Investors Council Testimony at Hearing on Corporate Governance and Executive Compensation

[2] Why? It is not because people are more evil than they used to be. They are not. Human nature doesn't change.

[3] But it is human nature to act in one's self interest. There is more fraud because people have correctly figured out that it pays. Corporate fraud has huge upsides and few downsides. That is a key fact.

[4] Why does corporate, accounting and financing fraud pay better with fewer risks than it used to? Because our investor- protecting laws and regulations have been worn down by years of special interest lobbying. On top of that, decades of loophole finding have paid off better than any lottery.

[5] Why have special interests been so successful? Because corporate America, accountants and Wall Street interests are wealthy and organized and because millions of blue collar and middle class Americans are not. Most are not even aware of how current rules fail them.

[6] The point is this. People will behave badly if they are rewarded for it and risk little. That is the current state of our investor protection laws. Enron, Global Crossing and all the others happen because we let them. Our safety nets are failing us: outside auditors, boards of directors, rating agencies, analysts, the stock exchanges, the SEC and prosecutors.

[7] The most important safety net, however, is investors themselves. People will take care of their property unless laws prevent them. You maintain your cars and houses because they are yours. We investors are the owners of companies, and we would take actions to prevent the frauds of which we are the victims. But we can't. The rules that govern us, as carved and chipped at by special interests, prevent us.

[8] Most of these rules are outside your committee's jurisdiction. But I have included a few examples of existing laws that shackle us in my written remarks in case you are interested. They make for more gripping reading than most parts of the congressional record.

[10] Worse, the SEC is free to, and often does, change its interpretations of these rules, without warning or recourse, so we don't know from one year to the next what we can ask.

[12] How do you, the Finance Committee do this? Give us the necessary information to track the money. If we can track it, we can try to tie it to proper goals. There is a reason that companies have been lending rich CEOs millions of dollars: combining loans and stock options allows CEOs to hide it when they dump company stock. We are hoping new SEC rules do close this loophole. There is a reason many companies give their directors cushy side agreements that fit through disclosure loopholes -- directors can be co-opted without owners knowing it. There is a reason companies use accounting loopholes to delay or hide bad news. One reason stock option plans is that it has been hard for shareholders to track them, so pay is somewhat hidden [sic]. Recently enacted SEC rules hopefully will close this disclosure gap. So close any disclosure loopholes that prevent us from tracking the money. If we can track it, we have a better shot at structuring it to prevent abuse and reward proper goals.

[13] Second, help us use CEO pay to encourage good behavior and deter bad. Don't let CEOs set their own pay -- shareholders need to vote on stock option plans. Do not let executives print up stock, options like counterfeit money -- the Council supports charging stock options to earnings and thus Senator Levin's bill. Do not allow executives to increase their compensation through fraud or the buying off of directors with conflict-creating deals -- the Council supports real board independence and the disclosure of all board conflicts.

[14] On expensing stock options. We believe that current disclosure requirements allow important information to be hidden in footnotes. We believe that options have value, that they are compensation, that they are more easily abused than cash and that expensing improves comparability and eliminates the inequitable disparate treatment we now have of expensing only certain kinds of options, especially performance-based indexed options which investors favor.

[15] Figuring out how to tie executives' interests to the long- term success of companies isn't hard. But acting on these things is. I understand the tremendous pressure you are all under not to charge options to earnings-so I understand that it will take remarkable courage for you to act on this. I keep thinking that if we could somehow harness the pressure executives are applying to you not to charge options to earnings and direct it, say, at finding Osama Bin Laden, he'd be sitting here today. I wish the same energy would be directed at employees' and shareholders' interests.

[16] I realize that those of you supporting Senators Levin and McCain are profiles in courage, and I thank you. You are clearly in good company -- Warren Buffett, Alan Greenspan, AIMR, TIAA-CREF and the Council's many members. We would like to work with you on this and any other ways we can keep our markets clean. The fact that we've had a good run of it the past 200 years doesn't guarantee our future. Only you can do that.