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First Annual Capital Markets Summit: Securing America's Competitiveness - Remarks by Thomas J. Donohue
March 14, 2007
Thank you very much, and good afternoon everyone.
We've all heard the growing chorus of voices that have been sounding the alarm about the long-term competitiveness of U.S. capital markets.
This morning you heard the thoughtful recommendations of the Chamber's bipartisan, independent Commission.
As I said previously, the Commission's co-chairs-Bill Daley and A.B. Culvahouse-provided outstanding leadership for this effort.
All the commissioners volunteered hundreds of hours of their time because they are committed to the success of our capital markets, our economy, and our workers.
But they have not been the only ones examining these issues.
In the past six months, the Hal Scott Committee and the Bloomberg-Schumer Report also made uncompromising assessments of our financial systems. Just yesterday Secretary Paulson convened a summit of his own.
Remarkably, we have all reached similar conclusions. I say remarkable because these reports represent the findings of vastly different constituencies-a Democratic senator, a Republican mayor, a treasury secretary, academics, consultants, and business people from a wide range of industries.
Here's what they found: Fundamentally, markets outside the United States are becoming deeper, quicker, and more competitive.
In many ways we welcome the development of alternative capital markets that contribute to global economic growth, but their development underscores the fact that investors have new alternatives and we have new competition.
Advanced technologies are making it easier to conduct cost-effective financial transactions almost anywhere in the world.
At the same time, the United States is stuck with legal and regulatory regimes developed in the 1930s, a time closer to the Civil War than to today.
The predictable result? U.S. capital markets are experiencing a steady decline in their share of global activity. They are increasingly being viewed by both domestic and foreign firms as a more dangerous and complicated place to do business.
Even though U.S. capital markets remain-at least for now-the deepest and most liquid in the world, companies increasingly see listing on our public markets as adding unpredictable, uncontrollable, and unnecessary risks and costs, especially in the regulatory and litigation arenas.
They see the competition between federal and state regulators to second-guess each other and business They see non-transparent regulators that are slow to make important decisions And they face the prospect of no-win litigation with out-of-control discovery and other litigation costs.
Simply put, our capital markets are no longer the most attractive place on earth for honest business leaders to access capital.
All of these studies have proven beyond a shadow of a doubt that our capital markets have critical problems that must be addressed.
And they have underscored what's at stake.
Now, some would argue that only big multinational companies care about capital markets and that they don't affect the average American.
That couldn't be further from the truth. Who relies on the success of our capital markets? Everyone.
The nation's 57 million investors rely on the success of our capital markets to build better lives and grow a nest egg for retirement.
Our nation's 25 million small businesses rely on the success of our capital markets to help them start, nurture, and grow their companies.
Small firms represent 99.7% of all employer firms and have generated 60% to 80% of net jobs annually over the last decade. You'd better believe capital markets are important to them, and that small businesses are important to our economy!
Even those firms too small to access our public markets rely on a low cost of capital to help fuel their hopes and dreams.
Mid-cap and large firms rely on the success of our markets to help them expand, improve productivity, and create jobs.
In short, capital markets are the greatest means of wealth creation known to man. They are critical to the economic success of our nation and to each of its citizens.
So, we understand the challenges to our capital markets and have acknowledged their importance. Now what?
Any study conducted by the Chamber is not going to sit on a shelf and collect dust. We are prone to action. We have some experience in driving change in Washington.
For us, the time for study and talk is over. It's time to act.
What's been missing from this debate is a dedicated vehicle whose sole mission is to advance reforms. Today we are launching such a vehicle the Center for Capital Markets Competitiveness.
The Center will advance a legislative, regulatory, and legal agenda designed to strengthen the competitiveness of U.S. capital markets.
It will begin by aggressively implementing the most important and widely-supported recommendations from all these different sources.
But its mission will not end there. It will address domestic and international securities regulation, as well as challenges to the auditing profession, proxy rules, business due process, and a host of other issues.
And, it will work with all those who understand that driving action on these issues is critical to every business, from the corner bakery in Dubuque to the most sophisticated firm on Wall Street.
Now let me tell you what it's not about. It's not about trying to get businesses off the hook. It's not about avoiding tough enforcement.
It's about helping to preserve businesses that create the vast majority of jobs in this country, provide health insurance to 136 million people, and are responsible for the productivity and innovation that gives us the highest standard of living in the world. We don't want to kill the goose that lays the golden egg.
The Center's action will be guided by these three realities:
We've become complacent with our capital markets and are being seriously challenged by competitors
Capital goes where it is welcome, safe, and has a good chance to grow
And it will take all U.S. stakeholders-elected officials, regulators, and businesses-working together to keep our markets the best and most attractive in the world.
Allow me to elaborate on each of these points.
Old Complacency, New Competition
For a nation that thrives on competition-in sports, business, politics, you name it-we've become complacent about our capital markets.
We're all used to the idea that the United States is number one. It's been that way for a long time and we don't expect it to change.
The fact is, we've got competition and they are eager to eat our lunch.
The NCAA basketball tournament starts tomorrow we're like a great team that's become overconfident. We're not practicing as hard, we're becoming careless with the ball, and we're getting beat in transition.
Before we know it some low-seeded team has us down 20 points at the half. Instead of making a run for the title, we run the risk of ending up on the sidelines.
When it comes to capital markets, a few statistics demonstrate how far we're behind the ball.
Last year, more than 350 companies went public in Europe, selling $86 billion of stock. In the United States, 235 companies raised $48 billion in IPOs.
Not one of the 10 largest stock issues of 2006 was listed in New York.
Since 2001, the U.S. share of worldwide securities industry revenue has fallen to about 58% from 62%. Investment banks earned almost $42 billion in fees last year underwriting securities and advising on mergers in Europe and Asia, almost 40% more than what they earned in the United States.
We've been served a wakeup call. Now we have to answer it, while there's still time left on the clock.
Building Better Markets
We're suffering from less investment in our markets because-as I've said before-we've ignored the first rule of capital: It goes where it is welcome, safe, and can grow.
The question is, how can we make our markets more attractive? How can we instill confidence in investors and mitigate their risk? How can we protect investors without choking off investment?
A New Framework
Examining the framework governing our markets would be a good start.
I'm reminded of a quote by Sam Walton, who said "Capital isn't scarce, vision is."
A new vision for our capital markets is needed if they are to retain their title as the global gold standard.
Unfortunately, today's vision is the vision of the 1930s when our governance laws were first enacted.
They served us well for many decades. However, over the past 20 years this framework has proven incapable of keeping up with:
-the development and use of new and innovative financial products
-the changing expectations and demands of investors
-or the increased competitiveness of foreign markets.
Instead, it's become a patchwork of federal and state laws and regulations, enforced by numerous agencies that often overlap and conflict.
We need a new framework for a new century, one that is more rational, streamlined, and efficient.
We need a regulator that welcomes capital markets innovation and can quickly and efficiently respond by developing necessary rules. We need a regulator that can drive global rules needed in today's markets.
A New Enforcement Regime
We must also change the way the laws are enforced.
The SEC needs to move away from a mentality of regulation-through-enforcement and become more transparent and predictable.
Let me be direct on this point-those defending the old way of scrutinizing markets will respond by saying that business is simply seeking to avoid oversight and get away with fraud.
Nonsense. The Chamber has called for swift and harsh judgments of anyone seeking to game our capital markets, and we will continue to do so.
Detecting and punishing fraud on the markets benefits all market participants.
There's no question we should pursue fraud aggressively and efficiently. What we are seeking to fix is the current enforcement regime which ignores basic due process rights for honest market participants.
This destructive approach to enforcement seems to assume that there is an undiscovered Enron or World-Com in every business. It assumes that the problem is not those who commit fraud but the nature of business itself.
It is this view that we will unapologetically challenge.
Enforcement authorities should embrace, not attack, all legitimate efforts to make it easier for them to detect and punish fraud without jeopardizing the vitality of our capital markets.
For example, the attack on attorney-client privilege and other due process rights is disturbing and undermines our markets.
The so-called Thompson Memorandum requires companies to waive their right to attorney-client privilege and to pay employees' legal fees if they want to be considered "cooperative" in an investigation.
If they are deemed uncooperative, their chances of an indictment dramatically increases, as does the possibility of a major public relations disaster that could damage the company's image and stock price.
These waivers weaken corporate compliance efforts by impeding open communication within the companies.
Much of Sarbanes-Oxley was about increasing communication, expertise, and transparency between management and boards so they can do a better job of protecting investors. Waivers of attorney-client privilege produce the opposite result.
And, because these waivers extend to all parties, they have become the feedstock for unscrupulous class action lawyers seeking to compel settlements by driving up discovery costs in securities litigation.
Recent attempts to fix this through the new "McNulty Memorandum" fall way short of addressing the problem. As long as waiving privilege can be used as a cooperation factor, prosecutors will expect it.
The Thompson and McNulty Memoranda are products of the Justice Department, and were implemented without input from Congress. But it is imperative that Congress weighs in now. They should invalidate those provisions that prevent executives and employees from freely, candidly, and confidentially consulting with their attorneys.
Other business critics have argued that we are seeking to weaken the SEC so it provides little or no regulation. That is also nonsense.
What we seek are regulatory changes to modernize our markets. In some cases, this will mean expanding both the authority as well as the technological capabilities of the SEC.
For example, one crucial improvement would be to strengthen the SEC's authority to issue rules on the Sarbanes-Oxley Act, as the need arises for clarification and fine-tuning.
The problems and costs associated with the implementation of Section 404 have been well documented. It presents challenges not only to U.S. firms, but to foreign investors as well.
Just last week Sony and Pioneer Corp. said they would delay their annual earnings reports by a few weeks as they struggle with the extra paperwork needed to comply with Sarbanes-Oxley-an all too familiar situation to U.S. companies who have had to comply with the law since 2002.
Today, SOX is one of the few federal securities laws that are not expressly subject to the SEC's powers to issue rules and exemptions.
The SEC should be given statutory authority to more effectively and efficiently implement this legislation.
Businesses have an important role to play as well. They need to step up to the plate and do their part.
One important step they can take is to end the practice of issuing quarterly guidance-it promotes short term-thinking and encourages executives to manage earnings.
As an alternative to providing quarterly earnings guidance, companies should provide data that more accurately pinpoints company value and encourages long-term growth plans that would produce greater value for investors, employees, and customers.
Reducing Frivolous Litigation Risk
In addition to updating our regulatory framework and enforcement regime and discontinuing quarterly guidance, we can remove unnecessary elements of frivolous litigation risk in our markets by making commonsense reforms to our legal system and ensuring the viability of the auditing profession.
One of the most dominant criticisms of U.S. capital markets is that lawsuits impose significant costs on investors.
A unique aspect of the U.S. capital markets is the ease with which parties can file private lawsuits to recover damages attributable to a wide range of conduct that violates the federal securities laws.
Although many countries authorize such suits, the United States is unique in terms of the size and scale of claims permitted.
For example, civil penalties amounted to $4.7 billion in the United States during 2004, 100 times more than the U.K.
In addition to administrative enforcement penalties, private class action in the U.S. created an additional $3.5 billion of liability for issuers.This class action vehicle does not exist in the U.K. or in other major foreign markets.
Fundamental reform of America's securities class action lawsuit system is essential. In the final analysis, a system of shareholders suing themselves and driving down their own stock prices-with huge fees paid out to the lawyers for the privilege of doing so-is not conducive to attracting investment.
That's why our new Center will work closely with the Chamber's Institute for Legal Reform in advancing this priority.
Another large systemic risk to our capital markets is the possibility that another major audit firm will collapse in the current regulatory and litigation environment.
Audit firms play a critical role in our markets-assuring investors that public companies' financial statements are reliable. When fewer firms exist to do this crucial work, the public's faith in our markets wanes.
To prevent the further contraction of the audit profession, the government and market participants need to begin a serious conversation about the challenges facing these firms.
Those challenges include unrealistic public expectations about an auditor's ability to detect fraud and the huge damages audit firms are expected to pay while lacking adequate insurance coverage.
The profession plays the important role of bringing confidence and stability to our capital markets-a role that is as important as ever. Steps must be taken now to ensure that further contraction does not occur.
Looking internationally, we need convergence in accounting systems between U.S. and foreign markets.
Many of you heard PCAOB Chairman Mark Olson talk about that at length this morning.
Differing standards have become a serious impediment to the efficiency and growth of global markets, discouraging foreign investment. Convergence of standards would benefit all stakeholders.
Addressing the growing threats to U.S. capital markets and global competitiveness will require a team effort.
Lawmakers, regulators, and the business community all have an important role to play.
Lawmakers and regulators must always fulfill their sacred obligation to protect investors and police wrongdoing.
Businesses must adhere to the highest ethical standards at all times.
We must also keep focused on the real issues and not allow ourselves to get distracted.
Unfortunately, there are those who wish to advance their own special interest agendas under the guise of corporate governance and improving capital markets.
Union-controlled public pension funds have sponsored a host of shareholder resolutions designed to further their own political and economic agendas. Sometimes they have even worked with the trial bar to propose resolutions that push companies to settle lawsuits.
Increasingly, they are using proxy battles to achieve what they could not win at the bargaining table: pro-union policies.
These policies may be good for some unionized workers, but they are not good for all workers and shareholders.
We will fight any effort to give some shareholders greater power than others. While these proposals are advanced in the name of shareholder democracy, there is nothing democratic about allowing special interest politics to trump the interests of all shareholders.
Lawmakers and the SEC should not allow these special interest groups to hijack companies and extort policies that reduce shareholder value through proxy fights.
That means the SEC should abandon its proposed shareholder access rule. When America is losing ground in the race for global competitiveness, the agency should not be saddling our markets with more dead weight.
Needless to say, stakeholders will not always agree. Principled people can have honest differences of opinion on key issues.
But we should be united in our goal to make U.S. capital markets the most fair, efficient, transparent, and attractive in the world.
The health of our markets drives to the heart of Americans' standard of living, way of life, and economic future.
Given the discussion we have had so far today- with voices from different parties, ideologies, and backgrounds-I am encouraged that we can pull together as Americans have always pulled together in times of great challenge.
The business community is prepared to lead this effort in good faith, with great energy and passion, and with an open mind to new solutions and viewpoints.
When it comes to our capital markets, the hour is growing late. It is time to act.