ALBANYNew York's business community is "appalled at the substantial, and in some cases massive, corporate wrongdoing that has been reported over the last year," and business leaders and the New York Stock Exchange have already initiated aggressive programs to restore public trust in corporations and corporate governance, Business Council President Daniel B. Walsh said today in legislative testimony.
These steps, and the new federal Sarbanes-Oxley Act of 2002, will help restore that trust so additional state laws enacted in Albany and other state capitals could do more harm than good, he warned.
"Additional reforms on a state-by-state basis risk a patchwork of uneven and confusing standards for companies already undergoing extensive efforts to ensure compliance with a large number of changes," Walsh said in his testimony. "New York-specific changes also could make New York a less attractive place to incorporate and do business, and could inhibit the ability of New York companies to compete, create jobs, and generate economic growth for our state."
Walsh made his comments in testimony prepared for a legislative hearing in New York City Friday morning. The hearing was jointly sponsored by the Assembly Committee on Corporations, Authorities and Commissions, the Senate Committee on Investigations, and the Senate Committee on Higher Education. The full testimony is posted at www.bcnys.org/whatsnew/2002/0926testimony.htm.
"The vast majority of corporations are run by honest, dedicated, and ethical leaders who are striving to do the right thing for their corporation, their employees, their shareholders and the communities where they do business," Walsh said in his testimony.
"Our capital markets are built upon trust. Once trust is undermined, the foundations of our free-enterprise system suffer a loss of confidence. There is no more important mission to the business community than restoring trust."
Walsh noted that the United States has the best corporate governance, financial reporting, and securities markets systems in the world, and that New York, as home to many of the world's corporate leaders as well as the New York Stock Exchange and other stock exchanges, is at the center of those systems.
In response to recent corporate misdeeds, Congress, the Securities and Exchange Commission (SEC), the New York Stock Exchange, and the business community "have moved swiftly and forcefully to produce broad initiatives to improve corporate practices and to implement far-reaching reforms in the areas of corporate governance, regulation of the securities markets, and oversight of the accounting profession," he testified.
For example:
The Sarbanes-Oxley Act is "the most sweeping reform of corporate governance, securities laws, and the accounting profession since the initial passage of federal securities laws in 1933 and 1934," Walsh said. Specifically, the law:
- Creates a new oversight body for the accounting profession.
- Sharply restricts auditors' ability to perform non-audit services for clients.
- Requires CEOs and CFOs to certify that SEC filings are accurate.
- Enhances the role of board audit committees and requires that they include only independent directors.
- Expands SEC's enforcement tools.
- Creates new criminal penalties for securities-related offenses and makes existing ones more stringent.
- Creates new protection for whistleblowers.
The New York Stock Exchange has already approved new, more stringent corporate-governance listing standards that, if approved by the SEC, would:
- Require boards to comprise a majority of independent directors.
- Increase responsibilities for audit committees.
- Require that corporate governance and compensation committees consist entirely of independent directors.
- Require shareholder approval of option plans.
- Require adoption and disclosure of corporate governance principles and of codes of business conducts and ethics.
The business community has also advanced reform proposals. For example, the Business Roundtable (BRT), an association of chief executive officers of leading corporations, has published an updated summary of its "principles of corporate governance" that recommend a number of best practices in corporate governance, including:
- Required stockholder approval of stock options and restricted stock plans in which directors or executive officers participate.
- Publishing of corporate governance principles.
- Creation of a way employees can tell management and boards about potential misconduct without fear of retribution.
- Requirements that only independent directors sit on board committees that oversee audits, corporate governance, and compensation.
- A commitment to a "substantial majority" of independent board directors.
- Prompt disclosure of significant developments.
- A commitment to a management structure that links the interests of management to the long-term stockholders, including a mix of long- and short-term incentives.
"For those to whom it was not obvious before, it is now abundantly clear that anything less than total honesty in corporate financial reporting and ethical conduct will not be tolerated," Walsh said.
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