7-11-02 McCain's Speech on Corporate Governance Reform

This guy has just taken a leave of his senses.

Posted on 2002-07-11 11:18:15

7-11-02 McCain's Speech on Corporate Governance Reform

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.

As Teddy Roosevelt said almost a century ago, “We draw the line against
misconduct, not against wealth. The capitalist who, alone or in
conjunction with his fellows, performs some great industrial feat by
which he wins money is a well-doer, not a wrong doer, provided he works
in the proper and legitimate lines.” During my years in Congress, I
have opposed unnecessary regulation of business activity, mindful that
the heavy hand of government can discourage innovation and wealth
creation.

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.

I believe – I STILL believe – that the best way to ensure the solvency
of the Social Security system, to honor the solemn promise that in
exchange for the payroll taxes they have rendered all their working
lives, all Americans will receive a minimally adequate retirement
income, is to allow them to invest a portion of their payroll taxes in
the financial markets. In fact, I can see no other viable way to ensure
that those entering the workforce today will receive the benefits
promised to them upon their retirement. Markets fluctuate. We are in a
down cycle today. But it won’t last forever. And investments in the
stock market have over time always yielded higher returns than any other
responsible investment. Allowing Americans to invest responsibly a
small part of their payroll taxes will not only save Social Security,
but will provide them with greater retirement income than those who now
or will soon depend on Social Security checks.

Some of my Democratic friends have exploited the occasion of these
corporate scandals to ridicule yet again this necessary reform. But
even without their fear-mongering, how can we expect to convince
Americans that the one pension plan every American is entitled to is
safe in private investments when the stock market and our economy are
daily battered by revelations of corporate wrongdoing? According to a
recent survey, sixty-nine percent of those polled now “think most
companies lie to or mislead investors.” Unless Congress and the
President move rapidly and boldly to reform corporate governance and
government oversight, and repair investor confidence, the damage done by
these scandals will outlive most of us in this room.

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 hell 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.

In another recent survey, 160 chief financial officers were queried
whether they had ever been pressured by senior corporate executives to
misrepresent the financial health of their companies. Fifty-five
percent said they had, but refused. Twelve percent admitted to yielding
to those requests. I fear the problem is not just limited to the
relative few scandals that have claimed space on the front pages of
today’s newspapers.

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.

Thanks to the success of our free enterprise system, the public’s stake
in America’s companies is far larger and more important to our economy
and to the financial well-being of our citizens than it was in years
past. Almost half of adult Americans own stock directly or indirectly.
Their numbers have increased sixty percent in the past fifteen years. A
growing portion of the public depends more on private retirement plans
than on Social Security for their retirement income. And balancing the
federal budget also depends more than before on healthy financial
markets, as demonstrated this year when a shortfall in tax revenues from
gains on securities investments expanded a growing federal deficit.
Over the past year, corporate scandals have cost the public and the
government many billions of dollars.

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.

Over the last fifteen years, the leading accounting firms diversified
their services to include lucrative consulting to the auditing clients
on tax management, mergers and acquisition strategy, systems, cost
control and corporate structure. The reason seemed logical at the time:
to strengthen client relationships, improve profitability and retain
talent that was being lured by the firm’s corporate clients. The
result, however, was to create a fundamental conflict of interest
between, on the one hand, rigorously and objectively scrutinizing their
auditing clients and, on the other hand, currying favor with those same
clients to win their consulting business.

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.

Stock options are a legitimate and valuable form of employee
compensation. But they must be reported as an operating expense.
Otherwise they obscure the company’s real worth, misinform investors,
and encourage continued false reporting of profitability. Options are
no less tangible a cost than depreciation, another non-cash expense.
Like depreciation, option costs should be run through the income
statement.

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, unscrupolous
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.

It is also fair criticism to recognize that government does not always
set a sterling example of honesty to corporate executives. Beyond
offering carefully considered regulation to right the checks and
balances governing our markets, government should also forswear the
slight of hand that we employ in our budgeting and spending decisions.
Too often, we have cooked the books, exploited off balance sheet
accounting, fudged budget numbers and failed to disclose fully the
nation’s assets and liabilities. If we in Washington are to have
credibility in the public eye as we address the corporate accounting
mess, we must reform our own fiscal practices.

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.

Thank you.

Key Principles to Restore Public Trust and Confidence in Corporate
America
Proposed by Senator John McCain
July 11, 2002
National Press Club

1. Prohibit any firm that serves as the auditor of a company from
providing any consulting service to that company. Only a complete
separation of auditing and consulting services will safeguard the
integrity of audits.

2. Establish an accounting oversight board completely independent from
the industry to establish and enforce the standards for audits of
publicly traded companies. The board should be financed as an
independent agency or, if as part of the SEC, it should possess
considerable autonomy. 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.

3. Require stock options to be reported as an operating expense.
Options are no less tangible a cost than depreciation, another non-cash
expense. Like depreciation, option costs should be run through the
income statement.

4. 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.

5. Preclude directors and executive officers 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 90 days after they leave the company.

6. Prohibit all members of corporate boards of directors from having a
material stake in the company, with the exception of the CEO. The
purpose of the board is to represent shareholders, not themselves and
not the management.

7. Require corporate pension fund committees, and the funds they manage,
to function independently of management and be appointed in the same
manner as directors of mutual funds.

8. Require corporate executives to return all compensation directly
received from their proven misconduct.

(Page 1 of 2)
9. Require top corporate officers 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.

10. Require executives 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. This will help the SEC to determine whether there
has been intentional wrongdoing.

11. Place analysts where they belong – with the investment groups
advising and serving the public – and 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.

12. Harvey Pitt should resign as SEC Chairman. Mr. Pitt began his
tenure with an assurance that under his leadership the SEC would offer
“kinder and gentler” oversight. His past association is with leading
accounting firms and this has contributed to his sitting out 29 SEC
decisions in less than a year. A fine man though he may be, the
circumstances today require a new leader of the SEC whose background and
record leave no questions that he or she will proactively assure the
independence and authority of the SEC to protect the integrity of our
markets.

Thank you. I didn't have the patients to reform that entire speech. thx swheats

Once again McCrazy trying to out clinton the clintons. PUKE

No problem, its even harder trying to read McCain's convoluted idealism from his hypocritical perch. Encourage the vote on the President's nominations, Mr. McCain.

. 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.

Is he talking about Senators up for re-election...???

#1 will destroy every small business CPA firm in the country

#5 get ready for higher CEO salaries if you are going to restrict shares as compensation. not to mention incentive.

#6 wouldn't allow someone to be on the inside of a company to see what is actually happening instead of having it filtered to them by the president

His statement in support of the private SS accounts is somewhat bold.

Sure makes a whole lot of sense to this dumb redneck.

Last night Evans and O'Neil were on CNBC for an hour, discussing economics with a group of student MBAs from various universities. Wish I had caught the entire show but these two men are so refreshing in their speech and values.

O'Neil spoke at length about the process of allowing some privatization of social security.

Wish I had taped the show.......too bad it wasn't on CSPIN....but then honest discussion and truth are missing from that program for quite some time now.

Social Security is one of those issues that just never gets dealt with. As a Gen Xer, it is a conern of mine. At the moment, we face increasing payroll taxes and decreasing payouts, and our age bracket is demographically disadvantaged.

#1 will destroy every small business CPA firm in the country

I'm not sure I agree - most small business CPA firms do not audit publicly held companies and this proposal (as I understand it) is only aimed at firms that audit publicly held companies.

#5 get ready for higher CEO salaries if you are going to restrict shares as compensation. not to mention incentive.

Not only that, but you will automatically have high turnover of CEOs, with a resulting flux in performance of the companies. A better idea might be to have incentive stock options not be exerciseable for 5 or more years. That way, the officers will have to ensure that the stock will be higher in 5 years, or their options are worthless.

#6 wouldn't allow someone to be on the inside of a company to see what is actually happening instead of having it filtered to them by the president

Possibly, but the real harm is that if the Board of Directors does not have a "material stake" in the company, they will not have the good of the business at heart. They will be heirlings, who will be more interested in not being sued than in helping the business. Also, it galls me that he proposes that the more stock you own in the company, the less say over how it is managed you should have! What a stupid, socialistic (or fascistic) view of the role of government vs the role of owner.

# 11 is another anti-business proposal. Just have the brokerage houses disclose immediately any relationship they have with the companies they represent. I, as a reasonably intelligent citizen, can then determine if I want to stay with that broker or go to another.

Social Security is one of those issues that just never gets dealt with. As a Gen Xer, it is a conern of mine. At the moment, we face increasing payroll taxes and decreasing payouts, and our age bracket is demographically disadvantaged.

Just keep working hard, so that I (a baby-boomer) can get mine. /sarcasm

Keating 5 pot calling all other kettles black.....

Is that a good thing?

Keating 5 pot calling all other kettles black.....

My sentiments exactly! The press seem to forget that little piece of information that Mccain was part of Keating 5!

"Key Principles to Restore Public Trust and Confidence in Corporate America, Proposed by Senator John McCain, July 11, 2002, National Press Club"

Ah yes, I see Lame McStain is pandering to his main constituency again--the left-wing intelligentsia, otherwise known as the Dumbocrap Media Complex.

S'matter Johnny Boy--haven't had your leering mug on the cover of Newsweek lately and you're feeling left out?

I really am hoping the rumor about Mr. Cindy Hensley not seeking re-election is true......

So am I -- the thought of him being a lameduck would make my day!

I just watched McCain on CSPN....this is clearly his next crusade...

What do you guys think? Will he turn this into his next CFR?

Do you know why the thread about McStain not running for re-election got pulled after 66 posts? (I wasn't online when it got pulled).