[Congressional Record Volume 148, Number 102 (Wednesday, July 24, 2002)]
[Senate]
[Pages S7248-S7249]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
STRENGTHENING CORPORATE ACCOUNTABILITY WHILE STRENGTHENING CORPORATE
INNOVATION
Mr. HATCH. Mr. President, the Senate accomplished two significant
feats last week. First, this body took strong action to ensure that
candor and accountability will be watchwords in the world of corporate
accounting. We have given the Securities and Exchange Commission the
tools it needs to better do its job of ensuring that financial
statements tell investors, in plain English, how our nation's
corporations are really doing. And we crafted 21st-century criminal
statutes and tougher penalties for those corporate wrongdoers who
willfully mislead investors about corporate finances, and we are still
working on that language.
Second, and more important, we resisted to a great extent the
temptation to turn this bill, on which Senator Sarbanes and Senator
Gramm worked so hard, into a tool for demagoguery. With the continuing
reports of shoddy bookkeeping at some of our biggest companies, with
terrible news coming from Wall Street these past few weeks, and with
continuing layoffs at major corporations, it is no wonder that many
pundits across the country, and even a few of our colleagues, were
tempted to cast about, looking for a bill to support--any bill at all--
that could make them look tough on white-collar crime.
But the battle is not over yet. We know that here in Congress, as
well as in the regulatory agencies and in State governments, there are
still moves afoot to impose more rules, more regulations, and more
punishments on American businesses. There are those who are predicting
that this wave of corporate scandals could give rise to a new era of
big government, much like the Progressive Era or even the Great
Depression.
I rise today, to say that this Nation must not return down that
failed path. A new era of ``re-regulation'' would, without a doubt,
damage or destroy the twin engines of innovation and capital formation
that have made the American people the richest people the world has
ever known. A new era of re-regulation, however well-intentioned, would
put us on the path that Europe and Japan have recently trod. We would
be playing a constant game of catch-up with whatever country was in the
economic lead. People in the leading countries would have access to new
inventions today, and then, years later, citizens of the sluggish
United States would finally be able to afford them. That is the kind of
trickle-down we need to avoid, and that is the kind of trickle-down
that the good people of Europe and Japan live with every day.
I have faith that the American people will not be led down that path.
Instead, I believe that they will remember that in the late 1990s, the
forces of competition gave birth to modern wonders in the fields of
medicine and telecommunications while Congress cut capital gains taxes
and balanced the budget. We saw the promise of venture capital
unleashed, as many new start-ups tried out their new ideas in the
marketplace even though we knew in advance that only a few would
succeed.
And as investment and innovation increased, our workers became more
productive, and higher productivity led, as always, to higher wages and
better living standards. Census figures show that since 1980, the share
of families earning over $100,000 per year doubled, even after
adjusting for inflation. The number of people living in poverty has
declined, and the only reason it has not declined faster is because
this land of opportunity draws in poor immigrants from throughout the
world. In many cases, however, within a generation these immigrants
will rise into the middle and upper ranks of income-earners.
And, most saliently, this prosperity reached into almost every part
of American life. Overall unemployment rates reached the lowest levels
in 30 years, and every race and every age group saw its fortunes
improve. Just as the 1980s debunked the pessimists who thought that
stagflation and malaise were the waves of the future, so the 1990s,
with unemployment rates getting down to 4 percent, debunked those who
thought that unemployment rates below 6 percent inevitably spark
inflation.
Despite the fact that the American people have endured a year of high
energy prices, a painful recession, waves of corporate
accounting scandals, and the horrific attacks of September Eleventh,
our economy's foundations remain strong. Innovation and capital
formation have continued even during the depths of the recession, to
the amazement of the pessimists. Despite the many buffetings our nation
has endured, America's workers are more productive today than they were
just a year ago. That continued the trend of the last few years, where
we saw productivity grow at an annual rate of 3.1 percent.
We have seen the unemployment rate shoot up from its 30-year low of
3.9 percent up to 5.9 percent in June. Mere numbers, of course, can
never convey the real cost of losing a job. And tragically, recessions
continue to hurt workers months and months after sales pick up. But
clearly, this recession is like no other that we have seen:
manufacturing has been hit hard, very hard, by this recession. Workers
in those industries, and people who live in towns that rely on those
industries, have paid a heavy price.
But our economy's resilience and flexibility is amazing, and this
resilience shows in our labor markets, where our nationwide average
unemployment rate of 5.9 percent, while still too high, would have been
hailed during most of the 1980's and 1990's. And if Congress acts to
restore the economy to its potential, enacting policies that encourage
innovation and capital formation, we can continue to improve our
standard of living, get the unemployment rate back down, and make our
economy more resistant to the inevitable economic shocks of our modern
world.
As Chairman Greenspan noted last Tuesday, Congress can strengthen our
economy's long-run potential through strong fiscal discipline, so that
more of our economy's resources are in the hands of our innovating
private sector. And since capital formation and technical innovation
are keys to productivity growth, we should move aggressively toward
expensing capital equipment and finally making the research and
development tax credit permanent.
The accounting reform bill we passed last week is a good bill, and
once it comes out of conference, I hope it is even better. The Senate
bill reduces the potential for conflicts of interest between auditing
and consulting services. It ensures that the government will vigorously
scrutinize audits to ensure that the balance sheet is telling the real
story. And it modernizes the criminal codes to deal with the corrupt
few who knowingly break the rules outright.
But once the final version of this bill becomes law, that is by no
means the end of the story. Once the regulators get ahold of the final
bill, it will, once again, become a target for anti-corporate
activists, those who distrust bigness, who distrust success, and who
distrust the competitive spirit of the American people. They will seek
to pressure the SEC and the Financial Accounting Standards Board to
enact rules that express their hostility toward corporate America. And
however well-intentioned the goals of these activists, they could have
disastrous consequences.
Let us consider an example that sounds reasonable enough. I started
off by noting that the Sarbanes bill would ensure that financial
statements tell investors, in plain English, how our nation's
corporations are really doing. There are good reasons for reporting
financial statements in language that ordinary investors can
understand, and the SEC has done a good job encouraging corporations
and financial services companies to avoid unneeded jargon in their
official statements. But at the same time, we need to remember that
while corporate finance is not rocket science, it is not that far from
it.
Some issues will be hard to understand, and they should stay that
way. If we insist that every financial dealing be completely
understandable to the average investor, then you know what we will end
up with. Corporations that
[[Page S7249]]
the average investor would not want to invest in. Investors want their
companies to be run by people who know more about finance than they do,
just as they want our homes built by people who know more about
construction than they do. Sure, it is good to know the broad outlines
about how a house is built. But we expect construction workers to use
their specialized knowledge, knowledge that is difficult to convey to a
layperson.
The same holds true in the world of corporate management. Even after
these accounting reforms are up and running, accounting is still going
to sound like a foreign language to most people, and plenty of run-of-
the-mill business decisions are going to sound complex to outsiders.
Critics will accuse anything with a footnote of being a loophole, just
another example of ``crony capitalism.'' They will put pressure on
America's businesses to simplify their businesses so that it can be
``transparent'' to outsiders. But we cannot give in to the urge to
insist that corporate finance be intelligible to high-school students,
and we cannot allow pressure groups to dictate how to organize a
business.
We have seen unjustified awards destroy the careers of many good
doctors who can no longer get malpractice insurance just because juries
end up being swayed by emotion and genuine human suffering rather than
by the difficult medical issues at hand. We cannot let the same thing
happen to corporate America.
Finally, I want to address an overarching question: Do we really live
in a world where a couple of crafty and unscrupulous executives can
destroy an entire Fortune 500 company? Is our market economy really a
house of cards that needs the ever-present support of the Federal
Government to keep from falling down? I do not believe the evidence
supports these pessimistic conclusions. The companies that have been in
the news made bad business decisions generated by what Chairman
Greenspan called ``infectious greed,'' which they covered up with
accounting chicanery. It was the bad business decisions that were the
root cause here, made far worse by the fact that the mistakes were
successfully covered up for so long.
By tightening the auditor's scrutiny of business decisions, we expect
that in the future, bad decisions will be uncovered sooner, before too
much damage is done to the company and to its stock price. But business
decisions will continue to be made, both good and bad, and companies
will continue to rise and fall as customers and shareholders vote with
their dollars. That, as Secretary O'Neill noted, is the ``genius of the
market.''
And that brings me to my final point. If auditors uncover a serious
problem with a company's books, who will fix it? Surely, in most cases,
the board of directors will act aggressively to sack the problem
executives and install a new team that will work hard to put things
right. Especially with the incentive of stock options and stock
ownership, the new management team, facing auditor scrutiny, will have
strong reasons to do the best they can to boost shareholder value. The
punishments dealt by the stock market are already giving corporations a
strong incentive to reform, as stockholders press for clarity and
boards of directors interrogate their CEOs and demand answers.
But what about those occasional situations where the directors are
either incompetent or out of touch? In practice, it is very difficult
for shareholders to replace directors on their own. There are sometimes
millions of individual shareholders, each of whom has little incentive
to put in the time and effort of replacing their directors. It is
almost always easier to sell the badly-performing stock than it is to
replace incompetent directors. At this point, our last best hope is
that much-maligned character from the 1980s, the hostile takeover
artist.
The Sarbanes bill uses the phrase ``protection of investors'' over 20
times. But who protects investors better than someone who invests a
large sum of cash into a failing company, kicks out the old,
ineffective, perhaps even corrupt management, and installs new leaders
dedicated to maximizing long-run shareholder value? But while we have
seen numerous large mergers over the last decade, why have we not seen
as many genuinely hostile takeovers? The answer, of course, is
legislation. In this case, it was not federal law but state laws that
stemmed the tide of hostile takeovers, as laws made it easier for
sloppy management to fend off takeover advances. So even if improved
audits uncover corporate incompetence or worse, shareholders could
still be left with bad managers and worthless investments.
The accounting reform legislation on which we have worked will break
new ground in the realm of investor protection. It will increase
transparency and punish wrongdoers. But that is only half the battle
against corporate mismanagement. The second half of the battle comes
when directors and shareholders take action to purge the ineffective
executives and restore the profitability of their investments. In time,
I hope Congress takes action to assist them. The combined calls by the
President and the Senate for directors with greater independence is a
strong step in that direction.
In closing, I want to draw attention again to the true foundation of
our nation's prosperity--our nation's workers, the most productive in
the world. Whether they work in a factory, behind a desk, or on a farm,
the American worker can produce more in an hour than any other worker
in the world. That is because they have access to better tools, better
knowledge, better education, and in particular, better organizations.
From old-economy stalwarts such as Ford to new-economy innovators like
Intel to our ever-modernizing agribusiness sector, our economy's large
organizations help to coordinate the activities and innovations of
countless numbers of people so that we can accomplish more with our
scarce time. The quality of American automobiles, the speed of
American-designed microprocessors, and the produce of America's farms
keep increasing each and every year. I am confident that our accounting
reforms, if enforced prudently, will help to strengthen the American
corporation's ability to innovate. And by doing so, all Americans will
reap the rewards.
Mr. President, I yield the floor.
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