Opening Remarks for the Securities Industry Association - Speech by Thomas J. Donohue

New York, New York
March 3, 2005

Opening

Thank you. I'm very pleased to be a part of your program on capital markets – and to address a group of people who are largely responsible for the smooth and efficient operation of those markets.

I always enjoy being in New York. The Chamber recently opened an office here. To represent business in the new global economy, we have to be a global organization.

So now we have offices New York, Brussels, and Berlin and an on-the-ground presence in Beijing. That is in addition to our affiliation with 100 American Chambers of Commerce abroad.
At the U.S. Chamber of Commerce, our mission, above all else, is to protect and promote our free enterprise system, and the capital markets are the crown jewel of that system.

They are the lifeblood of our economy… incubators of America's genius and competitive spirit.

By accessing our capital markets, an entrepreneur can turn a software company he started in his home into one of the largest multinational corporations in the world. Just ask Bill Gates.

Though today several foreign markets rival the United States in innovation and human talent, nowhere in the world can companies gain access to cash and counsel like they can here.

Last year, businesses raised some $3 trillion through U.S. capital markets, and they did so within a system that is more transparent, more regulated, and more efficient than any in the world.

Our challenge is to optimize the performance of our capital markets so that the United States will forever be known as the place to pursue opportunity and create wealth from investments.

I'd like to take this opportunity to talk about what I see to be a major threat encroaching on our capital markets and what the Chamber is doing to address this challenge.

It helps if we think of the capital markets working like a pendulum. The pendulum achieves balance when it swings equally between free enterprise that generates economic opportunity and sensible regulation that ensures transparency, investor confidence, and rule of law.
From time to time, certain events cause the pendulum to swing too far in one direction, and during those times, we must take action to bring it back into balance.

In recent years, corporate misdeeds by a handful of wrongdoers caused shareholder values and investor confidence to plummet. The pendulum had swung too far.

Additional government oversight was necessary to make corrections, improve transparency, and restore the confidence of investors.

The U.S. Chamber was supportive of many provisions contained within Sarbanes-Oxley.

But rather than bring the pendulum back into balance, the manner in which Sarbanes-Oxley has been applied, enforced, and exploited by special interest groups has swung the pendulum too far in the opposite direction.
Excessive Regulations

More and more CEOs and directors say the benefits of being a public company are being outweighed by excessive government interference.

When a small-cap company's audit fees double in a single year, and when it pays $1 million out-of-pocket to comply with Section 404 of Sarbanes-Oxley, the pendulum has swung too far…

When as many as 1,000 U.S. public companies won't be able to comply with the reporting mandates, the pendulum has swung too far…

When CEOs spend more time on regulatory compliance than they do strategizing, expanding, developing new product lines, and hiring new workers, the pendulum has swung too far…

When qualified and responsible board directors are resigning their posts for fear of being held liable for a bad outcome, the pendulum has swung too far…

When board members become overly concerned with protecting themselves and have less time and incentive to aggressively pursue the interests of the company and its shareholders, the pendulum has swung too far…

When dozens of European companies are taking steps to deregister from our stock exchanges, because, they say, the U.S. reporting regime is unreasonably expensive and intrusive, the pendulum has swung too far …

When there were only six new listings by European companies on the New York Stock Exchange and NASDAQ all of last year, the pendulum has swung too far.

When evidence shows that a growing number of small and mid-size U.S. public companies are deciding to go private in part because of the cost and time requirements of SEC compliance, the pendulum has swung too far…

On the other hand, when some private companies are choosing not to access the capital markets for reasons directly related to regulatory burdens, the pendulum has swung too far.

Attorneys General

The business community is also greatly concerned with abusive tactics that are used to enforce corporate governance regulations.

Let me be clear: The Chamber supports strong measures to protect investors, as well as vigilant oversight to root out all fraud.

No voice in business has been stronger than the Chamber's in terms of condemning wrongdoing, supporting more enforcement and tougher penalties, and putting genuine corporate criminals where they belong—in jail.

However, we object when regulators exceed their authority and reach well beyond the intent of Sarbanes-Oxley.

In particular, we are deeply troubled by the actions of some prosecutors and attorneys general who seem bent on criminalizing honest mistakes and legitimate accounting differences.

And we take exception when these officials imply that individual criminal activity at a single firm indicates widespread industry wrongdoing.

We become greatly concerned when due process rights guaranteed by the Constitution are compromised and when companies feel that negotiating a settlement is the only choice—even though no wrongdoing has been committed.

We've entered into an era of enforcement competition among regulators in which a subpoena or even simply the announcement of an investigation can send the value of stocks, 401(k) plans, and dividend payouts plummeting, causing real financial damage to shareholders and employees.

Enforcement competition appears to be driven more by a desire to change legal business practices and influence the composition of management teams and boards and less by a desire to bring guilty parties to justice.

Again, as with regulations, enforcement needs to be balanced and fair. Let's prosecute the lawbreakers, but protect the innocent.

ISS/CalPERS

Let me move on to another area of concern. Outside groups with special interest agendas—such as trial lawyers, labor unions, public pension funds and rating agencies—are exploiting concerns about corporate governance to win concessions and advance their interests.

You'll recall that last year, CalPERS, the nation's largest pension fund, withheld proxy ballot votes for directors at thousands of public companies.

CalPERS said it sought to use its proxy votes to eliminate conflicts of interest and improve corporate governance at those companies.

But a closer look into CalPERS shows that its tactics were a bit disingenuous.

Eleven of its 13 board members are union members, union officials, or government officials who received or solicited contributions from unions.

The CalPERS board chairman at the time of its proxy campaign was a union official who personally organized and hosted rallies against Safeway during the supermarket chain's labor dispute.

Not by coincidence, CalPERS took a lead role in a very public attack against Safeway's board.

Conflicts of interest can't be any more transparent than in the case of CalPERS. When the spotlight was turned around on them, it became apparent that CalPERS was doing the work of organized labor—and not California's retirees and taxpayers.

CalPERS has found a strong ally in Institutional Shareholder Services, or ISS, the ratings agency that has its own conflicts of interest.

ISS provides the research and the proxy voting recommendation used by CalPERS to support its charges against companies.

At the same time, ISS is paid by corporations to advise them on corporate governance issues.

Dozens of companies have complained to the SEC that ISS puts pressure on them to buy ISS consulting services or risk receiving an unfavorably low corporate review score.

And that's not all: corporate directors can now pay ISS to attend training courses to improve the chances that ISS will recommend in their favor for the next proxy season.

Litigation

ISS has caused further damage to our capital markets system by teaming up with the class action trial bar to advance securities litigation.

Research conducted by ISS and paid for by trial lawyers is used in securities litigation settlements to convince the court to approve massive plaintiffs' attorneys' fees.

But that's not the end of it. Recently, the founder of ISS has become a paid consultant for trial lawyers in securities litigation settlements. He negotiates corporate governance reforms with the settling company, and these unproven and untested reforms are characterized as compensation for shareholder plaintiffs.

Securities litigation is a huge business. Nearly $3 billion was paid in settlements in 2003; defense costs were at least that much and probably more.

Virtually all of the cases filed are class actions with thousands of class members and potential claims amounting to tens of billions of dollars.

Most, if not dismissed at the outset, end in settlement – not because the lawsuits have merit, but rather because the defendants simply cannot afford to contest the claims.

And who benefits ISS and its trial lawyer friends. ISS has set itself up as a for-profit judge and jury of corporate governance. It has a virtual monopoly on proxy voting services.

Yet not a single investigation into ISS' glaring – and well publicized – conflicts of interests has been conducted.
Again, the pendulum has swung too far.

Chamber Strategy

The Chamber is engaged in a comprehensive campaign to protect the capital markets from overzealous regulators, trial lawyers, public pension funds, and rating agencies.

Our strategy includes developing the research and data needed to show how the current environment is hurting the markets, public companies, and the economy.

This year we will release a study on the future of the auditing industry as well as report cards on Section 404 and the entire Sarbanes-Oxley law. Studies on SEC enforcement practices and pension funds governance are also in the works.

We also are challenging the SEC and other regulators on rules and regulations that go too far and are not based on solid research and data.

We successfully made the case to Chairman Donaldson that the SEC's proposed "shareholder access" rule is unworkable. We are challenging the SEC's new mutual funds regulation in the courts because we believe the SEC both exceeded its authority and failed to show any evidence to justify its approach.

Finally, the Chamber is working to prevent every special interest group – from unions to trial lawyers – from using the current environment to promote their agendas or line their pockets.

This effort will include further exposing conflicts of interest within CalPERS and ISS, as well as a campaign to enact far-reaching reform of how private litigation is conducted under federal securities laws.
The Chamber's law firm, the National Chamber Litigation Center, has had success weeding out frivolous securities actions at the pleading and class certification stages through the filing of amicus briefs in key cases.

We've also begun investigating allegations of improper conduct between short sellers and plaintiffs' lawyers to attack and/or manipulate stock prices of publicly-held companies.

We've asked the SEC to conduct its own investigation of these practices in coordination with a congressional oversight investigation.

The Chamber is taking on the aggressive tactics of the SEC, CalPERS, ISS, and attorneys general because individual companies don't want to put themselves in the crosshairs of these powerful organizations. When tough issues surface, the Chamber is there to stand up for legitimate businesses.
Conclusion

Our comprehensive corporate governance initiative is focused on one goal and one goal only: to restore balance.

American innovation, progress, and success in the global economy hinges on capital markets that achieve the right balance between government oversight and the forces of the free market.

When the pendulum swings too far in either direction, capital formation and economic growth suffer as a result.

We must understand that in a global economy, capital can and will go where it is welcome, where it is safe, and where it stands a reasonable chance to earn a return on investment.

For the longest time, the U.S. capital markets have been that place, and they still can be if we don't discourage innovation, creation, and business confidence with excessive regulatory interference.

Thank you very much.