FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you for giving me this opportunity to speak about President Bush's plan for improving corporate disclosure.

I want to communicate three points today: what the real problem is in the U.S. capital markets that demands reform, what the President has proposed to fix it, and how we can measure results.

First, let me try to frame the problem. The headlines of the moment are concentrated on allegations of egregious conduct. However distressing this conduct may have been, I will suggest that the real need for reform lies elsewhere and is subtler. It is a slipping ethic of boardroom responsibility and accountability in some of the corporate world.

Next I'll explain how the President's plan would restore that responsibility and accountability, and what the President's plan would imply for issuers, outside advisers, and investors. The President's plan focuses on the work for Washington - for the Securities and Exchange Commission and Congress - in particular, defining and enforcing the minimum disclosure standards that issuers must meet, and reinforcing the independence of outside auditors. But the real work must fall to the private sector, not just in complying with those minimum standards, but in setting best practices.

Last, I'll ask how we can measure success. In the short-term, success means government activity, as the SEC sharpens its enforcement and Congress empowers the SEC with targeted new authority. Over the longer-term, the measure of success must be results. Are issuers more fully fulfilling their disclosure obligations - by informing investors more accurately, fairly, and quickly?

Let's go back to what triggered all this attention: the collapse of Enron. Of course, the SEC, Justice Department, and multiple Congressional committees have investigations underway, and I can't comment on the specifics of the Enron matter - especially since the Treasury Department is not privy to any of the details. At a minimum we can now say, however, that something criminal occurred, because one person has pled guilty to obstruction of justice.

And for precisely that reason, I want to suggest that, as a matter of policy, Enron is not the best place to start. Nor are the other high-profile instances in which corporate leaders allegedly defrauded investors or otherwise may have broken the law. These are serious crimes if true. The allegations have certainly built a consensus for the SEC to sharpen its enforcement.

But the headlines threaten to distract from the real problem. You and I know that flagrant wrong-doing of the type alleged is quite rare. It is especially rare in the U.S. capital markets, which remain the deepest, most liquid, and most transparent in the world. Whatever imperfections the U.S. corporate disclosure regime may have, it's still far and away the most rigorous that you can find.

The real problem at which the President has taken aim is less striking, but perhaps even more pressing. It is a deterioration of responsibility and accountability in some of professional and corporate America, namely in meeting corporations' core disclosure obligation. "America is ushering in a responsibility era," the President said in announcing his plan. "And this new culture must include a renewed sense of corporate responsibility."

This deterioration has fostered an ethic equating Generally Accepted Accounting Principles (GAAP) compliance with adequate disclosure. This ethic sets the bar too low. Companies must provide investors with the information a reasonable investor would find necessary to assess the company's value, without compromising competitive secrets. As the SEC has re-affirmed, GAAP compliance is not enough.

That core disclosure obligation has sometimes been lost in a financial reporting culture that strives for legalistic compliance with encyclopedic rules. While bankers, accountants, and corporate executives have worked tirelessly to refine corporate finance techniques, disclosure practices have fallen far behind - allowing some firms to conceal the true risks that investors face. To some extent, this deterioration has been a perverse outcome of well-intentioned efforts by investors to hold corporate management accountable. Unfortunately, these investor and analyst pressures have focused excessively on short-term corporate earnings, not long-term performance. Under this pressure, less scrupulous CEOs have too often tapped accounting and financing devices whose sole purpose is to inflate short-term earnings.

That is the real problem - not naked fraud, for which our securities regulators are adequately equipped, but more respectable-sounding explanations for misrepresenting or coloring a company's true financial condition. For the sake of the efficiency of our capital markets, for the sake of investor protection, we must restore the ethic of responsibility to corporate leaders and their outside advisers. As the President said at the State of the Union address in January, our disclosure regime must hold corporate leaders "to the highest standards of conduct."

On March 7, the President outlined his plan for restoring this ethic of boardroom responsibility. I will review the highlights of the plan, and try to articulate what it would entail for issuers and their outside advisers.

I've already touched on the first: better information for investors. The goal is to raise the bar on what constitutes adequate disclosure by preventing companies from hiding behind technical GAAP compliance. Each investor should have access to a true and fair picture of the company, in plain English. For issuers and outside advisers, this means taking a crucial mental step while preparing financial reports: to step back and ask, "Do these disclosures, taken as a whole, provide investors with the information in our control that a reasonable investor would find necessary to assess the company's true risks and financial condition?" If the answer is no, the statements most likely will not pass muster.

Almost 200 years have passed since the London Rothschilds mythically illustrated the value of communications speed, when carrier pigeons and couriers relayed Napoleon's defeat at Waterloo. Our disclosure scheme, with its strict adherence to quarterly results and annual wrap-ups, sometimes seems more than a little rooted in Nathan Rothschilds' Rothschild's time. The President's plan would modernize the delivery of financial information. In particular, the President has called on the SEC to expand the list of significant events requiring prompt disclosure between reporting periods. The President has also called for faster disclosures of insiders' transactions. Today as much as 40 days can pass before investors learn of corporate leaders' open-market sales or purchases, or as much as a year for transactions with the company. In the future, the President called for requiring corporate leaders to tell investors within two days whenever they buy or sell the company's stock for personal gain.

How can we make sure that companies actually deliver this better information? President Bush directed our attention to CEOs by noting that "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 financial statements. The point is to make each CEO actively assess to the best of his or her knowledge whether the financial reports he or she is signing meet the company's disclosure obligation.

The President's plan and his speeches are at http://www.whitehouse.gov/infocus/corporateresponsibility

This proposal is really just cribbing from the best practices that leading CEOs set today, with an eye to the long-term value of their investors' holdings.

If a CEO or other corporate officer is guilty of misconduct that caused financial restatements, the SEC should force him or her to give back any compensation gained thereby. If corporate leaders abuse their power, the SEC should deny them the right to serve as a director or officer of a public company, whether for a period or permanently. The SEC currently lacks this power to do so without a court order; the President has called on Congress to create it, while preserving the right of judicial appeal.

Last, the President believes we need a stronger and more independent auditing and accounting system. The efficiency of our capital markets depends on the independent judgment of outside auditors. Recent events have suggested that we can do better. The President is committed to bolstering that independence, and to holding auditors to the highest standards of conduct - but in ways that avoid unintended consequences. The centerpiece of this effort will be a new, independent private-sector regulatory board, under the SEC's supervision, to develop and enforce standards of professional conduct and competence.

A strong defense for investors is an active, informed audit committee, and so the President proposes making audit committees more accountable. The President has proposed that the SEC issue new guidelines for audit committees to use in deciding whether a non-auditing service would compromise an auditor's integrity. Audit committees would also report their choice of auditor directly to the shareholders. And the President supports prohibiting outside auditors from providing internal audit services to the same client. This would eliminate the largest obstacle to auditor independence.

Earlier I noted that GAAP does not define the limit of disclosure obligations. Investors and issuers alike will want companies to meet their full obligations in as transparent, clear, and comparable a fashion as possible. One place the Financial Accounting and Standards Board (FASB) can help is by patching the holes in accounting rules that have yawned open for too long - like revenue recognition or off-balance sheet items. The President has called on the SEC to exercise more effective and broader oversight of FASB to ensure that accounting standards are issued more promptly and are more responsive to the needs of investors.

The President's plan focuses on government's role in defining and enforcing corporations' disclosure obligations. Government can hold people to minimum standards - the floor of legal behavior. But in a society that prizes individual freedom and initiative-taking, this responsibility cannot fall solely on the government. Penalties and censures can only take us so far. As Federal Reserve Chairman Alan Greenspan recently said, "Rules cannot substitute for character."

It falls instead to corporate executives and the professionals who advise them to take us beyond these minimum standards to best practices.

Now is a good time for financial and auditing professionals in particular to remind themselves of the aspirational nature of their calling. Our General Counsel at the Treasury likes to say, "It is the duty of a professional not just to say what a client can do, but what a client should do." As we learn from the Andersen and Enron imbroglio, I hope that other financial professionals will take heed of that advice.

I've spoken mainly about what the producers of financial information - companies - must do. Yet there's one last group that has a responsibility here to ensure adequate disclosure beyond minimum, government-mandated standards: the consumers of financial information, namely investors and financial analysts. Too many investors and financial analysts have been asleep at the switch. They are now awakening, and stock prices are beginning to reflect a premium for clear financial disclosures. Investors and analysts must keep pressing for better disclosures, however, if they - and we as a society - are to reap the benefits of ever more efficient capital markets.

I've tried to identify the central problem that demands fixing, this subtle deterioration in responsibility and accountability in corporate boardrooms. I've outlined how the President's plan would reverse that trend by raising the bar for adequate disclosure, tightening responsibilities and sanctions for corporate leaders, and bolstering the independence of outside auditors and the responsibilities of audit committees. And I've stressed that this package of reforms cannot do the job alone - that you in the private sector, whether you are an issuer, an outside professional, or an investor, must pick up with best practices where we in government's minimum standards must stop.

Let me close by observing a management imperative on which the President is exceptionally keen: deliver results. And as any manager knows, the first step in achieving results is to define what success would mean.

In the coming months, we should look to whether the government has acted. First, has Congress sent the President a bill consistent with his plan, and in particular, one that offers the SEC the targeted authority it does not have today? The good news is that Congress is taking the right first steps. Yesterday House Financial Services Chairman Michael Oxley and Capital Markets Sub-Committee Chairman Richard Baker led a good bill, a bill the Administration supports, to resounding victory on the House floor. Now it is the Senate's turn to act. And second, has the SEC used its extensive powers to improve transparency and integrity in the capital markets? We are encouraged that that the answer will be yes, as the SEC vigorously pursues the initiatives that Chairman Harvey Pitt has spearheaded.

Success over the long-term is not as easy to define. Success does not mean the end of bankruptcies.

A corporate bankruptcy is not pretty, but most often it is a sign that capitalism's energies are alive - that capitalists have denied a failing enterprise more capital. Nor does success mean the end to rapid ups and downs in stock prices, so long as investor perceptions about companies' business prospects shift just as rapidly. And unfortunately success also does not mean the end of fraud. The President's plan and the SEC's disclosure and enforcement initiatives should mean fewer frauds, plus catching them earlier. But we'll never get rid of every cheat.

One could weigh success by whether the Justice Department gets more convictions or the SEC wins more civil suits. Yet that too would be misleading. A good disclosure regime cannot be premised on ever-mounting law enforcement actions.

The best measure may flow straight from our goal: delivering the information that investors need. We know a company's disclosures have been poor when we discover later on that it has been unforthcoming or misleading about its financial condition (putting aside honest errors). The stock price swiftly reacts, almost always falling. So perhaps the right way to gauge our success is to track how often these post hoc financial disclosures move stock prices. The financial economists will have to take it from here.

Thank you for your attention.