[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
     OATH TAKING, TRUTH TELLING, AND REMEDIES IN THE BUSINESS WORLD
=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                COMMERCE, TRADE, AND CONSUMER PROTECTION

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 26, 2002

                               __________

                           Serial No. 107-121

                               __________

      Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house


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                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
RICHARD BURR, North Carolina         BART GORDON, Tennessee
ED WHITFIELD, Kentucky               PETER DEUTSCH, Florida
GREG GANSKE, Iowa                    BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia             ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming               BART STUPAK, Michigan
JOHN SHIMKUS, Illinois               ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico           TOM SAWYER, Ohio
JOHN B. SHADEGG, Arizona             ALBERT R. WYNN, Maryland
CHARLES ``CHIP'' PICKERING,          GENE GREEN, Texas
Mississippi                          KAREN McCARTHY, Missouri
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
TOM DAVIS, Virginia                  THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee                 BILL LUTHER, Minnesota
ROBERT L. EHRLICH, Jr., Maryland     LOIS CAPPS, California
STEVE BUYER, Indiana                 MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California        CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire       JANE HARMAN, California
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
ERNIE FLETCHER, Kentucky

                  David V. Marventano, Staff Director

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

        Subcommittee on Commerce, Trade, and Consumer Protection

                    CLIFF STEARNS, Florida, Chairman

FRED UPTON, Michigan                 EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia                 DIANA DeGETTE, Colorado
  Vice Chairman                      LOIS CAPPS, California
ED WHITFIELD, Kentucky               MICHAEL F. DOYLE, Pennsylvania
BARBARA CUBIN, Wyoming               CHRISTOPHER JOHN, Louisiana
JOHN SHIMKUS, Illinois               JANE HARMAN, California
JOHN B. SHADEGG, Arizona             HENRY A. WAXMAN, California
ED BRYANT, Tennessee                 EDWARD J. MARKEY, Massachusetts
GEORGE RADANOVICH, California        BART GORDON, Tennessee
CHARLES F. BASS, New Hampshire       PETER DEUTSCH, Florida
JOSEPH R. PITTS, Pennsylvania        BOBBY L. RUSH, Illinois
MARY BONO, California                ANNA G. ESHOO, California
GREG WALDEN, Oregon                  JOHN D. DINGELL, Michigan,
LEE TERRY, Nebraska                    (Ex Officio)
ERNIE FLETCHER, Kentucky
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)







                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Cathy, Samuel Truett, Founder, Chairman and Chief Executive 
      Officer, Chick-fil-A, Inc..................................    10
    Cohn, Sherman L., Professor of Law, Georgetown University Law 
      Center.....................................................    17
    Lidsky, Lyrissa C. Barnett, Professor of Law, Levin College 
      of Law, University of Florida..............................    38
    Smith, L. Murphy, Assistant Department Head, Department of 
      Accounting, Texas A&M University...........................    14

                                 (iii)

  


     OATH TAKING, TRUTH TELLING, AND REMEDIES IN THE BUSINESS WORLD

                              ----------                              


                         FRIDAY, JULY 26, 2002

              House of Representatives,    
              Committee on Energy and Commerce,    
                       Subcommittee on Commerce, Trade,    
                                   and Consumer Protection,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2123, Rayburn House Office Building, Hon. Cliff Stearns 
(chairman) presiding.
    Members present: Representatives Stearns, Deal, Shimkus, 
Bryant, Terry, Tauzin (ex officio), and Towns.
    Also present: Representatives Chambliss, Collins, and 
Isakson.
    Staff present: Ramsen Betfarhad, policy coordinator and 
majority counsel; Shannon Vildostegui, majority counsel; David 
Cavicke, majority counsel; William Carty, legislative clerk; 
J.P. Guzzardo, legal intern; Bruce Gwinn, minority professional 
staff; and Consuela Washington, minority counsel.
    Mr. Stearns. The subcommittee will come to order, and we 
would like to have our panelists come down. I would like to 
welcome all of you, especially our witnesses, and thank them 
for their appearance and testimony before the subcommittee. 
Today we will examine business ethics and oath taking in light 
of the recent scandals that have colored this country's recent 
corporate history.
    The Energy and Commerce Committee has been at the forefront 
of congressional investigations examining Enron, Global 
Crossing and WorldCom. Those investigations, in addition to 
uncovering disturbing facts about illegal and questionable 
practices that permeate these companies and others, also 
highlighted a seemingly pervasive disregard of ethics by 
business executives and professionals.
    In the earnings race of the mid to late 1990's, many 
business executives and professionals seemed to have traded 
their own integrity and the good name of their company, albeit 
incrementally, for greed and a chance to beat analysts' 
earnings estimates. I don't think this phenomenon is unique to 
the 1990's. America's corporate and economic history is replete 
with stories of disastrous failures in business ethics during 
boom periods. The 1990's were no exception.
    As with other postboom periods in our history, markets' 
self-correcting mechanisms have kicked in to better align 
corporate practice with business ethics. In the recent months 
investors have severely punished companies by driving down 
their share prices where there was a slight hint of 
questionable behavior such as accounting irregularity. This is 
how the market reacts in helping to mitigate against a crisis 
of confidence and trust that pervades corporate America today.
    Economic history also shows that when there are such crises 
of confidence and trust in American business, that government 
must act. It enacts new laws just as we did yesterday. It 
enforces existing laws much more rigorously, as the SEC and the 
Department of Justice are now doing. The new laws and more 
rigorous enforcement of existing laws are all designed to 
address current ills that stem from lapses in business ethics 
and hope to prevent similar future problems.
    Both prudent government intervention and market self-
corrections will go a long way toward remedying this problem, 
but no lesser luminaries than Warren Buffett and Alan Greenspan 
have reminded us that the attitudes and actions of the CEO and 
other officers of companies are what determine corporate 
conduct, good or bad. Obviously, markets' self-correcting 
mechanisms and legal prohibitions and sanctions help keep that 
conduct in check. CEOs can be fired, and worse, they can go to 
jail for bad conduct, and we have just seen that recently.
    Yet it seems to me, just as Warren Buffett wrote in a 
recent editorial when he said, quote, to clean up their acts on 
these fronts, CEOs don't need independent directors, oversight 
committees or auditors who are absolutely free of conflicts of 
interest. They simply need to do what is right, end quote. 
Doing the right thing means having and exercising good business 
ethics. We cannot legislate integrity or personal 
responsibility. Laws can only encourage good behavior. But 
Congress will legislate enforcement and stiff penalties if CEOs 
do not do the right thing.
    At today's hearing we are hearing from law and business 
professors that teach our future corporate executives and 
business professionals ethics. We will learn what are the 
existing codes of ethics that govern the professions. We will 
also learn whether those codes should be improved and/or better 
instilled in the students of today. We will hear from prominent 
business executives--a prominent business executive speaking to 
the role and the significance of the CEOs and other corporate 
officers in the business ethics that pervade their companies.
    So I look forward to our witnesses today, and I want to 
thank them for their participation, and now we will have an 
opening statement from the distinguished ranking member, the 
gentleman from New York Mr. Towns.
    [The prepared statement of Hon. Cliff Stearns follows:]
  Prepared Statement of Hon. Cliff Stearns, Chairman, Subcommittee on 
                Commerce, Trade, and Consumer Protection
    Good morning. I would like to welcome you all, especially our 
witnesses for their appearance and testimony before the subcommittee. 
Today, we will examine business ethics and oath taking in light of the 
recent scandals that have colored this country's recent corporate 
history.
    The Energy and Commerce Committee has been at the forefront of 
Congressional investigations examining Enron, Global Crossing, and 
Worldcom. Those investigations, in addition to uncovering distributing 
facts about illegal and questionable practices that permeated those 
companies and others, also highlighted a seemingly pervasive disregard 
of ethics by business executives and professionals.
    In the earnings race of the mid to late 90s, many business 
executives and professionals seem to have traded their own integrity 
and the good name of their company, albeit incrementally, for greed and 
a chance to beat analysts earnings estimates. I don't think this 
phenomenon is unique to the 90s. America's corporate and economic 
history is replete with stories of fantastic failures in business 
ethics during ``boom'' periods. The 90s were no exception.
    As with other post-boom periods in our history, the markets' self-
correcting mechanisms have kicked in to better align corporate practice 
with business ethics. In the recent months, investors have severely 
pushed companies by driving down their share prices where there was a 
slight hint of questionable behavior, such as ``accounting 
irregularities''. This is how the markets react in helping mitigate 
against the crisis of confidence and trust that pervades corporate 
America today.
    Economic history also shows that when there are such crises of 
confidence and trust in American business, the Government acts. It 
enacts new laws, as we did yesterday. It enforces existing laws more 
rigorously, as the SEC and Department of Justice are doing. The new 
laws and more rigorous enforcement of existing laws are all designed to 
address current ills that stem from lapses in business ethics and hope 
to prevent similar future ills.
    Both prudent government intervention and market self-corrections 
will go a long way towards remedying the problem. But no lesser 
luminaries than Warren Buffet and Alan Greenspan remind us that the 
attitudes and actions of the CEO and other officers of companies are 
what determine corporate conduct, good or bad. Obviously, markets' 
self-correcting mechanisms and legal prohibitions and sanctions help 
keep that conduct in check. CEO's can be fired and worst can go to jail 
for bad conduct, as we have seen happen recently. Yet, it seems to me 
that as Warren Buffet wrote in a recent editorial: ``[t]o clean up 
their act on these fronts, C.E.O.'s don't need ``independent'' 
directors, oversight committees or auditors absolutely free of 
conflicts of interest. They simply need to do what's right.'' Doing the 
right thing means having and exercising ``good'' business ethics. We 
cannot legislate integrity or personal responsibility. Laws can only 
encourage good behavior.
    At today's hearing we'll hear from law and business professors that 
teach our future corporate officers and business professionals ethics. 
We will learn what are the existing codes of ethics that govern 
business professionals. We'll also learn whether those codes should be 
improved and/or better instilled in the students. We will hear from a 
prominent business executive speaking to the role and significance of 
the CEO and other corporate officers in the business ethics that 
pervades a company.
    I thank the witnesses for their participation and look forward to 
their testimony.

    Mr. Towns. Mr. Chairman, I have an opening statement that I 
will just place in the record, but I would just like to make a 
few comments. First of all, I would like to thank you for 
holding this hearing. I think it is important that we do it at 
this time. Ethics is something that we cannot legislate, but I 
think that we cannot sit around and just watch and see what is 
happening, because it is important that we have the confidence 
of the general public, and, of course, if we do not do 
something, I am certain that that confidence will not be there. 
So I want to salute you, Mr. Chairman, for taking the lead in 
this particular issue and to say to you that even though the 
business community have done a few things, but I still don't 
think it is enough, and that in the event that we do not do 
something, then I think that we are going to jeopardize, you 
know, a lot of people in a lot of areas, and the confidence 
just will not be there.
    So I want to salute you for moving forward with this 
hearing today and to say to you that I look forward to hearing 
from the witnesses, because I think that when we talk about 
ethics, we can't talk about it enough. So thank you very much, 
Mr. Chairman. And I yield back.
    Mr. Stearns. Okay. The gentleman yields back. And by 
unanimous consent his opening statement will be made part of 
the record.
    My colleagues, by unanimous consent the gentleman from 
Georgia, the Honorable John Isakson, will participate if there 
is no exception. So ordered.
    Now, the vice chairman of our subcommittee the gentleman, 
also from Georgia, Mr. Nathan Deal.
    Mr. Deal. Thank you, Mr. Chairman, and thank you for 
holding this hearing today, and in a few minutes I look forward 
to introducing one of the very special panel members here, Mr. 
Truett Cathy, who is certainly one of the premiere business 
people in our Nation and from our State of Georgia, and we are 
proud to have him here. And I also welcome my colleague Mr. 
Isakson to this hearing today.
    As you have indicated, Mr. Chairman, we hear a lot about 
the bad things that go on in business, in corporate America. 
Today as we listen to those from the academic community who 
train the CEOs and the legal advisors to major corporations, 
and as we listen to a businessman who has shown that success in 
the marketplace does not depend on dishonesty, but, in fact, it 
depends on exactly the opposite, that is that you play by the 
rules, that you treat your customers fairly, and that you 
display the kind of leadership that people in the everyday 
world who invest in corporations expect, I think we get the 
message out that that is the foundation on which American 
business has truly been built. And the ones who have deviated 
from that are the exceptions to the rule and not the rule 
itself.
    Certainly all of us, as we have come through our own 
educational background, have been taught that morality and 
ethics are, in fact, the cornerstones of not only a successful 
personal life, but a successful business and professional life. 
And I think that we need to send a message, especially to the 
young people of this country today, that as they make their 
choices about professions, as they make their choices about 
what they are going to do with their lives, that they 
understand very clearly that from the halls of Congress to the 
business communities itself, that the concept of honesty and 
fair dealing is important and, in fact, is essential.
    I am pleased that we have these outstanding members of this 
panel to reinforce that concept as we proceed to this hearing, 
and I look forward to introducing Mr. Cathy in a few moments. 
Thank you, Mr. Chairman.
    Mr. Stearns. Thank my colleague.
    And Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman.
    It is great to have you all here today, and it is a shame 
that we have to have you here today, because this shouldn't be 
something that we have to advertise. This just should be the 
way we operate.
    You know, one of the Founding Fathers was quoted--and I 
won't try to remember which one. He says, though good laws do 
well, good people do better. And it talks about a moral 
foundation of truth that is instilled throughout our society, 
although sometimes we lose our way.
    I am a West Pointer, so I didn't wear my class ring for a 
long time. Actually I put it on not to get--I put it on during 
the impeachment issues because I had to keep asking a lot of 
questions. The code at West Point is duty, honor, country. And 
I have my class ring here. And General MacArthur said, duty, 
honor, country. Those three words reverently dictate what you 
ought to be, what you can be, what you will be. His speech to 
the corps of cadets at the end of his career indicates how the 
Academy has attempted to imbed into a culture that would 
permeate through the military.
    Other things that are done at West Point is the honor code: 
A cadet will not lie, cheat or steal, nor tolerate those who 
do; and part of the cadet prayer, which says, help me to do the 
harder right over the easier wrong, not being content with the 
half truth when the whole can be won.
    This background, when I had to make some tough decisions, 
caused me to focus back on my educational background, and not 
only that, but also my family background and my training there. 
But we all know that this also tries to permeate itself through 
the Army Officer Corps where an officer's word is his bond. The 
moral foundation of the United States Army tends to depart from 
the background at West Point, but it always continues and takes 
more work, just like a successful marriage takes work, a good 
corporate culture takes work.
    We are glad that you are here to help get the word out that 
there are goods actors out there instilling good corporate 
cultures, and if we are concerned about having character 
education in our schools, which is a big thing now--
unfortunately we have to do that, because they are not getting 
it at home--then it is good to tell the story that that there 
needs to be character core education in the boardrooms.
    We thank you all for being here. We are excited about 
listening to your stories, and we hope our other folks who are 
creating jobs and wealth in this country will take heart that 
there are good folks out there.
    And, Mr. Chairman, thank you for the extension of my time, 
and I yield back.
    Mr. Stearns. Thank you. I want to thank the gentleman.
    Mr. Terry, gentleman from Nebraska.
    Mr. Terry. Thank you, Mr. Chairman. I have a statement, and 
I will just submit it.
    Mr. Stearns. So ordered.
    [The prepared statement of Hon. Lee Terry follows:]
Prepared Statement of Hon. Lee Terry, a Representative in Congress from 
                         the State of Nebraska
    Thank you, Mr. Chairman, and thank you for holding this hearing on 
a very important issue: the accountability of chief executive officers 
for the financial statements their companies issue to the public.
    I am not a promoter of more laws, just better ones. I do not 
support increased regulations; rather, enforcing the ones we already 
have on the books. This Committee and this Congress have taken strong 
steps this session to streamline accounting laws and oversight 
regulations. We have closed loopholes, filled in gaps, tightened grips, 
and made our economy's future strong by doing so.
    Issue by issue, Mr. Chairman, your leadership has led to real-time 
financial disclosures, transparent investor information, plain language 
documentation, and harsher penalties for those who knowingly commit the 
crimes that lead to Enrons, Worldcoms, and ImClones. Yet more needs to 
be done, which is why this hearing today is so important.
    Like a quarterback for a football team, CEOs get to take all of the 
credit when things go well and have to take all of the blame when 
things go badly. Yet legally, they are not held accountable. When a 
quarterback fumbles, throws a few interceptions, maybe even throws the 
game, the coach has a responsibility to bench him, so that no more 
follies will occur. Mr. Chairman, the federal government must be the 
coach every once in a while, and we have a responsibility to bench CEOs 
who lie, cheat, hide, and steal. President Truman said it best: ``The 
buck stops here.'' At the end of the day, CEOs have a duty to ensure 
ethical behavior of their companies. By signing on the dotted line that 
their financial statements are accurate and true, CEOs will be held 
accountable to the letter of the law.
    Thank you again, Mr. Chairman, for holding this hearing, and I look 
forward to the testimony.

    Mr. Stearns. Mr. Bryant, the gentleman from Tennessee.
    Mr. Bryant. Thank you, Mr. Chairman.
    Having walked in late, I apologize to the panel. I will be 
very brief here.
    I would say that listening to Mr. Shimkus's speech, I would 
tell him that I would take full credit for that, although I am 
not sure I actually did. I actually taught at West Point during 
that time, and I claim him when he is on his best behavior that 
he was one of my students; but usually when he is not on his 
best behavior, I disavow him completely. But I will certainly 
agree with what he says and thank the panel for coming.
    I can't help but think not just the cause--but I cannot 
help but think back just a few short years ago with what we 
went through in Washington as a part of the actual impeachment 
of a President and actually being firsthand involved in that 
myself, knowing what was there and the example that was not 
only, I think--the very bad example that was not only set to 
our youth, but I think something we missed was the bad example 
it set for our corporate executives and other people in 
business and certainly, I believe, lowered the standard, if you 
will, of truth and integrity. And I think it was a very bad 
example. I am not saying that is all of it by any means. 
Certainly at the core is simply greed, the human nature of 
greed. But we have to do what we can as a body, as a Congress, 
to correct that.
    We always hear you can't legislate morality, but we do 
attempt to do it in many ways. But certainly we have to do 
that. Also we have to set an example ourselves as Members of 
Congress. But I can sound like I am starting to preach here, 
and I am not.
    But let me yield back my time and thank this very 
distinguished panel for being here today and so we can move on 
and hear them. Thank you.
    Mr. Stearns. I thank my colleague.
    I think that what we are going to do is have--the vice 
chairman introduce one of our CEOs, the distinguished Mr. 
Cathy, and then, Mr. Isakson you will have an opportunity after 
Mr. Deal speaks to also do an opening statement and to provide 
anything further.
    So with that we will move to our panel and Mr. Deal.
    Mr. Deal. Thank you, Mr. Chairman.
    Probably the guest that we have today in the form of a 
panel member is best recognized by some of the ads that feature 
the ``Eat Mor Chikin.'' this is certainly one of the more 
successful advertising recognition symbols in our country. It 
is the recognition of Chick-fil-A, and we are very pleased, 
especially Mr. Isakson and I as Georgians, to have a native 
Georgian on the panel today, Mr. Truett Cathy.
    Mr. Cathy grew up in Atlanta. He began his business 
activities running a Coca-Cola stand in Atlanta. He carried the 
concepts of good business practices from those early years, in 
his preteen years, all the way through his career here until 
today and is certainly, I think, the model for the kind of 
business that all of us would like to see succeed in our 
country.
    Chick-fil-A has over 1,040 franchises across the country. 
It is a business that for 34 consecutive years have each year 
posted sales growth, and that in itself is phenomenal. It is a 
business that has adhered to the importance of never having a 
customer who leaves dissatisfied; that the customer is first 
and most important, because that is what keeps a business, 
especially a business like the restaurant business, going on a 
daily basis.
    But he has a unique distinction. The restaurant business is 
a very competitive business, and Sundays are sometimes regarded 
as the most important day in the restaurant business because 
people are off working generally, and they go out to eat. But 
because it is Sunday, Mr. Cathy has consistently adhered to the 
concept that his restaurant is closed on Sunday, and the reason 
is that he wants his employees to have time to worship, if they 
choose, and also to have time with their families. So it is not 
the typical business model, and he is certainly not in many 
respects the typical business entrepreneur, but is the example 
that all of us, I think, should adhere to. He is a very kind 
and gentle man, and it is indeed my pleasure to have him on 
this panel today.
    Mr. Stearns. I thank the gentleman.
    Mr. Isakson, you are welcome to make introductory remarks.
    Mr. Isakson. I will just be very brief, and I appreciate 
all the things that Congressman Deal said. And Congressman 
Collins is also--all of us from Georgia are here because in 
my--I don't know a finer man than Truett Cathy, and I have 
known him for a number of years. I practiced business in 
Atlanta for 34 years before I came to Congress. It was a real 
estate business, so we from time to time dealt with Chick-fil-A 
people looking for sites. My kids were raised on Chick-fil-A 
because it is the favorite thing they like to eat.
    But the point I wanted to make is this: Truett Cathy is not 
one of those people that writes a book or comes up with a cute 
phrase and puts it on for pretense. He is a guy that every day 
lives the life that he is here to tell you about, and I can 
tell you in advance he will be more humble than he should be 
because he is that type of a man.
    I just lament that, having attended the Enron hearings here 
in Washington a few months ago and seeing standing-room-only 
crowds coming to hear about a tragedy, that we don't have a 
standing-room-only crowd here today to hear about what most 
American business is really like, but what I think Atlanta and 
Georgia's finest businessman is. Truett Cathy walks the walk. 
He talks the talk. He has changed the lives of thousands of 
children, and he has made it possible for hundreds of his 
employees to get college educations who would otherwise never 
have had a chance. But every Sunday, for, I think, 50 years, he 
has taught 13-year-old boys Sunday school, trying to point them 
in the right direction in life, and many of them today are 
walking examples just like Truett is.
    So it is a real honor for me to be here around my role 
model and my idol Truett Cathy. Thank you, Mr. Chairman.
    Mr. Stearns. Thank you.
    And the gentleman Mac Collins from Georgia is also 
recognized, not a member of the committee, but certainly 
welcome his comments.
    Mr. Collins. Thank you, Mr. Chairman. And I join my two 
colleagues as well as the other colleagues in welcoming the 
panel, particularly the Cathy family, Mr. Truett, his son Dan, 
and two grandsons.
    You know, I have know Mr. Cathy for, oh, 10, 15 years since 
I have been campaigning in Clayton County and Henry County, 
Georgia, for political office. I know him as a man of honor, a 
man of integrity and a man of faith. And I know that he has, as 
a father, raised a family with those same traits. Not only has 
he raised a family who are people of faith, but he has taken in 
a lot of foster children; homes in the United States that he 
has for foster children, funded them, visits with them, and 
lets them know of his faith, and through faith has been 
successful to him and will be successful for them if they 
follow that route. But not only here, but in Peru, he has 
helped children there.
    It has been mentioned he has been teaching Sunday school 
for a number of years. I have attended some of his classes 
because I wanted to hear him. I welcome them. I am glad to call 
them friends, and I am glad that they live in the Third 
District of Georgia.
    Thank you for all you do, all your family. And one last 
thing. Mr. Cathy, when each of his children became the age of 
driving, at that time it was 16 in Georgia, they could get them 
an automobile, but on the steering wheel of that automobile 
would be an engraving. It would be a Bible verse of their 
choice. That is the type of man Truett Cathy and his wife and 
family are. Thank you, Mr. Truett.
    Mr. Stearns. I thank the gentleman.
    Also we have also from the great State of Georgia Mr. Saxby 
Chambliss, who is offering a quick opening statement or 
comment.
    Mr. Chambliss. Thank you, Mr. Chairman, and just adding to 
what my colleagues have said about Mr. Cathy, he is a 
remarkable man who has had a remarkable life and has had just a 
profound influence on any number of other not just Georgians, 
but Americans, and he is somebody that we Georgians are 
extremely proud of. And just one quick story.
    His son Dan and Mr. Cathy invited me to an event back the 
Saturday before the Fourth of July, which is an annual event 
they have at their ranch, which is located in my district, and 
it is a ranch on which they have a home for children. And it 
is--the home itself is a remarkable story, it says a lot about 
Mr. Cathy and Dan and that whole family. And we were there that 
Saturday night. There were probably, I don't know, 3,000, 3,500 
folks there at Mr. Cathy's and Dan's invitation. And there 
were, gee, a lot more children than there were adults just 
enjoying life, celebrating the great country that we live in, 
and having an opportunity to see the work that Mr. Cathy has 
done for so many children in our part of the State who have not 
had the advantages that most of us have had. And it was truly a 
great night for America, but it was a great night to pay 
tribute to the Cathy family.
    Mr. Cathy, unfortunately, by the time I got there, had 
already gone, and he had gone for the right reason. He had left 
Upson County and had headed somewhere--I don't believe it was 
back home, Mr. Cathy. I know it was north of Atlanta. But he 
was gone to teach Sunday school or gone home so he could get a 
good night's sleep so he could teach Sunday school the next 
morning. And all Georgians are extremely proud of--I am very 
proud of you. We are proud to have your facility in my 
district, and we appreciate you being here today, and thank you 
and Dan and your whole family.
    Mr. Stearns. I thank the gentleman.
    [Additional statements submitted for the record follow:]
    Prepared Statement of Hon. Charles F. Bass, a Representative in 
                Congress from the State of New Hampshire
    Mr. Chairman, thank you. I am pleased that this subcommittee is 
addressing the issue of business ethics. In light of recent corporate 
responsibility scandals, it is ap- propriate that we examine how the 
federal government may be able to rectify the institutional problems 
that exist within our business models.
    Although I do not believe it is the role of Congress to legislate 
honesty mandates, as Americans, it is incumbent upon us to reevaluate 
the significance of social re- sponsibility and its effects on our 
business and economic systems. The failure to ad- here to a 
professional code of ethics by some executives has contributed to the 
cur- rent economic melange. I believe this hearing will serve as a 
positive step in re- dressing the wrongs that have led to this point so 
that they should not have to occur in the future.
    I yield back to the Chairman.
                                 ______
                                 
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    Thank you, Mr. Chairman, and I'd like to thank you for holding this 
hearing and for continuing to focus on the myriad problems that have 
been exposed in the busi- ness community in recent months. Straight 
truth, favorable or not, from our public companies and their governors 
is the foundation for trust in our free market system, and we in 
Congress must find the best way to encourage ethical behavior by busi- 
ness leaders and protect investors from corporate malfeasance.
    Our business community, and the investor culture that thrives 
therein, is based upon concepts that we've heard more and more about 
since these corporate scandals have unfolded. The notions of 
``transparent accounting,'' ``auditor independence'' and ``investor 
confidence'' are more than Boardroom phrases. Because of the technology 
boom of the late 90's and the democratization of the financial markets, 
these con- cepts are now discussed around American dinner tables. 
Investors simply must have confidence in financial reporting, and we 
must do everything we can to ensure the veracity of reporting and the 
continued strength of our market system. The first and, I think, most 
important, step in this process is to restore the fundamental trust of 
the general public in the integrity of business leaders and the 
financial reports they issue.
    Swearing an oath has long been a very public way for those in a 
position of lead- ership--in government and in the private sector--to 
take explicit responsibility for their actions with regard to that 
position. For example, Members of Congress take an oath to uphold the 
Constitution. Public avowal serves as an assurance to the public--
investor or constituent--that the leader raising her right hand will 
act in the interest of those she serves. But in addition to that, it 
shores up confidence in the system as a whole. It shows that the system 
is comprised of men and women who are accountable not only to those 
they serve directly, but also to the entire com- munity.
    Mr. Chairman, the investors who have lost huge amounts of money are 
irate with the shady dealings of their corporate representatives. So 
too are those of us who be- lieve in the virtues of the free market. In 
fact, it is the most stalwart of defenders of free markets that are 
most offended by those who have abused the system.
    The business community is just that, a community, and when people 
cook the books in an attempt to line their own pockets, they do an 
incredible disservice to all of those who try to inform themselves 
completely and invest responsibly. Yester- day we took meaningful steps 
to protect investors by passing the Conference report

for HR 3763. I look forward to hearing from our witnesses today about 
further steps, legislative or otherwise, that need to be taken to 
restore confidence in our market system.
    Again thank you, Mr. Chairman, for holding this hearing and for 
investigating possible remedies to the problems we face.
    I yield back the balance of my time.

    Mr. Stearns. We want to welcome----
    Mr. Collins. Mr. Chairman, would you yield for a moment, 
please?
    Mr. Stearns. I would be glad to yield.
    Mr. Collins. This is the Commerce Committee, and we are so 
proud to be over here with you. And, you know, we are from 
Georgia, and Georgia is the poultry capital of the world. We 
are having trouble based on some conflict that we have with 
Russia. It might be a good suggestion if we send Mr. Cathy over 
to Russia. I believe he could convince those people over there 
they need to eat more chicken, and if they eat more chicken, 
then they will probably bring down that barrier and settle that 
conflict.
    Mr. Stearns. Probably so. Does vodka go with chicken?
    Mr. Deal. Not at Chick-fil-A.
    Mr. Stearns. Let me welcome our panel.
    Mr. Collins. They are already indulging in enough of that, 
but they need to eat more chicken.
    Mr. Stearns. Okay. Of course, we have Samuel Truett Cathy, 
who is founder and chairman and chief executive officer of 
Chick-fil-A. We have Murphy Smith, assistant department head, 
department of accounting, Texas A&M University. And we have 
Sherman Cohn, professor of law, Georgetown University Law 
School; and Lyrissa Barnett Lidsky, a professor of law, Levin 
College of Law, the University of Florida.
    So let me welcome all of you this morning, and we will go 
from my left to my right with opening statements, and, Mr. 
Cathy, we will start with you. What we need you to do is turn 
on the mike and then move the mike a little closer to you.

 STATEMENT OF SAMUEL TRUETT CATHY, FOUNDER, CHAIRMAN AND CHIEF 
              EXECUTIVE OFFICER, CHICK-FIL-A, INC.

    Mr. Cathy. Okay. Great. It is indeed an honor for me and 
humbling in spirit to be here with you and hearing all these 
glorying remarks. I could sit here and enjoy this the rest of 
the day, and I will be here, be glad to listen to you. I love 
to hear such kind remarks, and I am grateful for those. But I 
am thankful that you invited me to speak, realizing when I was 
in school I was tongue-tied. The best I could do was the name 
Truett Cathy, and here you are inviting me to speak to a very 
distinguished group. So I am indeed honored. People ask me, do 
you get many speaking engagements, and I say, well, I get a lot 
of first-time speaking engagements, but seldom does anyone ask 
me back. So I appreciate this first opportunity I have had to 
speak to such a distinguished group.
    As I think about ethics and the business ethics, I realize 
there is no such thing as a business ethics. It is individual 
ethics. People make the business. I am proud of all my 
representation of Chick-fil-A folks. They know what dedication 
and commitment is and loyalty among our people. We are a 
private company. That is why we don't have a board of directors 
to answer to, thank goodness. And we do not have to answer to 
stockholders that arereally the bosses of these companies. They 
are the ones that ought to be protected and watch after their 
own interest. But today I am grateful that we are still a 
private company, family owned, and operate on some principles 
that have been very meaningful to me throughout my business 
life.
    Here back in 1982 we were experiencing some kind of 
difficult situations. No. 1 is we just moved into a $10 million 
corporate headquarters. It was fully financed. Business 
interest on borrowing money was 20 and 21 percent. We saw some 
decline in our sales because all the major chains were getting 
in the chicken breast sandwich business, which caused the 
product to be inflated, and I was disturbed at the time because 
everything that I had at that time was predicated on the 
success of Chick-fil-A.
    And so I called a meeting among our executive committee. 
All of these gentlemen have more than 20 years of service with 
Chick-fil-A. They are fully dedicated and committed to 
operating a business on Christian principles, and so I asked 
the question, why are we here? Why are we alive, and why are we 
in business anyway? We never established a corporate purpose. 
But among the conversation of the eight of us spending 2 days 
there, we came away that this might be our corporate purpose, 
that we might glorify God by being a faithful steward for all 
that is entrusted to our care, and that we might have a 
positive influence on all the people that we come in contact 
with.
    We came back and shared this with our staff people, and 
they said, well, what else do you do? I said, well, we didn't 
have an answer to the current problems, but we did establish 
where our goals were, where our corporate purpose was and asked 
them to cooperate with. They were kind enough to give to me at 
Christmastime a plaque identifying my corporate purpose. So it 
was meaningful to them, but it is meaningful even today that 
where my responsibility is, how I should conduct myself over 
telephone calls and salespeople and people that are not doing 
the job that is expected of them.
    So being in the restaurant business, I feel kind of a 
divine calling to do those things--meeting people's needs, 
their physical needs, their emotional needs and even the 
spiritual needs. It is a privilege that we have to employ 
40,000 or 50,000 young people in our various businesses, and I 
am motivated by what I see in young people. A lot of them work 
because they have to work. Others work because they just like 
to work. I have never seen any objections to people enjoying 
their work. I find people that enjoy their work if they are 
putting their heart into it and performing at their very best. 
When we get in trouble is when we are doing less than what is 
expected of us.
    But it was brought out the fact of I do teach 13-year-old 
boys in Sunday school, and the reason that I do that is I feel 
it is the last opportunity to establish some values in life 
that will get them over the critical years of a teenager. So I 
tell them, you know, it is important that you make good 
decisions. Good decisions mean goods results; fair decisions, 
fair results; and the sad part about it, bad decisions equal 
bad results. So even teaching, I have my former students, some 
in prison today that have gone wayward and doing those things, 
and I ask, you know, I wondered if I had had just a little bit 
more time to spend with that individual.
    Also I pointed out--I asked one morning, how many of you 
would like to have a million dollars? And all the hands went 
up. They could have everything they wanted. Dad could have a 
pickup truck with shotgun shelf, and Mom could have a new 
dress. He could have a Go Kart. And I said, well, let me tell 
you something better than a million dollars; that the Bible 
says a good name is rather to be chosen than great riches.
    I think that is something we all need to realize, that God 
has a plan in our life. I consider the Bible as a blueprint, a 
road map for our life. I think instinctively we are all born 
with the idea that we want to be somebody and achieve goals 
that might be worthy, but somehow or another we are getting our 
priorities mixed up. I was asked by a reporter one time, how 
would you like to be remembered when you leave here? After 
thinking a moment or two, I said, I guess I would like to be 
remembered that I kept my priorities in the proper order, 
because I have observed business people, highly successful 
business, being a complete failure when it comes to the 
important things like your conduct with your family and in 
society and community.
    It is very, very important that we take a look at the 
important things. We realize we are in a changing world, but 
the important things never have changed. I still feel the 
principles of the Bible. I see no conflict between biblical 
principles and good business practice. They are there. They are 
outlined for us. And we need to read the Bible, and not only 
read it, but interpret it.
    I have been impressed with attending the national prayer 
breakfast where the President was there and his wife, and the 
Vice President and his wife, and numerous other peoples. And a 
Jewish person read from the Old Testament, and a Protestant 
read from the New Testament. Prayer is prayer.
    To get in my office and find that a kindergarten group was 
coming through, elementary school group, and I have a book at 
that time, It Is Easier to Succeed Than to Fail, and I told the 
children, I don't have books for each of you, but I will give 
you three and put them in the library. And I am signing this 
book, and under it I will put Proverbs 22:1. I am not going to 
tell you what Proverbs 22:1 is. You look it up, and you can 
find it in the Bible. I said, when you go to check out the 
book, take a look at what Proverbs 22:1 says. I said, you do 
have a Bible in your school, don't you? The teacher said, I am 
sorry, Mr. Cathy, we are not allowed to have a Bible in our 
school. How is it that people of higher authorities rely on 
prayer and Bible reading and character building, yet a child 
going to school cannot carry a Bible in their hands?
    Mr. Stearns. Mr. Cathy, I am going to have to interrupt 
you. We have a vote on the floor, so I am going to recess the 
committee, and we will come back momentarily. We just have one 
vote. So the committee stands in recess.
    [Brief recess.]
    Mr. Stearns. The subcommittee will reconvene, and Mr. Cathy 
was just finishing up his opening statement.
    So, Mr. Cathy, as a courtesy, if you don't mind wrapping up 
your opening statement, and then we will hear from Dr. Smith.
    Mr. Cathy. Thank you for the time that has already been 
given to me. I want to make a closing statement or two that I 
would like to relate to you.
    Many other things I would like to share with you at the 
proper time, but I will close by maybe telling you about a 
picture that I have on the wall of my office that was sent to 
me by my daughter as a teenager. But on that is a picture of a 
mountain climber, had proper attire with his safety rope on, 
with the caption that no goal is too high if we climb with care 
and confidence. And that is a reminder to all my people there 
that no goal is too high, but we have to be careful, and we 
have to practice biblical principles and do those things that 
will cause us to continue to experience success.
    So I would like to close by just making the statement I see 
no conflict between biblical principles and our faith, and we 
could do well to consider the things that are important in our 
life. And I feel that some of our people have been misguided to 
think that pressure put on them about the bottom line. We 
concentrate on people. And I know sometimes the stock companies 
concentrate on the bottom line. We should forget about the 
bottom line. It is important that we do things right and do 
things right long enough that you will receive the rewards that 
you are looking for. That is my closing remark.
    [The prepared statement of Samuel Truett Cathy follows:]
                 Prepared Statement of S. Truett Cathy
    Mr. Chairman and members of the Committee, I am honored that you 
have asked me to be here today. I cannot think of a greater privilege 
than to speak to the leaders of our nation. Further, that you thought 
me fit to speak on the issue of ethics is personally humbling.
    After agreeing to appear before you today, I had to ask myself 
``what is the meaning of `business ethics'?'' I concluded that there is 
really no such thing as business ethics. There is only personal ethics. 
I believe no amount business school training or work experience can 
teach what is ultimately a matter of personal character. Businesses are 
not dishonest or selfish, people are. Thus, a business, successful or 
not, is merely a reflection of the character of its leadership.
    I am deeply disturbed, as you are, by the lack of character I see 
in the marketplace. In order to satisfy the increased pressure for 
greater profits, some business leaders are making bad choices which 
ultimately hurt thousands of employees, stockholders, and the economy.
    We all know that the scorecard of any business is the profit it 
produces. Without profit, we cannot take care of our employees, our 
families, or contribute to the betterment of our communities. The 
question is: How do we balance the pursuit of profit and personal 
character?
    For me, I find that balance by applying biblical principles. I see 
no conflict between biblical principles and good business practices. 
We've tried to operate Chick-fil-A that way from the beginning . . . 
1946 . . . Comments.
    In grade schoo . . . (My Proverbs 22:1 story) . . . 
    There also is the book, ``Everything I Need To Know I Learned In 
Kindergarten'', and some of these things are . . . Comments.
    So, personal character is something we must teach our children and 
enforce through our actions. That is one reason we close on Sunday. Not 
everyone has personal convictions about closing on Sunday, but I 
believe most people respect my personal convictions in doing so. I once 
asked the group of 13 year old boys I teach Sunday school . . . (the 
hypocrite story) . . . Comments.
    I have a framed poster on my wall of a mountain climber given to me 
by my daughter, Trudy when she was just a young teenager, which says, 
``No goal is too high if we climb with care and confidence''. Many 
businesses today are overextended and have gotten themselves into 
financial trouble. I have always tried not to overextend. I am 
satisfied stepping from one plateau to the next, making sure we are 
doing everything right so that we can move on with confidence. I have 
always said I want to make sure we are getting better before we get 
bigger.
    Mr. Chairman and members of the committee, in closing, I would like 
to say that the important things in life haven't changed: those are 
faith, family values, and good character among others. I was asked the 
other day how I wanted to be remembered. My reply was that I would like 
to be remembered as one who kept their priorities in order; that while 
I've tried to build a successful business, I've kept focused on my 
family, the reputation of my name, on influencing others, and on 
incorporating my faith into every part of my life. In other words, Mr. 
Chairman, I believe faith works on both Main Street and Wall Street. 
Thank you again for the opportunity to be here today.

    Mr. Stearns. I thank you.
    Dr. Smith, your opening statement.

    STATEMENT OF L. MURPHY SMITH, ASSISTANT DEPARTMENT HEAD, 
         DEPARTMENT OF ACCOUNTING, TEXAS A&M UNIVERSITY

    Mr. Smith. Well, first, thanks for allowing me to be here 
today.
    Ethical values provide the foundation on which a civilized 
society exists. Without that foundation, civilization 
collapses. On a personal level everyone must answer the 
following question: What is my highest aspiration? The answer 
might be wealth, fame, knowledge, popularity or integrity, but 
if integrity is secondary to any of the alternatives, it will 
be sacrificed in situations where a choice must be made, and 
those situations will inevitably occur in every person's life. 
Allegations of unethical behavior by top management at Enron 
helped destroy the company's ability to function.
    A goal of a business firm should be to increase its owner's 
wealth. To do so requires the public's trust. In the long run, 
that trust depends on ethical business practices. In the United 
States and other free societies, people often have the freedom 
to make their own decisions about the right thing to do. Before 
the American Republic, a common belief was that where there was 
liberty, anarchy would result, because people would be unable 
to govern themselves. Yet Americans were free and well-behaved. 
How could this be?
    The great English writer G.K. Chesterton observed that 
America was the only Nation in the world founded on a creed. He 
said that creed was set forth with dogmatic and even 
theological lucidity in the Declaration of Independence. 
Chesterton was referring to the second paragraph of America's 
founding document: We hold these truths to be self-evident that 
all men are created equal; that they are endowed by their 
Creator with certain unalienable rights; that among these are 
life, liberty and the pursuit of happiness.
    Whether a person derives ethical values from religious 
principle, history and literature, or personal observation, 
there are some basic ethical guidelines to which everyone must 
agree. In considering the impact of ethical values on a 
society, nationally syndicated columnist Chuck Colson made the 
following observation: Societies are tragically vulnerable when 
the men and women who compose them lack character. A nation or 
a culture cannot endure for long unless it is undergirded by 
common values, such as valor, public-spiritedness, respect for 
others and for the law. It cannot stand unless it is populated 
by people who will act on motives superior to their own 
immediate interests.
    The purpose of ethics in business is to direct businessmen 
and women to abide by a code of conduct that facilitates, if 
not encourages, public confidence in their products and 
services. Educators sometimes wrestle with the question, can 
ethics be taught? The 26th President of the United States, 
Theodore Roosevelt, put it this way: To educate a person in 
mind and not in morals is to educate a menace to society. More 
recently the National Commission on Fraudulent Financial 
Reporting indicated that the business curricula should 
integrate the development of ethical values with the 
acquisition of knowledge and skills.
    When societal values are deteriorating, maintaining high 
ethical standards in accounting and business grows increasingly 
difficult. People will undoubtedly ask if everyone else is 
cheating, then how can an ethical person succeed? The answer is 
in the definition of success. The real measure of success is a 
person's character, not fame and fortune. Genuine success is 
living a life that reflects high ethical values. President 
Abraham Lincoln said it well: Honor is better than honors.
    What can government do? Perhaps America's first President 
can help answer that question. In George Washington's farewell 
speech to public life, he said, the survival of freedom on 
American soil would have nothing to do with him and everything 
to do with the character of its people and the government they 
would elect. He said, of all the dispositions and habits which 
lead to political prosperity, religion and morality are 
indispensable supports. Reason and experience both forbid us to 
expect that national morality can prevail in the exclusion of 
religious principle. Passing additional laws and regulations 
are often necessary to punish criminal behavior and to provide 
moral guidance to law-abiding citizens; however, even more 
effective leadership would be for government to inspire its 
citizens to act with virtue and honor.
    As President Washington pointed out, there is no better 
source of inspiration than religious principle. The fact that 
governmental institutions have downplayed the role of religion, 
particularly Christianity, starting in the last half of the 20 
century is arguably a key factor in the decline of national 
morality, including the recent ethical failures in business. 
Government should include and encourage the active 
participation of people of faith and the inclusion of religious 
principle in the public arena. This would almost certainly be a 
step in the right direction of inspiring ethical behavior in 
American society, including the business community.
    In the aftermath of 9/11, I am encouraged by the refocus on 
valor, public-spiritedness and other godly values. As President 
Bush leads our Nation, I am grateful that he reads the Bible 
and spends time in prayer. He affirms our national motto, In 
God We Trust.
    Rules and regulation of government cannot preserve a free 
and ethical society whose people lack integrity. Ethics is the 
heart of America's economic and social freedom. Unethical 
behavior is a dagger in the heart. According to business 
textbooks, top management sets the ethical direction for the 
firm. Company policies and internal controls are ineffective 
without ethical leadership from the top. Likewise, the 
political leaders of our Nation set the tone for its citizens. 
Laws and regulations will do far less than your example.
    And finally, I just thank you for your efforts and all the 
Members of Congress who are striving to pass appropriate 
legislation and to provide ethical leadership for our country.
    [The prepared statement of L. Murphy Smith follows:]
 Prepared Statement of L. Murphy Smith, Professor of Accounting, Texas 
                             A&M University
    Ethical values provide the foundation on which a civilized society 
exists. Without the foundation, civilization would collapse. On a 
personal level, everyone must answer the following question: What is my 
highest aspiration? The answer might be wealth, fame, knowledge, 
popularity, or integrity. But if integrity is secondary to any of the 
alternatives, it will be sacrificed in situations in which a choice 
must be made. Such situations will inevitably occur every person's 
life.
    Allegations of unethical behavior by top management at Enron helped 
destroy the company's ability to function. A goal of a business firm 
should be to increase its owners' wealth; to do so requires the 
public's trust. In the long run, that trust depends on ethical business 
practices.
    In the United States and other free societies, people often have 
the freedom to make their own decisions about the ``right'' thing to 
do. Before the American Republic, a common belief was that where there 
was liberty, anarchy would result because people would be unable to 
govern themselves. Yet Americans were free and well behaved. How could 
this be? The great English writer, G.K. Chesterton, observed that 
America was the only nation in the world founded on a creed. He said 
that creed was set forth with dogmatic and even theological lucidity in 
the Declaration of Independence. Chesterton was referring to the second 
paragraph of America's founding document: ``We hold these truths to be 
self-evident, that all men are created equal, that they are endowed by 
the Creator with certain unalienable rights, that among these are life, 
liberty and the pursuit of happiness.''
    Whether a person derives ethical values from religious principle, 
history and literature, or personal observation, there are some basic 
ethical guidelines to which everyone must agree. In considering the 
impact of ethical values on a society, nationally syndicated columnist 
Chuck Colson made the following observation. ``Societies are tragically 
vulnerable when the men and women who compose them lack character. A 
nation or a culture cannot endure for long unless it is under-girded by 
common values such as valor, public-spiritedness, respect for others 
and for the law; it cannot stand unless it is populated by people who 
will act on motives superior to their own immediate interest.''
    The purpose of ethics in business is to direct business men and 
women to abide by a code of conduct that facilitates, if not 
encourages, public confidence in their products and services. Educators 
sometimes wrestle with the question: Can ethics be taught? The twenty-
sixth president of the United States, Theodore Roosevelt put it this 
way: ``To educate a person in mind and not in morals is to educate a 
menace to society.'' More recently the National Commission on 
Fraudulent Financial Reporting (Treadway Commission) indicated that 
business curricula should integrate the development of ethical values 
with the acquisition of knowledge and skills. John C. Burton, former 
dean of the Columbia University Business School, in a speech to the 
American Accounting Association, stated that the declining influence of 
social institutions has increased the role educators must play in 
shaping values.
    When societal values are deteriorating, maintaining high ethical 
standards in accounting and business grows increasingly difficult. 
People will undoubtedly ask: If everyone else is cheating, then how can 
an ethical person possibly succeed? The answer is in the definition of 
success. The real measure of success is a person's character, not fame 
and fortune. Genuine success is living a life that reflects high 
ethical values. President Abraham Lincoln said it well: ``Honor is 
better than honors.''
    What can government do? Perhaps America's First President can help 
answer that question. In George Washington's farewell speech to public 
life, he said that the survival of freedom on American soil would have 
nothing to do with him, and everything to do with the character of its 
people and the government they would elect:
        Of all the dispositions and habits which lead to political 
        prosperity, religion and morality are indispensable supports. 
        [R]eason and experience both forbid us to expect that national 
        morality can prevail in exclusion of religious principle.
    Passing additional laws and regulations are often necessary to 
punish criminal behavior and to provide moral guidance to law-abiding 
persons. However, more effective leadership would be for government to 
inspire its citizens to act with virtue and honor. As President 
Washington pointed out, there is no better source of inspiration than 
religious principle. The fact that governmental institutions have 
downplayed the role of religion, particularly Christianity, starting in 
the last half of the twentieth century, is arguably a key factor in the 
decline of national morality, including the recent ethical failures in 
business. Government should include and encourage the active 
participation of people of faith and the inclusion of religious 
principle in the public arena. This would almost certainly be a step in 
the right direction of inspiring ethical behavior in American society, 
including the business community. In the aftermath of 9-11, I am 
encouraged by the re-focus on valor, public-spiritedness, and other 
godly values. As President Bush leads our nation, I am grateful that he 
reads the Bible and spends time in prayer. He affirms our national 
motto: In God we trust.
    Rules and regulations of government cannot preserve a free and 
ethical society whose people lack integrity. Ethics is the heart of 
America's economic and social freedom. Unethical behavior is a dagger 
in the heart. According to business textbooks, top management sets the 
ethical direction for the firm. Company policies and internal controls 
are ineffective without ethical leadership from the top. Likewise, the 
political leaders of our nation set the tone for its citizens. Laws and 
regulations will do far less than your example.

    Mr. Stearns. Thank you, Dr. Smith.
    Professor Cohn.

   STATEMENT OF SHERMAN L. COHN, PROFESSOR OF LAW, GEORGETOWN 
                     UNIVERSITY LAW CENTER

    Mr. Cohn. Thank you very much for the invitation and for 
hearing us out on these very important issues.
    I associate myself with what my two colleagues to my right 
have already said, and I am not going to repeat it.
    Mr. Stearns. You might just move the microphone just a 
little. That is good.
    Mr. Cohn. Thank you. I would like to focus on the role of 
lawyers. I teach legal ethics at Georgetown. I practice it in 
many ways. I tell my students that the most important ethical 
question is the one you ask yourself in front of the mirror as 
to who you are, and that every lawyer at some point will have 
to ask that question in a very hard situation. There are many 
such situations.
    The problem, once you get from the broad ethical precepts 
to application, is that there are so often conflicting precepts 
and how they apply. For the lawyer, you have two very 
fundamental values that come into conflict. One is your duty to 
your client, which we all hold as very important. Those of you 
who have had occasion to employ lawyers know that you want that 
lawyer to be loyal to you and to exercise the duty to you, not 
to the other side. But then we have the value of the duty to 
the system and to the public.
    In the business world, where we have set up a system by 
which there should be checks and balances, the accountant and 
the accountant statements which we thought we could rely on 
until recently, that is a very important protection. That is a 
part of what our whole securities law is built on and our 
system is built on. The lawyer who stands there should be able 
to say, no, you can't do that, or I will not participate in it. 
And that is the conflict that occurs, because there should be 
some balance where the lawyer is not entirely the handmaiden of 
the client.
    Now, clients don't generally like to hear that. They want 
the lawyer to do their bidding. But the lawyer should have 
independent judgment and should be able to say to the CEO, no 
matter who he is, or the financial person, or anyone else, no, 
this can't be done that way, and I will not participate in it 
if it is done. Now, that may mean, and I tell my students this, 
you keep your resume ready, particularly if you are in-house 
counsel. Whether it is government or private, you have to be 
ready to walk and to give up a job and to give up all the 
income that comes with that position. And this is true even in 
large law firms where quite often you have a client such as an 
Enron or a Xerox or a WorldCom that gives so much into the 
bottom line of that business called the law firm, and at some 
point with your integrity you have to say, no, I can't do that, 
and I am ready to walk.
    That is the message we convey. It is a lot harder to carry 
it out, and, therefore, we have set up various ethical 
guideposts. I have given you some excerpts from the rules of 
professional conduct. 1.13 says that when the corporate person 
with whom the lawyer is dealing is doing something wrong, it is 
up to the lawyer to then take it up to the highest level, which 
would include the board of directors, and say, there is 
something wrong here. Now, of course, once you do that, once 
you go past the person who hired you, you have to be ready to 
find a new job or find a new client. That is a part of it. But 
you go up as far as the board. If the board does not go along 
with you, and you think it is wrong, then at that point you 
have the ability and, I suggest, the duty to withdraw.
    The one thing you can't do is breach your duty of 
confidentiality. You can't make it public. All you can do is 
resign. That is our system, because the duty of confidentiality 
is so very important. You can't participate in fraud. You can't 
aid it. You can't abet it.
    Now, one of the aspects is where does the SEC fit in all 
this? Now, the SEC, does enforce illegal ethics, not as much as 
we would like to have them do it. One of the problems is 
resources. Government always has a problem with resources, and 
that is why this Congress almost 100 years ago, created a 
concept which has often been called private attorneys general 
in the Clayton Act, having to do with antitrust. Antitrust was 
so important to this Congress that it established a process of 
treble damages plus attorney's fees when the plaintiff wins in 
order to encourage private litigation. In the case of 
securities regulation, this Congress, in its wisdom, in 1995, 
went the other way and said, we just want the SEC to enforce 
these matters. And in the Private Securities Litigation Act 
they pulled back on the private attorney general concept in 
this area.
    Now, about 30 years ago there was a case before the Supreme 
Court called J.I. Case Company v. Borak, in which the issue was 
whether there was to be a private cause of action to enforce a 
public duty. The SEC, in an amicus brief, said, we think there 
should be. Why? Because we don't have enough resources to 
enforce. I suggest that is something that needs to be 
rethought.
    Thank you, Mr. Chairman.
    [The prepared statement of Sherman L. Cohn follows:]
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    Mr. Stearns. And I thank you.
    Professor Lidsky, welcome.

   STATEMENT OF LYRISSA C. BARNETT LIDSKY, PROFESSOR OF LAW, 
          LEVIN COLLEGE OF LAW, UNIVERSITY OF FLORIDA

    Ms. Lidsky. I thank you. It was nice to be invited to speak 
on this important topic, and I am glad that the committee has 
chosen to address truth-telling in the business world. I have 
gotten where I dread reading the papers, like most of the 
public, because I am worried that I will read about a web of 
lies that has taken down a corporation and taken its investors 
with it. But when I read the papers as a legal ethics 
professor, my question is, where were the lawyers? Now, I am 
not the first person to ask that question. A judge asked it 
about the lawyers in the S&L scandals. And so my second 
question is, what didn't we learn in the 1980's during the S&L 
crisis about how to prevent these kinds of things from 
happening?
    Looking at the legal ethics rules, believe it or not, the 
legal ethics rules clearly state that lawyers may not tell 
outright lies, and the legal ethics rules also clearly state 
that a lawyer cannot remain silent and assist a client to lie 
to a court. But when it comes to transactional lawyers, the law 
is less clear about what a lawyer's duties are when a client is 
trying to perpetrate a lie on the public.
    The problem with the recent cases is that they appear to 
involve a lot more than lawyers simply remaining silent and 
adhering to their duty of keeping a client's confidences. They 
actually seem to involve lawyer enablement or lawyers as 
enablers of client lies, and that is important because lawyers 
serve as gatekeepers for clients like Enron. If lawyers didn't 
assist Enron, it never could have gained access to the capital 
markets, securities markets, and so lawyer assistance was 
absolutely vital for it to do what it did.
    Now, let me enter a disclaimer here. I am not claiming to 
know any more than the general public about the specific law 
firm's actions in Enron. In fact, Vincent and Elkins probably 
employs many of my former law school classmates. I am from 
Texas, and it is a big Texas firm. But nonetheless, it seems 
that there was lawyer enablement in the sense that lawyers were 
doing things like drafting press releases, structuring 
transactions that didn't have any substance behind them, 
drafting opinion letters, and so they were lending their 
expertise and credibility to a corporation that couldn't have 
done what it did without their assistance. Also, the assistance 
of the accountants and the bankers was crucial.
    So the question is what should they have done to avoid 
enabling this kind of fraud by the client? The question for us 
today might be who is going to fix the problem? And I have to 
say that I don't have faith in the bar to fix the problem of 
its own. The bar is largely self-regulating, and the bar has 
shown a failure of will when it comes to resolving the conflict 
between the duty of confidentiality and the duty not to assist 
a client in fraud.
    The bar recently had an opportunity to draft clear rules 
that told lawyers what they have to do to avoid enabling client 
fraud, and they just didn't do it. So I think it is going to 
require the government to take action. I think the SEC has to 
be involved with more civil enforcement actions against law 
firms that draft documents they know to be false and enable the 
client to lie to the public. I think the SEC--it is useful if 
the SEC promulgates rules that clearly state the lawyer's 
disclosure obligations when a client is trying to lie to the 
public. That was what was done partly in the wake of the S&L 
scandal, and it has been somewhat successful for those lawyers 
that are involved in banking.
    But I don't think that is enough. SEC simply doesn't have 
the resources to deal with a problem of this magnitude. And I 
don't think it is a problem restricted to a few bad apples. I 
think there is a systemic cultural problem where people just 
don't want to take responsibility for calling a halt to actions 
of a client that are improper. So I think the solution has to 
come from private litigation, unfortunately. And I say 
unfortunately, because private litigation has costs. Once you 
enable more lawsuits to be brought against law firms, it means 
that there are going to be a number of frivolous suits brought, 
too. But nonetheless, the prospect of having to be held 
accountable in dollars to investors who were harmed by a 
client's lies will make law firms sit up and take notice.
    Attorneys who prosecute these type of actions have the 
resources to pursue them. They have the sophistication to deal 
with cases that involve complexity of the type that Enron, 
WorldCom, all of those cases present. And unfortunately, it is 
one of the few solutions to curbing this kind of lawyer 
enablement that we have been seeing. The criminal penalties 
don't hurt either, but they can only deal with the most extreme 
cases.
    It was said earlier that you can't legislate morality. I 
agree, you can't legislate morality, but what you can do is 
create laws that support people who exercise moral courage, 
people like Sherron Watkins, and you can create cultures that 
support people who exercise moral courage, and that starts in 
law school. It starts with telling lawyers that there are 
things--young lawyers, they are not lawyers yet--that there are 
things more important than their law degree, things more 
important than their law license that they have to adhere to.
    Mr. Stearns. I thank you.
    And, of course, I want to just recognize you come from the 
University of Florida. I had the opportunity to represent the 
university for 4 years, and now that is in a new congressional 
district where I am running, so I certainly want to commend you 
and that wonderful university.
    I will start with my questions. I had the opportunity to 
participate in the oversight hearings on Enron in which we 
dealt with Vincent and Elkins, which was a law firm for Enron. 
And, Professor Lidsky, when you talk about lawyer enabling, 
when Sherron Watkins came to the CEO and said, there is a 
problem, he gave it to the law firm. Now, you would think at 
that point that law firm would recognize immediately, like we 
did on the committee, every Democrat, Republican recognized 
immediately, that she was, one, a whistle-blower, and, two, 
that this company is going to implode. Yet Vincent and Elkins 
put together a memo which created a camouflage, a smokescreen 
to the whole thing and allowed people to say there is not a big 
problem.
    You are telling me right now the bar is not stepping 
forward to put in a code of ethics preventing enabling lawyers 
to help their clients because they have fiduciary 
responsibility and confidentiality. But don't they have an 
ethical responsibility to say, no, we can't go forward? Sherron 
Watkins is telling the truth. There is no use camouflaging it. 
So what can the United States do with this lack of ethics, with 
lawyers enabling clients to participate in a cover-up or a 
smokescreen like we saw in the Enron situation?
    Ms. Lidsky. I think the only thing you can do is make it 
clear that they are going to be held accountable for that 
later. In the situation you described, what a law firm might 
tend to do when it is a huge client for the firm is they don't 
want to be complicit in the client's fraud, but one of the ways 
they try to assuage their own fears of being complicit in the 
client's fraud is by kind of avoiding knowing too much. And so 
you can comfort yourself by saying, I didn't tell an outright 
lie. I didn't know anything that would have made me change my 
opinion, because you put blinders on so you couldn't see what 
you know was going on around you.
    And so I think that is kind of a tendency that a law firm 
might have in a situation like that, is to try to block off so 
you don't find out anything that would trigger a duty to have 
to put a halt to it if you were the whistle-blower yourself.
    Mr. Stearns. Professor Cohn, Professor Lidsky has alluded 
to the fact that we have to hold the lawyers personally 
responsible in terms of money. I think you had indicated that 
the way to solve this problem is to say a lawyer or a law firm 
that is involved with enabling, and is found guilty, has a 
monetary penalty on them, possibly jail.
    I mean, the bar is not doing it; should Congress? I mean, 
how should we do something like she is talking about? And do 
you agree or disagree?
    Mr. Cohn. No. I agree that for those bad apples--and let us 
hope that the whole bushel isn't bad, either for the CEOs or 
the lawyers or the accountants; that there are a lot of good 
people out there. But for those who are tempted by greed--and 
that is what it is, even for the professionals, because the 
professionals see that fee coming in and want to keep it coming 
in.
    Mr. Stearns. Wants it to get larger.
    Mr. Cohn. And wants it to get larger, and wants to keep 
that client. So that there has to be a real sanction--and a 
real sanction.
    Mr. Stearns. Coming from the government and the Security 
Exchange Commission?
    Mr. Cohn. It can come from there. But we know through 
history that--and this Congress has recognized it for almost 
100 years now--that government interest in an area goes up and 
down, sometimes depending on politics, sometimes depending on 
other demands. And there are never enough resources. And 
therefore we, this Congress, in the Clayton Act established the 
whole concept of the private attorney general to help enforce 
government policy that the Congress sets.
    Mr. Stearns. Okay. So are you saying that Congress should 
legislate something or the SEC should institute brand-new laws 
that make lawyers monetarily responsible in the event of 
enabling?
    Mr. Cohn. I think that the SEC probably has enough laws 
now. They need to enforce them.
    Mr. Stearns. So, is that your opinion, too?
    Ms. Lidsky. I think they have enough laws to enforce in 
terms of making lawyers pay. I think there should be more clear 
disclosure rules.
    Mr. Stearns. Okay. Dr. Smith, my questions are almost over. 
I have attacked this questioning from the lawyer side, but let 
me go from the accountant side. We also saw Arthur Anderson 
dealing with Enron--that Arthur Anderson was involved because 
they wanted more business. Is this same kind of problem that we 
saw in the attorney/client also true in the client and the 
accountant?
    Mr. Smith. Absolutely. I think when Professor Lidsky was 
talking about the challenge of practicing as a lawyer and 
facing a situation where you need to maintain your 
confidentiality with your client, but you are also trying to be 
sure you do the right thing, I mean, that is an issue that the 
accounting profession has to deal with.
    I guess the question that came to my mind when Professor 
Lidsky was talking was it seems like when the accountants fail 
in their role, that they are being held accountable and they 
are being sued. And, obviously, that is one of the problems--
well, one of the things that led to the demise of Arthur 
Anderson. Frankly, I was wondering, well, doesn't the same 
thing happen to law firms when they have a really difficult 
situation like the one with Enron?
    Mr. Cohn. The answer is yes. Yes, it is the same. And 
Vinson & Elkins, Kirkland & Ellis, and other law firms are 
being sued out of the Enron matter now.
    Mr. Stearns. Okay. My time has expired. We will go--we have 
a vote, but we are going to go to the ranking member for his 
questions.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Of course, even though we may not be able to legislate 
morality, there is a role for government to establish legal 
boundaries for what is acceptable behavior in business and 
elsewhere. Would you all agree with that statement?
    Mr. Cohn. Absolutely.
    Mr. Smith. Absolutely.
    Ms. Lidsky. [Nodding in the affirmative.]
    Mr. Towns. Yesterday both the House and the Senate passed 
the accounting standards bill and have now sent it to the 
President for signature. And let me ask you, Professor Cohn, 
Professor Lidsky, and, of course, Dr. Smith, whether you are 
familiar with the legislation and whether you think it sets out 
the appropriate boundaries for behavior in the business world.
    Mr. Cohn. I think it makes a good start. It is good 
increment--as Professor Coffee at Columbia said, and as is 
reported in the paper, it is a good incremental move. I don't 
think it goes far enough, but it is an important start.
    Mr. Towns. When you say--could you sort of expound on that, 
far enough, some of the things you think that should be in it?
    Mr. Cohn. Well, I would certainly go back and reexamine 
that 1995 Private Securities Act, because, if you take a look 
there, it withdrew some very important threats against exactly 
what happened. What we did learn out of the savings and loan 
scandals is that you could go after law firms, and there were 
many law firms who paid tens of millions of dollars out of 
Lincoln Savings & Loan and other scandals like that. And we 
also know there were a lot of private suits that were able to 
help the SEC or the OTC there in its work. And yet, in 1995, 
this Congress decided to pull that back and take that private 
attorney general concept and reduce it in the securities area, 
not in the antitrust area where it started, but the securities 
area, even though the SEC in the Borack case told the Supreme 
Court, we need this because we don't have enough resources to 
do the job.
    So I suggest there is a contradiction there that this 
committee might address.
    Mr. Towns. Next.
    Mr. Smith. Well, the day I arrived, yesterday, of course 
the stock market had a great day, and I think the general 
public clearly reacted very favorably to the fact that Congress 
was taking action. And people need reassurance. And I think, as 
you were saying, Mr. Towns, the point that government may not 
be able to legislate individual morality, but clearly it sets 
moral direction by the laws that are passed, and government is 
necessary to punish misbehavior.
    But I guess I would like to go back and say that I just 
wanted to agree with something that Mr. Cathy said earlier. I 
think one of the tragedies in our country is that while people 
here today have had the freedom and felt very comfortable 
sharing their faith perspectives and showing appreciation to 
Mr. Cathy's example--which I totally agree with--you know, I 
think it is a shame that there is an educational system in 
America where many educators feel that they are unable to share 
their faith and feel that they are unable to have a Bible in 
the school. And I think without those foundational principles 
laid down early in children's lives, that you wind up--and the 
incredible pressure to make money and to, you know, be as 
successful as possible without regard to their character is a 
huge problem. And I think that would be something that will be 
great for this committee to address, along with the problems in 
law and business and accounting.
    Mr. Towns. Thank you very much. Do you have something very 
quickly to add to this?
    Ms. Lidsky. Yes. I would say that there is the possibility 
of lawsuits against law firms, as Vinson & Elkins is finding 
out. But the 1995 act took away the biggest hammer, which was 
aiding and abetting liability for 10(b)(5) violations. And so I 
think that that needs to be rectified.
    Mr. Towns. Thank you.
    Mr. Chairman, I would like to enter into the record the 
accounting bill H.R. 3763, the Sarbanes bill: ``not later than 
180 days after the date of enactment of this Act, the 
Commission shall issue rules--''.
    Mr. Stearns. So ordered.
    [The information referred to follows:]
    [GRAPHIC] [TIFF OMITTED] 81956.020
    

    Mr. Towns. And the last thing I want to say before I yield 
back, Mr. Chairman, litigation is fine, you know. But, you 
know, it still doesn't get to the problem that I really--and 
the way I think we need to get there, and that is that the 
little people who have lost money, even though we litigate, it 
doesn't solve that problem. They are still out of their money. 
And I don't know what we do to be able to address that issue.
    And do you have any comments on it? Because we have some 
folks that have lost everything. They are at the age to retire 
and they have absolutely nothing. I mean--and that to me is a 
very dis- turbing thing, and I don't know how we get there. Do 
you have any comments on that?
    Mr. Cohn. Well, that is the hard one. And it goes back 
decades and centuries where this has been going on, where greed 
will end up robbing the little people. I have seen my own 
retirement fund go down in the past year.
    I suppose there is the possibility, though I am not sure 
that I favor it, of in effect a securities fund. I pay to the 
State of Mary-

land every year money into what is called the Attorneys 
Securities Fund. So for attorneys who steal from clients, there 
is some money to help them. That concept might somehow come 
into this with some kind of an insurance, a premium paid on 
every stock transaction. It is a possibility.
    I haven't thought it through well enough to say I am even 
in favor of it, but there are certainly examples, as we did in 
the banking business. We did that, and the banks are insured up 
to--each one of us, up to $100,000 per account. And that is 
because of a premium that the banks pay into the FDIC, and that 
might very well be a precedent to take a look at.
    Mr. Towns. Thank you.
    I yield back, Mr. Chairman.
    Mr. Stearns. Thank you, my colleague. And again, we ask 
your patience and indulgence. The subcommittee is going to take 
a recess to go vote, and we will be right back.
    [Brief recess.]
    Mr. Stearns. The subcommittee will reconvene. The 
gentleman, Mr. Deal, from Georgia is recognized.
    Mr. Deal. Thank you, Mr. Chairman.
    Mr. Cathy, we are not going to ignore you. I am going to 
get back with you with some questions in just a minute, if I 
have the time, but I want to pursue an issue that Professor 
Cohn has raised, and also Professor Lidsky. And that relates to 
the 1995 securities reform legislation. As I am sure both of 
you recall, that was legislation that was bipartisanly 
supported, and in fact required--and, I believe, was the only 
instance in which we overrode the veto of President Clinton on 
that issue.
    And what led to that legislation was the extreme abuse that 
had occurred by the plaintiffs trial bar with regard to what 
many of us would perceive to be frivolous litigation and, in 
fact, lawsuits being filed not for the purpose of trying to 
convince a jury, but simply to try to leverage, and in many 
instances to the extent to almost extort settlements from 
corporations, of what probably would have ultimately proven to 
be frivolous lawsuits. But obviously, because of the costs that 
were associated with it, plaintiff's counsel knew that it was 
going to probably settle because it was going to be cheaper to 
do so.
    That was the abuse that the reform of 1995 was aimed at. It 
was a legitimate concern, one that I think is still--would have 
been a legitimate concern had we not taken corrective action.
    With regard to the ruling about aiding and abetting, it is 
my understanding that the Supreme Court had ruled in the 
Central Bank case that the statute did not confer the control 
over aiding and abetting. And we simply did not, I suppose, 
incorporate that and extend that in the authority granted to 
the SEC. Perhaps that is something we might look at, but I 
don't think it is fair to say that we took it out of the 1995 
act. We did not. I don't think it was ever there by virtue of 
the interpretation of the Supreme Court.
    But let me ask you a related question, because I think this 
is one that as a member of the bar, and as one who at age 23 
was very excited when I was admitted to the bar, and I think 
during my legal education was impressed with the fact that it 
was an ethical profession and one that the bar itself would 
hold you to a standard by virtue of the licensing process, 
whether anyone else did or not.
    As one who has been chairman of the judiciary committee at 
my State level for a number of years before coming to Congress, 
I was always concerned that we were granted a peculiar 
situation by virtue of my State law and, I am sure, in some 
other States. And that is, all other licensed professions were 
regulated through our Secretary of State's office, with someone 
assigned to monitor and control that activity. But the bar was 
unique in that it was an integrated bar, and that by law was 
assigned to the bar itself to do that.
    And I think overall the bar has done a fairly good job of 
disciplining and disbarring its members, but invariably--one of 
the cases that I am familiar with--it has always been the 
situation where the lawyer was in effect defrauding or 
mistreating his client. It was rarely anything in a third-party 
atmosphere where the lawyer and his client were mistreating a 
third party.
    Would either of you care to comment about whether or not 
disbarment for that kind of collusive activity is being dealt 
with by the bar through the disbarment process?
    Ms. Lidsky. Well, first I wanted to say that the lawyer 
self-regulation process does work very well for some things. 
Lawyers are held to ethical standards by the bar that are very 
high in some instances. So my condemnation of the bar's failure 
in this area shouldn't be taken as a global condemnation of the 
bar, because I do think they set high standards for lawyers in 
many instances.
    And indeed, 41 States have said that--at least that lawyers 
may reveal fraud in some instances. But the problem is partly 
the complexity of the kind of transactions that we are taking 
about here--rarely are they going to go in after a 
transactional lawyer as opposed to a lawyer in litigation. So 
it is harder to find out about the fraud in the first place, 
ordinarily. Rarely will they go after a transactional lawyer 
who was in what is perceived to be a complicated situation in a 
lot of these circumstances.
    I can't answer your question specifically; you know, name 
how many cases that the bar has pursued, but it is not their 
primary focus. I can say that with confidence.
    Mr. Cohn. You are absolutely right. There are very few 
situations in which the bar--and we are speaking of the bar 
here, we are speaking about something that is under the control 
of the Supreme Court of each State. So, it is not entirely 
separated from a public body. But it is very seldom that a non-
client will be able to have charges brought against a lawyer, 
either civilly or in the disciplinary situation. There are 
some, but not very many.
    In the area of fraud, it is interesting to me that until 
1983, the ethical rules said that a lawyer could disclose any 
crime, and that included when fraud was criminal, a criminal 
fraud. That was taken out of the rules by the ABA in 1983 at 
the hue and cry of the corporate bar because of their dealing 
with their clients.
    In the proposals that are now the Rules of Professional 
Conduct, the proposals of the Kutak Commission back there, 
there was an explicit provision about disclosure of fraud, 
fraud that would hurt the public. But at the house of 
delegates, that was shouted out mainly by the corporate bar.
    Now, curiously too, to me, when that went out to the 
States, it was only a minority of States that followed what the 
ABA proposed. Most States at least permit the public disclosure 
of upcoming fraud--not past fraud, but upcoming fraud. And some 
States such as New Jersey require it. They make it mandatory.
    The SEC has on occasion enforced this type of requirement 
on lawyers for public corporations on the theory that this 
feeds into the reports that get filed to the SEC. That needs 
more of that by either SEC having the resources to do it or 
expanding the possibility of private litigation.
    I am aware that the 1995 act was meant to eliminate or at 
least deal with a very real problem of frivolous suits, which 
is real. It is still real. That is not going to go away so 
easily, either. But my personal view is that it also 
established an atmosphere by which anything seems to go. And so 
the act was--is a very important benchmark as to the atmosphere 
that Congress has conveyed to the public and the corporate 
public.
    Mr. Deal. Mr. Chairman, would you indulge, and I would just 
make a very brief concluding statement. I think this has been 
very revealing and I think a good discussion. I would hope that 
Congress has corrected any misinformation or misinterpretation 
that was sent anywhere by virtue of our actions this week. And 
I think in fact we have done exactly that.
    I would simply say with regard to professional status of 
the bar in terms of self-regulation and licensing and the 
deferment that has being given by the States to them, that I 
would hope the ABA will go back and reexamine that disclosure 
rule, and I would also hope that we would see the bars of the 
States taking their own initiative, maybe even in the absence 
of an outside complaint, when by virtue of disclosure of 
information it becomes very obvious that something ethically 
was wrong. I think if the bar doesn't begin to do that on its 
own initiative, instead of waiting for the complaint process, 
then I think, very well, it is going to lose its peculiar 
ability to regulate itself that has been given to it.
    But thank you very much. Thank you, Mr. Chairman.
    Mr. Stearns. Thank the gentleman.
    The gentleman from Nebraska.
    Mr. Terry. Thank you, Mr. Chairman. And as a member of the 
bar from Nebraska, it has been an interesting discussion. And I 
agree with Mr. Deal; unless the bar associations are willing to 
do this sua sponte, without complaint, I am not sure how we can 
ever go after the lawyers who do this, because they are 
incognito; we don't know who they are as a shareholder. We 
can't file a specific complaint as required by most bar 
associations across the State. You just can't say, ``I think a 
lawyer has been bad'' to initiate an investigation into whether 
there has been an ethics violation.
    So it has been an interesting violation, but I want to 
raise it from the lawyer level to the CEO level within the 
corporation, and ask in a philosophical question here--well, 
not so philosophical. But we are now mandating, and soon 
financial disclosure reports have to be filed with the 
signature of the CEO affirming the authenticity and 
truthfulness of the information therein.
    I just wonder, though, philosophically--waxing 
philosophically here, without a code of conduct, is this enough 
to change behavior? Do you think this goes far enough? Will the 
fact that we have just coupled them with mandated jail 
sentences change behavior?
    What are your thoughts on this mandated signature and 
affirmation? And I will--anyone on the panel; it is not 
specific to anyone.
    Mr. Cathy, since you or somebody in your position has to 
sign on that, what are your feelings?
    Mr. Cathy. Well, you know, Chick-fil-A is still a private 
company, and we have a lot of privileges that I have. And I am 
sometimes asked, why don't you go public? That is the way to 
make money. That you can sell, you know, many, many times of 
what the company is worth and you can walk off with a gold mine 
in your hands.
    But one reason I don't go public is, No. 1, is I might lose 
my job. Second, is if I had some friends and widows and so 
forth to invest their life savings in my company, I would feel 
personally responsible for that. I would think I ought to be 
the loser before they would be the loser. I think they should 
sacrifice--whoever might be identified as guilty--sacrifice 
what material things they might have to rectify some of the 
damage that has been done for those that cannot help 
themselves. And I would feel--that in itself led me to be able 
to borrow money that I needed to grow at the pace I wanted to 
grow, so I take the personal liability. And I feel that any CEO 
should take the responsibility to take care of that one who is 
a stockholder. And they should be making the calls, and then we 
should be--they should be protected, and that right might be 
right. And certainly we put too much confidence in signatures 
of maybe the chief executive officers and the auditors and so 
forth that has become wealthy because of some of the schemes 
that have been invented by those where pressure is put on them, 
the bottom line, the bottom line. It doesn't make any 
difference on how you reach it, but let us keep an eye on the 
bottom line.
    Mr. Terry. Yeah.
    Mr. Cathy. And so we are more interested in people than the 
profits.
    Mr. Terry. Well, and you are a man of integrity and honor. 
And it is amazing that we have heard testimony in this room of 
CEOs that are willing to take all the credit when the company 
was going up, and had absolutely no knowledge of anything going 
on when it was going down. Which just baffles me because, as a 
captain of a ship, you take responsibility for the actions of 
your crew. And it is with great dismay that we have heard that 
type of testimony here.
    Any of you other--Professor Lidsky, would you like to 
comment?
    Ms. Lidsky. I think a signature requirement is an excellent 
idea. If somebody put their name to something, there is a 
formality there that makes them really think about what they 
are doing. And truly dishonest people will still be dishonest 
and be willing to put their name on it, but people--it will 
make them think twice and make them really think about what 
they are doing. Especially with lawyers. There is a culture 
amongst lawyers that when you sign your name, you had better 
have read what you signed and understood it and know what it 
was about.
    And I think that that would be an excellent formality that 
would make people really think about the significance of what 
they do before they do it.
    Mr. Cohn. And it has worked from the standpoint of the 
liability of people who sign prospectuses when stock is being 
offered on the market and--with their personal liability. So 
there is that precedent out there that, since the Securities 
Acts of the 1930's, has built a very good market.
    Mr. Smith. I would like to interject one thing on that. I 
think the general public needed reassurance that our elected 
leaders were taking the problems seriously. And so I can 
appreciate the legislation that has recently been--that has 
already been enacted and that is coming down the line.
    But I would like to say, when I was an accounting student 
roughly 30 years ago, one of the things that is taught in all 
the business books and in the accounting books is that the 
financial statements are the responsibility of management. And 
so I think that there has always been that responsibility, and 
management could have always been held accountable.
    I am always impressed when I get to meet legislators like 
yourselves, just what great people of integrity and wanting to 
do the right thing I see, and I really appreciate your efforts. 
But I guess you all know this: There is always that balance 
between when you have too much legislation. And sometimes I 
wonder if the legislation we had before the current economic or 
stock market crisis had been really rigorously enforced, maybe 
things would have been better. And you all have mentioned the 
ethics rules that lawyers have to face and deal with, and the 
idea that was shared that, if the bar did a better job of 
enforcing what is already there, maybe that would have helped 
us avoid the current dilemma.
    Mr. Stearns. I thank the gentleman. I think what we are 
going to do is--we have a vote, so I think we are each going to 
go around and probably ask one question, so we can get through 
and let you go so you don't have to wait for us.
    Dr. Smith, do accounting programs have a mandatory 
accounting ethics course?
    Mr. Smith. No, they don't.
    Mr. Stearns. And, Dr. Cohn, they do, though, in the law.
    Mr. Cohn. Absolutely, since Watergate.
    Mr. Stearns. Since Watergate. And do you think, Dr. Smith, 
based upon all these problems that we have had, that the 
accounting industry should have a mandatory ethics course in 
the program?
    Mr. Smith. I don't know that a single course is absolutely 
necessary. I think ethics should be integrated into the 
existing courses. I teach ethics in my courses. Every course I 
teach, I integrate ethical issues into some of the other issues 
that we discuss, and I have 1 day in particular that I 
specifically talk about it.
    Mr. Stearns. When an accountant gets his degree, is there 
an oath he has to take?
    Mr. Smith. Yes.
    Mr. Stearns. And, obviously, for the law there is an oath. 
And is this oath, do you think, encompassing enough that it 
makes an impression, like Mr. Deal mentioned when he took the 
oath as a lawyer? I have never heard of the accountants talk 
too much about this oath.
    Mr. Smith. I think that is something for us in accounting 
to look at and think about.
    Mr. Stearns. Mr. Cathy, my last question is--I had the 
opportunity to run a very small operation, not like yours. But 
I notice I had sometimes employees would display unethical 
behavior; there would be stealing and other things like that. 
How do you create a climate of high morality and ethics? I know 
it starts from the leader down. But do you have a code of 
ethics that you have the employees read? I mean, what do you do 
when somebody, for example, has an ethical problem? When you 
encounter an ethical dilemma, what do you do?
    Mr. Cathy. We used to place on cash registers the 
commandment, ``Thou shall not steal.''
    Mr. Stearns. Right. Okay.
    Mr. Cathy. As a reminder to these individuals that you 
shouldn't steal. But we have some of that in spite of all the 
advantages we offer. We think maybe some try to discover a new 
way to do it that may be more profitable. But I think it starts 
from the top, as you say. We set the tone. And we think all of 
our operators know what is expected of them. They are expected 
to be honest, although some of the operators from time to time 
slip up and take a little bit more money than what they are 
getting. You know, Chick-fil-A is getting rich, I need the 
money. So they excuse themselves----
    Mr. Stearns. Rationalize.
    Mr. Cathy. [continuing] for taking things that don't belong 
to them. Going back to the kindergarten situation. There are a 
lot of things, but you can't teach character unless you have 
got something to start with.
    So if a person is going to lie, he is going to steal. So 
they go hand in hand. I have never seen anybody that has stolen 
that couldn't justify their actions by saying that they had a 
sick mother at home and didn't have any money and they needed 
that, or food, or other things that they can put up as an 
excuse. But they all--they should be accountable. And we don't 
mind discharging a person if we test the test. But I realize 
that others, in spite of all opportunities you offer, that is 
not good enough for them, they need a little bit more.
    Mr. Stearns. Thank you, Mr. Cathy.
    And my ranking member.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Let me begin by saying, Mr. Cathy, listening to you is a 
breath of fresh air. I want you to know that. Because when we 
look at where we are today and what is going on, and then to 
hear you and to listen to the way that you have gone about your 
business, I tell you, it makes a major difference. Your 
situation is very unique than what we see in here today. Let me 
just ask this question, Mr. Chairman--and I will conclude--to 
Professor Cohn, and I guess Professor Lidsky.
    Are you familiar with section 307 of the Sarbanes bill that 
just passed the House and the Senate and that the President has 
indicated he will sign into law? That section 307 of the 
Sarbanes bill requires the SEC to adopt rules requiring outside 
counsel to report to chief legal counsel or chief executive 
officer of a corporation any material violation of security 
laws or any breach of fiduciary duty. If neither of those 
officers take appropriate remedial or disciplinary actions, the 
outside legal counsel must then notify the audit committee or 
another committee comprised of independent directors of the 
board for that corporation.
    Do you believe that this provision will help outside legal 
counsel to exercise more independent judgment in these issues?
    I would like to get Professor Cohn and Professor Lidsky to 
comment on that.
    Mr. Cohn. I believe this is very helpful because it makes 
it clear and specific. However, this is now included in Rule 
1.13, which every State has adopted, so that it is there now. 
That obligation is there now. I am interested to know what the 
SEC will do about enforcing it. If this gives the SEC 
enforcement power for what is now 1.13, then it is--in my 
judgment an advance forward and it is a good move. If the SEC 
doesn't enforce it and it just sits there, it is no more than 
1.13 is now.
    Ms. Lidsky. I am in complete agreement. It is excellent, in 
the sense that it reiterates the duty under the current ethics 
rules to ascend the corporate ladder, to try to prevent a 
client who is trying to insist on committing a fraud. And it is 
nice, because it gives you enforcement potentially. But the 
question is, is anybody really going to enforce it. I think it 
can't but be helpful.
    Mr. Towns. Let me--just a last comment, very quickly, Mr. 
Chairman.
    You know, when you think about disbarment, you think about 
all these other things, but do you feel that severe penalties, 
more severe penalties--you know, as Mr. Cathy pointed out, that 
if you just take whatever they have and sort of give it back to 
the people that they have robbed from--you know, do you support 
that philosophy, having more severe penalties?
    Mr. Cohn. I think one thing that might be examined is 
whether the SEC now has the power to order a disgorgement of 
all profits made under an illegal situation or a fraudulent 
situation. And not disgorgement into the Federal Treasury, but 
back to the people who have been harmed. In some States you can 
get disgorgement and repayment to the people who have been 
hurt. And if the SEC does not have that power, I suggest that 
that is something this committee might take a look at.
    Mr. Stearns. Thank the gentleman. And last, to wrap up, the 
gentleman from Georgia, Mr. Deal.
    Mr. Deal. Thank you, Mr. Chairman. Again, thank you for 
having this hearing and for inviting this very distinguished 
panel. I am not going to ask a question, mainly because we have 
got only a few minutes left on this vote that is still pending 
right now. But particularly to all of you, and especially to 
Mr. Cathy and your son and your grandsons, we thank you for 
being here today setting the kind of example that all of us 
believe is the example that Corporate America should hear. And 
I especially like your slogan, ``Eat More Chicken,'' because, 
as you know, my congressional district in north Georgia is the 
No. 1 chicken producing, poultry producing district in the 
entire United States. And we appreciate what you do for the 
poultry industry as well as what you do for setting the kind of 
corporate example.
    You know, we just can't pass up those opportunities to plug 
what is happening in our district and our State. And we are 
proud of you, and I especially appreciate the fact that you 
would be here today.
    Thank you, Mr. Chairman.
    Mr. Stearns. You are welcome. And that is an unpaid 
political advertisement.
    Mr. Cathy, Dr. Smith, Professor Cohn, and Professor Lidsky, 
thank you very much for your patience. And the subcommittee is 
adjourned.
    [Whereupon, at 12:43 p.m., the subcommittee was adjourned.]

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