FROM THE OFFICE OF PUBLIC AFFAIRS

President Bush spoke last week about the importance of improving the accountability of corporate leaders as part of a broader effort to improve our system of corporate disclosure for the benefit of investors. I would like to take this opportunity to explain both the President's program and your critical role as financial analysts.

The goal is for public companies to inform investors better so that the financial markets can price risk better and allocate capital more efficiently. Nothing could be more important both for the long-run health of our economy and for investor protection. While federal and state governments can mandate minimum standards for the behavior of corporate actors and disclosure requirements for them to follow, unless you put that information to work, it will all be for naught. You, the financial analysts of America, must become the engine that takes the improvements in corporate disclosure and then drives the new information into the pricing of risk and into the efficiency of our capital markets.

The remarkable resilience that our economy has demonstrated is a consequence of our adaptable, flexible, and open markets for labor, goods, services, and capital. Over the past few months, however, we have learned once again not to take the performance of our capital markets for granted. For you and your clients and employers to allocate capital to the firms with the brightest prospects, you must have access to reliable information that allows you to make those judgments. The demise of Enron, other recent confidence-driven financial implosions, and the rash of recent earnings restatements have made us realize that our system of corporate disclosure is not working as well as it should.

Last Thursday, President Bush called on all of us to raise the bar for corporate disclosure in the United States, for all of us to hold corporate executives to the highest standards of conduct. I say "all of us" because this is not just a job for government. We in government can raise the legal minimums that public companies' CEOs must meet. But in our open society, committed to democracy and freedom of choice, government should not be the only source for setting behavioral norms for corporate actors.

Legal minimums enforced by fines and penalties will only take us so far. Improving the efficiency of financial markets and the ethics of our corporate leaders is principally a job for the business community itself.

The President's program is guided by three core principles: first, providing better (not necessarily y more) information to investors; second, making corporate officers more accountable; and, third, developing a stronger, more independent accounting and auditing system.

As the President made clear, and as the SEC has recently re-affirmed, mere compliance with GAAP is not enough. Each investor should have access to a true and fair picture of the company, in plain English, and should be promptly informed of unquestionably significant events that affect the condition and prospects of the company. Much of the press coverage of the President's announcement underestimates the importance of this. Our goal is to raise the bar for what constitutes adequate disclosure.

President Bush directed our attention to CEOs because "reform should start at the top." We believe that CEOs should personally vouch for the veracity, timeliness, and fairness of their companies' public disclosures, including their financial statements. If a CEO or other corporate officer is guilty of misconduct, he or she should have to give back any compensation gained thereby. If corporate leaders abuse their power, they should lose the right to serve as a director or officer of a public company. And corporate leaders should have to tell investors within two days whenever they buy or sell the company's stock for personal gain.

Finally, the President believes that we need a stronger and more independent auditing and accounting system. To do this we need to establish a new, independent regulatory board, under the SEC's supervision, to develop standards of professional conduct and competence. In addition, the SEC needs to exercise more effective and broader oversight of the Financial Accounting Standards Board to ensure that accounting standards are issued more promptly and are more responsive to the needs of investors.

A word on the policy choices that the President made with his economic team. Some have suggested that Congress should enact an absolute ban on audit firms providing any non-audit services but we don't think that rigid lines should be drawn in statutes. The President instead would re-assert the responsibility of audit committees, working under new SEC guidelines, to decide whether a non-auditing service would compromise an auditor's integrity, and to report their choice of auditor directly to the shareholders. The President would also step-up enforcement of securities fraud; we all think existing legal standards and penalties are sufficient and well-honed for the task. Last, the President does not want to induce more lawsuits. Nor does anyone on the President's team think that more litigation would solve the problem of corporate disclosure.

The President's proposals are the product of vigorous thinking and discussion among his advisors; in the end, the President and his entire team agreed on these proposals as the best way to secure fuller corporate disclosure. Many reflect the ideas of Harvey Pitt, the SEC chairman whom President Bush appointed.

Harvey was working at improving corporate disclosure before it became front page news, before the President asked Secretary O'Neill to lead the Working Group on Financial Markets to take up the topic, before congressional committees held hours upon hours of hearings. Harvey Pitt is doing a terrific job and the country is lucky to have his service. I think the country has been lucky to have both Chairman Pitt and Secretary O'Neill - one of America's most effective securities lawyers and one of America's most effective corporate leaders - working to improve corporate disclosure and governance.

What's next? In Washington, I have learned that the Congress and President have to spend some time disagreeing before we can agree. But there is a lot of common ground. The President's program shares much with the thoughtful proposals of House Financial Services Committee Chairman Michael Oxley and Congressman Richard Baker. As we move along, I think we are going to find greater convergence of ideas between the House and Senate and between Republicans and Democrats than some may want to admit. We all want to serve the same goals of better corporate disclosure and improved investor protection. And we all know that, even while we strive to improve it, our corporate disclosure regime is the best in the world.

But perhaps the most important next step for the President's proposals is not what happens in Washington but, rather, what happens outside of Washington. In many respects, the most important next step depends on you.

However we feel about the role that some financial analysts played in the exuberance of the late 1990s, our financial system is dependent on your profession to interpret the flow of financial information that drives our market economy. In the highly-articulated division of labor in our capital markets, you serve as the information intermediaries between the providers of capital and the users of capital, between the asset managers who pool and invest our savings and the companies that raise equity and borrow.

For capitalism to work, the people who control capital have got to behave like capitalists. They need to care intensely about where and how the capital they control is invested. But in the institutional setting of asset management today, we may have lost some of the sharp incentives present when one is putting one's own capital at risk.

Much of our investment capital is in the hands of banks, mutual funds, insurers, and private pensions. These are our modern capitalists. Yet it's not clear that the individual asset managers - who control the discrete investment portfolios -- have the incentives and the accountability to act like real capitalists. Indexation has many advantages as an investment strategy. One disadvantage, for society, is that the managers who run trillions of dollars by overtly or covertly tracking indexes are not exerting discipline on the leaders of the firms in which they invest. Nor are they demanding improved corporate disclosures.

Even with this large pool of inert capital, there are still probably enough marginal buyers and sellers to price investments properly, based on the information known to the market. But do we have enough asset managers pressing management for more information? I'm not sure.

As a consequence, we look to you. We rely upon you - the Fourth Estate of finance - to poke behind the screen of boilerplate reports and tedious footnotes. You are the engines of learning for modern capital markets. We depend on you to question corporate authority, to probe for inconsistencies in corporate disclosures, and to lead the drive for better, more meaningful information with which to price financial instruments.

It is up to you to press for the flow of financial information to keep pace with the rapid evolution of our capital markets and corporate finance. If you let us down, risks will be mispriced and capital misallocated. Eventually, when the markets take sudden notice of particularly egregious misallocations, we will witness yet more financial implosions.

President Bush called last week to hold CEOs and auditors accountable to their investors and employees, and to their society. That is why it is so important that you rise to the challenge, to President Bush's challenge, to press corporate America to fulfill its obligations.

To do this, of course, you yourselves have to be accountable, too. I applaud the steps that Dick Richard Grasso at the NYSE and Bob Robert Glauber at the NASD have taken together with the leadership of the House Financial Services Committee and the SEC to sharpen that accountability for the sell-side members of your profession. Keep at it. Deploy your skepticism. American capitalism depends on you.