few minutes sharing with you my perspective based on hundreds of personal conversations I've had with CEOs who are changing long held business models to meet new requirements.

Investors, corporate boards, and management are going through a tremendous learning process.

We've seen more corporate governance reforms in the past two years than we saw in the previous two decades.

Some of these changes have been positive. Boards are more independent, they meet more often, and they've improved communications with shareholders. Financial systems are more transparent, making it harder for wrongdoers to keep others in the dark.

Many of those who intentionally broke the law are in the process of being prosecuted and punished—rightfully so. And still others should be prosecuted. People who break the law and violate the trust shouldn't be in business—they should be in jail.

Corporate governance reforms have, to some degree, exposed wrongdoers, headed off criminal activity, and helped restore investor confidence.

But in this environment of change, we've also witnessed some unintended consequences—some the Chamber warned about, and others that no one saw coming.

Talented people are turning down board roles, and CEOs are finding it harder to get good advice from their lawyers and accountants.

Companies with the most innovative business models—the next Microsofts—will find it harder to attract the most experienced auditors and the most qualified directors.

The SEC, state attorneys general, and secretaries of state are engaged in a competitive game of "gotcha," instead of helping corporate executives understand and comply with the new rules. And the class action trial bar is following on their heels with a new mountain of lawsuits.

We have to be for strong enforcement of existing laws without creating enforcement competition in which the simple launch of an investigation deflates market capitalization, destroying good companies along with the bad. Companies need predictable enforcement regimes as well as predictable rules.

When you add everything up, what we see is a business environment in which CEOs are reluctant to take risks, take companies public, or acquire other companies—all of the things that characterize our free enterprise system, grow our economy, and create jobs.

For example, a leading CFO told us that his company is now reluctant to acquire privately held companies because of the short deadlines for certifying the books of the acquired company.

For smaller public companies, the escalated costs of doing business as a public company have caused them to question the benefits of being public at all.

Our free enterprise system is built on risk, on change, and on innovation. If we replace the risk-takers, the entrepreneurs, and the visionaries in our economy with bureaucrats, bean counters and regulatory overseers, then we will have caused far more problems than we set out to solve.
The business and regulatory communities must work together more closely to ensure that future reforms and those presently in the pipeline don't further harm our free enterprise system.

As it has since the earliest draft of the Sarbanes-Oxley legislation, the Chamber will continue to work with Congress, the SEC, the Public Corporate Accounting Oversight Board, and the stock exchanges to ensure that good intentions don't produce bad results.

Take, for instance, the SEC's proposed proxy rule change that would allow large shareholders and shareholder groups to nominate rival candidates for board seats.

Though the intent is to "democratize" corporate governance, the result could be the election of directors driven by hidden agendas or lacking the right skills, and it could also create rival factions that would prevent the board from doing its job in a smooth and efficient manner.

Now that public company boards have been rightfully strengthened, the goal is to get them to exercise good governance without trying to carry out the functions of the chief executive.

I think we'll have some good discussion on that point today.

More than anything, I hope this meeting facilitates a process in which all of the stakeholders—investors, management, directors, and regulators—work together to identify, reevaluate, and even reverse those corporate governance reforms that do more harm than good to the American spirit of enterprise.
And as we examine new challenges—like those in the mutual fund industry—we should avoid last year's frenzied rush to legislate—a rush that dampened risk-taking and decision-making at the highest levels of business.

With that, I'd like to turn the program over to Bill Little, Chairman of the National Chamber Foundation and a U.S. Chamber board member.

Bill is president and CEO of Quam-Nichols, a Chicago-based manufacturer of commercial and industrial audio products.

A former Chamber chairman, Bill has also chaired two different associations in the electronics and distributor industries.

He is the kind of thoughtful, active leader any association would want to have on its Board—and also the kind of person any of you would like to have as a friend.

Please welcome a sharp businessman and good Chamber man, Bill Little.