<DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:81956.wais]
OATH TAKING, TRUTH TELLING, AND REMEDIES IN THE BUSINESS WORLD
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
COMMERCE, TRADE, AND CONSUMER PROTECTION
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
JULY 26, 2002
__________
Serial No. 107-121
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
U.S. GOVERNMENT PRINTING OFFICE
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_____________________________________________________________________________
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COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia SHERROD BROWN, Ohio
RICHARD BURR, North Carolina BART GORDON, Tennessee
ED WHITFIELD, Kentucky PETER DEUTSCH, Florida
GREG GANSKE, Iowa BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming BART STUPAK, Michigan
JOHN SHIMKUS, Illinois ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico TOM SAWYER, Ohio
JOHN B. SHADEGG, Arizona ALBERT R. WYNN, Maryland
CHARLES ``CHIP'' PICKERING, GENE GREEN, Texas
Mississippi KAREN McCARTHY, Missouri
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
TOM DAVIS, Virginia THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee BILL LUTHER, Minnesota
ROBERT L. EHRLICH, Jr., Maryland LOIS CAPPS, California
STEVE BUYER, Indiana MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire JANE HARMAN, California
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
ERNIE FLETCHER, Kentucky
David V. Marventano, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Commerce, Trade, and Consumer Protection
CLIFF STEARNS, Florida, Chairman
FRED UPTON, Michigan EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia DIANA DeGETTE, Colorado
Vice Chairman LOIS CAPPS, California
ED WHITFIELD, Kentucky MICHAEL F. DOYLE, Pennsylvania
BARBARA CUBIN, Wyoming CHRISTOPHER JOHN, Louisiana
JOHN SHIMKUS, Illinois JANE HARMAN, California
JOHN B. SHADEGG, Arizona HENRY A. WAXMAN, California
ED BRYANT, Tennessee EDWARD J. MARKEY, Massachusetts
GEORGE RADANOVICH, California BART GORDON, Tennessee
CHARLES F. BASS, New Hampshire PETER DEUTSCH, Florida
JOSEPH R. PITTS, Pennsylvania BOBBY L. RUSH, Illinois
MARY BONO, California ANNA G. ESHOO, California
GREG WALDEN, Oregon JOHN D. DINGELL, Michigan,
LEE TERRY, Nebraska (Ex Officio)
ERNIE FLETCHER, Kentucky
W.J. ``BILLY'' TAUZIN, Louisiana
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Cathy, Samuel Truett, Founder, Chairman and Chief Executive
Officer, Chick-fil-A, Inc.................................. 10
Cohn, Sherman L., Professor of Law, Georgetown University Law
Center..................................................... 17
Lidsky, Lyrissa C. Barnett, Professor of Law, Levin College
of Law, University of Florida.............................. 38
Smith, L. Murphy, Assistant Department Head, Department of
Accounting, Texas A&M University........................... 14
(iii)
OATH TAKING, TRUTH TELLING, AND REMEDIES IN THE BUSINESS WORLD
----------
FRIDAY, JULY 26, 2002
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Commerce, Trade,
and Consumer Protection,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2123, Rayburn House Office Building, Hon. Cliff Stearns
(chairman) presiding.
Members present: Representatives Stearns, Deal, Shimkus,
Bryant, Terry, Tauzin (ex officio), and Towns.
Also present: Representatives Chambliss, Collins, and
Isakson.
Staff present: Ramsen Betfarhad, policy coordinator and
majority counsel; Shannon Vildostegui, majority counsel; David
Cavicke, majority counsel; William Carty, legislative clerk;
J.P. Guzzardo, legal intern; Bruce Gwinn, minority professional
staff; and Consuela Washington, minority counsel.
Mr. Stearns. The subcommittee will come to order, and we
would like to have our panelists come down. I would like to
welcome all of you, especially our witnesses, and thank them
for their appearance and testimony before the subcommittee.
Today we will examine business ethics and oath taking in light
of the recent scandals that have colored this country's recent
corporate history.
The Energy and Commerce Committee has been at the forefront
of congressional investigations examining Enron, Global
Crossing and WorldCom. Those investigations, in addition to
uncovering disturbing facts about illegal and questionable
practices that permeate these companies and others, also
highlighted a seemingly pervasive disregard of ethics by
business executives and professionals.
In the earnings race of the mid to late 1990's, many
business executives and professionals seemed to have traded
their own integrity and the good name of their company, albeit
incrementally, for greed and a chance to beat analysts'
earnings estimates. I don't think this phenomenon is unique to
the 1990's. America's corporate and economic history is replete
with stories of disastrous failures in business ethics during
boom periods. The 1990's were no exception.
As with other postboom periods in our history, markets'
self-correcting mechanisms have kicked in to better align
corporate practice with business ethics. In the recent months
investors have severely punished companies by driving down
their share prices where there was a slight hint of
questionable behavior such as accounting irregularity. This is
how the market reacts in helping to mitigate against a crisis
of confidence and trust that pervades corporate America today.
Economic history also shows that when there are such crises
of confidence and trust in American business, that government
must act. It enacts new laws just as we did yesterday. It
enforces existing laws much more rigorously, as the SEC and the
Department of Justice are now doing. The new laws and more
rigorous enforcement of existing laws are all designed to
address current ills that stem from lapses in business ethics
and hope to prevent similar future problems.
Both prudent government intervention and market self-
corrections will go a long way toward remedying this problem,
but no lesser luminaries than Warren Buffett and Alan Greenspan
have reminded us that the attitudes and actions of the CEO and
other officers of companies are what determine corporate
conduct, good or bad. Obviously, markets' self-correcting
mechanisms and legal prohibitions and sanctions help keep that
conduct in check. CEOs can be fired, and worse, they can go to
jail for bad conduct, and we have just seen that recently.
Yet it seems to me, just as Warren Buffett wrote in a
recent editorial when he said, quote, to clean up their acts on
these fronts, CEOs don't need independent directors, oversight
committees or auditors who are absolutely free of conflicts of
interest. They simply need to do what is right, end quote.
Doing the right thing means having and exercising good business
ethics. We cannot legislate integrity or personal
responsibility. Laws can only encourage good behavior. But
Congress will legislate enforcement and stiff penalties if CEOs
do not do the right thing.
At today's hearing we are hearing from law and business
professors that teach our future corporate executives and
business professionals ethics. We will learn what are the
existing codes of ethics that govern the professions. We will
also learn whether those codes should be improved and/or better
instilled in the students of today. We will hear from prominent
business executives--a prominent business executive speaking to
the role and the significance of the CEOs and other corporate
officers in the business ethics that pervade their companies.
So I look forward to our witnesses today, and I want to
thank them for their participation, and now we will have an
opening statement from the distinguished ranking member, the
gentleman from New York Mr. Towns.
[The prepared statement of Hon. Cliff Stearns follows:]
Prepared Statement of Hon. Cliff Stearns, Chairman, Subcommittee on
Commerce, Trade, and Consumer Protection
Good morning. I would like to welcome you all, especially our
witnesses for their appearance and testimony before the subcommittee.
Today, we will examine business ethics and oath taking in light of the
recent scandals that have colored this country's recent corporate
history.
The Energy and Commerce Committee has been at the forefront of
Congressional investigations examining Enron, Global Crossing, and
Worldcom. Those investigations, in addition to uncovering distributing
facts about illegal and questionable practices that permeated those
companies and others, also highlighted a seemingly pervasive disregard
of ethics by business executives and professionals.
In the earnings race of the mid to late 90s, many business
executives and professionals seem to have traded their own integrity
and the good name of their company, albeit incrementally, for greed and
a chance to beat analysts earnings estimates. I don't think this
phenomenon is unique to the 90s. America's corporate and economic
history is replete with stories of fantastic failures in business
ethics during ``boom'' periods. The 90s were no exception.
As with other post-boom periods in our history, the markets' self-
correcting mechanisms have kicked in to better align corporate practice
with business ethics. In the recent months, investors have severely
pushed companies by driving down their share prices where there was a
slight hint of questionable behavior, such as ``accounting
irregularities''. This is how the markets react in helping mitigate
against the crisis of confidence and trust that pervades corporate
America today.
Economic history also shows that when there are such crises of
confidence and trust in American business, the Government acts. It
enacts new laws, as we did yesterday. It enforces existing laws more
rigorously, as the SEC and Department of Justice are doing. The new
laws and more rigorous enforcement of existing laws are all designed to
address current ills that stem from lapses in business ethics and hope
to prevent similar future ills.
Both prudent government intervention and market self-corrections
will go a long way towards remedying the problem. But no lesser
luminaries than Warren Buffet and Alan Greenspan remind us that the
attitudes and actions of the CEO and other officers of companies are
what determine corporate conduct, good or bad. Obviously, markets'
self-correcting mechanisms and legal prohibitions and sanctions help
keep that conduct in check. CEO's can be fired and worst can go to jail
for bad conduct, as we have seen happen recently. Yet, it seems to me
that as Warren Buffet wrote in a recent editorial: ``[t]o clean up
their act on these fronts, C.E.O.'s don't need ``independent''
directors, oversight committees or auditors absolutely free of
conflicts of interest. They simply need to do what's right.'' Doing the
right thing means having and exercising ``good'' business ethics. We
cannot legislate integrity or personal responsibility. Laws can only
encourage good behavior.
At today's hearing we'll hear from law and business professors that
teach our future corporate officers and business professionals ethics.
We will learn what are the existing codes of ethics that govern
business professionals. We'll also learn whether those codes should be
improved and/or better instilled in the students. We will hear from a
prominent business executive speaking to the role and significance of
the CEO and other corporate officers in the business ethics that
pervades a company.
I thank the witnesses for their participation and look forward to
their testimony.
Mr. Towns. Mr. Chairman, I have an opening statement that I
will just place in the record, but I would just like to make a
few comments. First of all, I would like to thank you for
holding this hearing. I think it is important that we do it at
this time. Ethics is something that we cannot legislate, but I
think that we cannot sit around and just watch and see what is
happening, because it is important that we have the confidence
of the general public, and, of course, if we do not do
something, I am certain that that confidence will not be there.
So I want to salute you, Mr. Chairman, for taking the lead in
this particular issue and to say to you that even though the
business community have done a few things, but I still don't
think it is enough, and that in the event that we do not do
something, then I think that we are going to jeopardize, you
know, a lot of people in a lot of areas, and the confidence
just will not be there.
So I want to salute you for moving forward with this
hearing today and to say to you that I look forward to hearing
from the witnesses, because I think that when we talk about
ethics, we can't talk about it enough. So thank you very much,
Mr. Chairman. And I yield back.
Mr. Stearns. Okay. The gentleman yields back. And by
unanimous consent his opening statement will be made part of
the record.
My colleagues, by unanimous consent the gentleman from
Georgia, the Honorable John Isakson, will participate if there
is no exception. So ordered.
Now, the vice chairman of our subcommittee the gentleman,
also from Georgia, Mr. Nathan Deal.
Mr. Deal. Thank you, Mr. Chairman, and thank you for
holding this hearing today, and in a few minutes I look forward
to introducing one of the very special panel members here, Mr.
Truett Cathy, who is certainly one of the premiere business
people in our Nation and from our State of Georgia, and we are
proud to have him here. And I also welcome my colleague Mr.
Isakson to this hearing today.
As you have indicated, Mr. Chairman, we hear a lot about
the bad things that go on in business, in corporate America.
Today as we listen to those from the academic community who
train the CEOs and the legal advisors to major corporations,
and as we listen to a businessman who has shown that success in
the marketplace does not depend on dishonesty, but, in fact, it
depends on exactly the opposite, that is that you play by the
rules, that you treat your customers fairly, and that you
display the kind of leadership that people in the everyday
world who invest in corporations expect, I think we get the
message out that that is the foundation on which American
business has truly been built. And the ones who have deviated
from that are the exceptions to the rule and not the rule
itself.
Certainly all of us, as we have come through our own
educational background, have been taught that morality and
ethics are, in fact, the cornerstones of not only a successful
personal life, but a successful business and professional life.
And I think that we need to send a message, especially to the
young people of this country today, that as they make their
choices about professions, as they make their choices about
what they are going to do with their lives, that they
understand very clearly that from the halls of Congress to the
business communities itself, that the concept of honesty and
fair dealing is important and, in fact, is essential.
I am pleased that we have these outstanding members of this
panel to reinforce that concept as we proceed to this hearing,
and I look forward to introducing Mr. Cathy in a few moments.
Thank you, Mr. Chairman.
Mr. Stearns. Thank my colleague.
And Mr. Shimkus.
Mr. Shimkus. Thank you, Mr. Chairman.
It is great to have you all here today, and it is a shame
that we have to have you here today, because this shouldn't be
something that we have to advertise. This just should be the
way we operate.
You know, one of the Founding Fathers was quoted--and I
won't try to remember which one. He says, though good laws do
well, good people do better. And it talks about a moral
foundation of truth that is instilled throughout our society,
although sometimes we lose our way.
I am a West Pointer, so I didn't wear my class ring for a
long time. Actually I put it on not to get--I put it on during
the impeachment issues because I had to keep asking a lot of
questions. The code at West Point is duty, honor, country. And
I have my class ring here. And General MacArthur said, duty,
honor, country. Those three words reverently dictate what you
ought to be, what you can be, what you will be. His speech to
the corps of cadets at the end of his career indicates how the
Academy has attempted to imbed into a culture that would
permeate through the military.
Other things that are done at West Point is the honor code:
A cadet will not lie, cheat or steal, nor tolerate those who
do; and part of the cadet prayer, which says, help me to do the
harder right over the easier wrong, not being content with the
half truth when the whole can be won.
This background, when I had to make some tough decisions,
caused me to focus back on my educational background, and not
only that, but also my family background and my training there.
But we all know that this also tries to permeate itself through
the Army Officer Corps where an officer's word is his bond. The
moral foundation of the United States Army tends to depart from
the background at West Point, but it always continues and takes
more work, just like a successful marriage takes work, a good
corporate culture takes work.
We are glad that you are here to help get the word out that
there are goods actors out there instilling good corporate
cultures, and if we are concerned about having character
education in our schools, which is a big thing now--
unfortunately we have to do that, because they are not getting
it at home--then it is good to tell the story that that there
needs to be character core education in the boardrooms.
We thank you all for being here. We are excited about
listening to your stories, and we hope our other folks who are
creating jobs and wealth in this country will take heart that
there are good folks out there.
And, Mr. Chairman, thank you for the extension of my time,
and I yield back.
Mr. Stearns. Thank you. I want to thank the gentleman.
Mr. Terry, gentleman from Nebraska.
Mr. Terry. Thank you, Mr. Chairman. I have a statement, and
I will just submit it.
Mr. Stearns. So ordered.
[The prepared statement of Hon. Lee Terry follows:]
Prepared Statement of Hon. Lee Terry, a Representative in Congress from
the State of Nebraska
Thank you, Mr. Chairman, and thank you for holding this hearing on
a very important issue: the accountability of chief executive officers
for the financial statements their companies issue to the public.
I am not a promoter of more laws, just better ones. I do not
support increased regulations; rather, enforcing the ones we already
have on the books. This Committee and this Congress have taken strong
steps this session to streamline accounting laws and oversight
regulations. We have closed loopholes, filled in gaps, tightened grips,
and made our economy's future strong by doing so.
Issue by issue, Mr. Chairman, your leadership has led to real-time
financial disclosures, transparent investor information, plain language
documentation, and harsher penalties for those who knowingly commit the
crimes that lead to Enrons, Worldcoms, and ImClones. Yet more needs to
be done, which is why this hearing today is so important.
Like a quarterback for a football team, CEOs get to take all of the
credit when things go well and have to take all of the blame when
things go badly. Yet legally, they are not held accountable. When a
quarterback fumbles, throws a few interceptions, maybe even throws the
game, the coach has a responsibility to bench him, so that no more
follies will occur. Mr. Chairman, the federal government must be the
coach every once in a while, and we have a responsibility to bench CEOs
who lie, cheat, hide, and steal. President Truman said it best: ``The
buck stops here.'' At the end of the day, CEOs have a duty to ensure
ethical behavior of their companies. By signing on the dotted line that
their financial statements are accurate and true, CEOs will be held
accountable to the letter of the law.
Thank you again, Mr. Chairman, for holding this hearing, and I look
forward to the testimony.
Mr. Stearns. Mr. Bryant, the gentleman from Tennessee.
Mr. Bryant. Thank you, Mr. Chairman.
Having walked in late, I apologize to the panel. I will be
very brief here.
I would say that listening to Mr. Shimkus's speech, I would
tell him that I would take full credit for that, although I am
not sure I actually did. I actually taught at West Point during
that time, and I claim him when he is on his best behavior that
he was one of my students; but usually when he is not on his
best behavior, I disavow him completely. But I will certainly
agree with what he says and thank the panel for coming.
I can't help but think not just the cause--but I cannot
help but think back just a few short years ago with what we
went through in Washington as a part of the actual impeachment
of a President and actually being firsthand involved in that
myself, knowing what was there and the example that was not
only, I think--the very bad example that was not only set to
our youth, but I think something we missed was the bad example
it set for our corporate executives and other people in
business and certainly, I believe, lowered the standard, if you
will, of truth and integrity. And I think it was a very bad
example. I am not saying that is all of it by any means.
Certainly at the core is simply greed, the human nature of
greed. But we have to do what we can as a body, as a Congress,
to correct that.
We always hear you can't legislate morality, but we do
attempt to do it in many ways. But certainly we have to do
that. Also we have to set an example ourselves as Members of
Congress. But I can sound like I am starting to preach here,
and I am not.
But let me yield back my time and thank this very
distinguished panel for being here today and so we can move on
and hear them. Thank you.
Mr. Stearns. I thank my colleague.
I think that what we are going to do is have--the vice
chairman introduce one of our CEOs, the distinguished Mr.
Cathy, and then, Mr. Isakson you will have an opportunity after
Mr. Deal speaks to also do an opening statement and to provide
anything further.
So with that we will move to our panel and Mr. Deal.
Mr. Deal. Thank you, Mr. Chairman.
Probably the guest that we have today in the form of a
panel member is best recognized by some of the ads that feature
the ``Eat Mor Chikin.'' this is certainly one of the more
successful advertising recognition symbols in our country. It
is the recognition of Chick-fil-A, and we are very pleased,
especially Mr. Isakson and I as Georgians, to have a native
Georgian on the panel today, Mr. Truett Cathy.
Mr. Cathy grew up in Atlanta. He began his business
activities running a Coca-Cola stand in Atlanta. He carried the
concepts of good business practices from those early years, in
his preteen years, all the way through his career here until
today and is certainly, I think, the model for the kind of
business that all of us would like to see succeed in our
country.
Chick-fil-A has over 1,040 franchises across the country.
It is a business that for 34 consecutive years have each year
posted sales growth, and that in itself is phenomenal. It is a
business that has adhered to the importance of never having a
customer who leaves dissatisfied; that the customer is first
and most important, because that is what keeps a business,
especially a business like the restaurant business, going on a
daily basis.
But he has a unique distinction. The restaurant business is
a very competitive business, and Sundays are sometimes regarded
as the most important day in the restaurant business because
people are off working generally, and they go out to eat. But
because it is Sunday, Mr. Cathy has consistently adhered to the
concept that his restaurant is closed on Sunday, and the reason
is that he wants his employees to have time to worship, if they
choose, and also to have time with their families. So it is not
the typical business model, and he is certainly not in many
respects the typical business entrepreneur, but is the example
that all of us, I think, should adhere to. He is a very kind
and gentle man, and it is indeed my pleasure to have him on
this panel today.
Mr. Stearns. I thank the gentleman.
Mr. Isakson, you are welcome to make introductory remarks.
Mr. Isakson. I will just be very brief, and I appreciate
all the things that Congressman Deal said. And Congressman
Collins is also--all of us from Georgia are here because in
my--I don't know a finer man than Truett Cathy, and I have
known him for a number of years. I practiced business in
Atlanta for 34 years before I came to Congress. It was a real
estate business, so we from time to time dealt with Chick-fil-A
people looking for sites. My kids were raised on Chick-fil-A
because it is the favorite thing they like to eat.
But the point I wanted to make is this: Truett Cathy is not
one of those people that writes a book or comes up with a cute
phrase and puts it on for pretense. He is a guy that every day
lives the life that he is here to tell you about, and I can
tell you in advance he will be more humble than he should be
because he is that type of a man.
I just lament that, having attended the Enron hearings here
in Washington a few months ago and seeing standing-room-only
crowds coming to hear about a tragedy, that we don't have a
standing-room-only crowd here today to hear about what most
American business is really like, but what I think Atlanta and
Georgia's finest businessman is. Truett Cathy walks the walk.
He talks the talk. He has changed the lives of thousands of
children, and he has made it possible for hundreds of his
employees to get college educations who would otherwise never
have had a chance. But every Sunday, for, I think, 50 years, he
has taught 13-year-old boys Sunday school, trying to point them
in the right direction in life, and many of them today are
walking examples just like Truett is.
So it is a real honor for me to be here around my role
model and my idol Truett Cathy. Thank you, Mr. Chairman.
Mr. Stearns. Thank you.
And the gentleman Mac Collins from Georgia is also
recognized, not a member of the committee, but certainly
welcome his comments.
Mr. Collins. Thank you, Mr. Chairman. And I join my two
colleagues as well as the other colleagues in welcoming the
panel, particularly the Cathy family, Mr. Truett, his son Dan,
and two grandsons.
You know, I have know Mr. Cathy for, oh, 10, 15 years since
I have been campaigning in Clayton County and Henry County,
Georgia, for political office. I know him as a man of honor, a
man of integrity and a man of faith. And I know that he has, as
a father, raised a family with those same traits. Not only has
he raised a family who are people of faith, but he has taken in
a lot of foster children; homes in the United States that he
has for foster children, funded them, visits with them, and
lets them know of his faith, and through faith has been
successful to him and will be successful for them if they
follow that route. But not only here, but in Peru, he has
helped children there.
It has been mentioned he has been teaching Sunday school
for a number of years. I have attended some of his classes
because I wanted to hear him. I welcome them. I am glad to call
them friends, and I am glad that they live in the Third
District of Georgia.
Thank you for all you do, all your family. And one last
thing. Mr. Cathy, when each of his children became the age of
driving, at that time it was 16 in Georgia, they could get them
an automobile, but on the steering wheel of that automobile
would be an engraving. It would be a Bible verse of their
choice. That is the type of man Truett Cathy and his wife and
family are. Thank you, Mr. Truett.
Mr. Stearns. I thank the gentleman.
Also we have also from the great State of Georgia Mr. Saxby
Chambliss, who is offering a quick opening statement or
comment.
Mr. Chambliss. Thank you, Mr. Chairman, and just adding to
what my colleagues have said about Mr. Cathy, he is a
remarkable man who has had a remarkable life and has had just a
profound influence on any number of other not just Georgians,
but Americans, and he is somebody that we Georgians are
extremely proud of. And just one quick story.
His son Dan and Mr. Cathy invited me to an event back the
Saturday before the Fourth of July, which is an annual event
they have at their ranch, which is located in my district, and
it is a ranch on which they have a home for children. And it
is--the home itself is a remarkable story, it says a lot about
Mr. Cathy and Dan and that whole family. And we were there that
Saturday night. There were probably, I don't know, 3,000, 3,500
folks there at Mr. Cathy's and Dan's invitation. And there
were, gee, a lot more children than there were adults just
enjoying life, celebrating the great country that we live in,
and having an opportunity to see the work that Mr. Cathy has
done for so many children in our part of the State who have not
had the advantages that most of us have had. And it was truly a
great night for America, but it was a great night to pay
tribute to the Cathy family.
Mr. Cathy, unfortunately, by the time I got there, had
already gone, and he had gone for the right reason. He had left
Upson County and had headed somewhere--I don't believe it was
back home, Mr. Cathy. I know it was north of Atlanta. But he
was gone to teach Sunday school or gone home so he could get a
good night's sleep so he could teach Sunday school the next
morning. And all Georgians are extremely proud of--I am very
proud of you. We are proud to have your facility in my
district, and we appreciate you being here today, and thank you
and Dan and your whole family.
Mr. Stearns. I thank the gentleman.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Charles F. Bass, a Representative in
Congress from the State of New Hampshire
Mr. Chairman, thank you. I am pleased that this subcommittee is
addressing the issue of business ethics. In light of recent corporate
responsibility scandals, it is ap- propriate that we examine how the
federal government may be able to rectify the institutional problems
that exist within our business models.
Although I do not believe it is the role of Congress to legislate
honesty mandates, as Americans, it is incumbent upon us to reevaluate
the significance of social re- sponsibility and its effects on our
business and economic systems. The failure to ad- here to a
professional code of ethics by some executives has contributed to the
cur- rent economic melange. I believe this hearing will serve as a
positive step in re- dressing the wrongs that have led to this point so
that they should not have to occur in the future.
I yield back to the Chairman.
______
Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee
on Energy and Commerce
Thank you, Mr. Chairman, and I'd like to thank you for holding this
hearing and for continuing to focus on the myriad problems that have
been exposed in the busi- ness community in recent months. Straight
truth, favorable or not, from our public companies and their governors
is the foundation for trust in our free market system, and we in
Congress must find the best way to encourage ethical behavior by busi-
ness leaders and protect investors from corporate malfeasance.
Our business community, and the investor culture that thrives
therein, is based upon concepts that we've heard more and more about
since these corporate scandals have unfolded. The notions of
``transparent accounting,'' ``auditor independence'' and ``investor
confidence'' are more than Boardroom phrases. Because of the technology
boom of the late 90's and the democratization of the financial markets,
these con- cepts are now discussed around American dinner tables.
Investors simply must have confidence in financial reporting, and we
must do everything we can to ensure the veracity of reporting and the
continued strength of our market system. The first and, I think, most
important, step in this process is to restore the fundamental trust of
the general public in the integrity of business leaders and the
financial reports they issue.
Swearing an oath has long been a very public way for those in a
position of lead- ership--in government and in the private sector--to
take explicit responsibility for their actions with regard to that
position. For example, Members of Congress take an oath to uphold the
Constitution. Public avowal serves as an assurance to the public--
investor or constituent--that the leader raising her right hand will
act in the interest of those she serves. But in addition to that, it
shores up confidence in the system as a whole. It shows that the system
is comprised of men and women who are accountable not only to those
they serve directly, but also to the entire com- munity.
Mr. Chairman, the investors who have lost huge amounts of money are
irate with the shady dealings of their corporate representatives. So
too are those of us who be- lieve in the virtues of the free market. In
fact, it is the most stalwart of defenders of free markets that are
most offended by those who have abused the system.
The business community is just that, a community, and when people
cook the books in an attempt to line their own pockets, they do an
incredible disservice to all of those who try to inform themselves
completely and invest responsibly. Yester- day we took meaningful steps
to protect investors by passing the Conference report
for HR 3763. I look forward to hearing from our witnesses today about
further steps, legislative or otherwise, that need to be taken to
restore confidence in our market system.
Again thank you, Mr. Chairman, for holding this hearing and for
investigating possible remedies to the problems we face.
I yield back the balance of my time.
Mr. Stearns. We want to welcome----
Mr. Collins. Mr. Chairman, would you yield for a moment,
please?
Mr. Stearns. I would be glad to yield.
Mr. Collins. This is the Commerce Committee, and we are so
proud to be over here with you. And, you know, we are from
Georgia, and Georgia is the poultry capital of the world. We
are having trouble based on some conflict that we have with
Russia. It might be a good suggestion if we send Mr. Cathy over
to Russia. I believe he could convince those people over there
they need to eat more chicken, and if they eat more chicken,
then they will probably bring down that barrier and settle that
conflict.
Mr. Stearns. Probably so. Does vodka go with chicken?
Mr. Deal. Not at Chick-fil-A.
Mr. Stearns. Let me welcome our panel.
Mr. Collins. They are already indulging in enough of that,
but they need to eat more chicken.
Mr. Stearns. Okay. Of course, we have Samuel Truett Cathy,
who is founder and chairman and chief executive officer of
Chick-fil-A. We have Murphy Smith, assistant department head,
department of accounting, Texas A&M University. And we have
Sherman Cohn, professor of law, Georgetown University Law
School; and Lyrissa Barnett Lidsky, a professor of law, Levin
College of Law, the University of Florida.
So let me welcome all of you this morning, and we will go
from my left to my right with opening statements, and, Mr.
Cathy, we will start with you. What we need you to do is turn
on the mike and then move the mike a little closer to you.
STATEMENT OF SAMUEL TRUETT CATHY, FOUNDER, CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, CHICK-FIL-A, INC.
Mr. Cathy. Okay. Great. It is indeed an honor for me and
humbling in spirit to be here with you and hearing all these
glorying remarks. I could sit here and enjoy this the rest of
the day, and I will be here, be glad to listen to you. I love
to hear such kind remarks, and I am grateful for those. But I
am thankful that you invited me to speak, realizing when I was
in school I was tongue-tied. The best I could do was the name
Truett Cathy, and here you are inviting me to speak to a very
distinguished group. So I am indeed honored. People ask me, do
you get many speaking engagements, and I say, well, I get a lot
of first-time speaking engagements, but seldom does anyone ask
me back. So I appreciate this first opportunity I have had to
speak to such a distinguished group.
As I think about ethics and the business ethics, I realize
there is no such thing as a business ethics. It is individual
ethics. People make the business. I am proud of all my
representation of Chick-fil-A folks. They know what dedication
and commitment is and loyalty among our people. We are a
private company. That is why we don't have a board of directors
to answer to, thank goodness. And we do not have to answer to
stockholders that arereally the bosses of these companies. They
are the ones that ought to be protected and watch after their
own interest. But today I am grateful that we are still a
private company, family owned, and operate on some principles
that have been very meaningful to me throughout my business
life.
Here back in 1982 we were experiencing some kind of
difficult situations. No. 1 is we just moved into a $10 million
corporate headquarters. It was fully financed. Business
interest on borrowing money was 20 and 21 percent. We saw some
decline in our sales because all the major chains were getting
in the chicken breast sandwich business, which caused the
product to be inflated, and I was disturbed at the time because
everything that I had at that time was predicated on the
success of Chick-fil-A.
And so I called a meeting among our executive committee.
All of these gentlemen have more than 20 years of service with
Chick-fil-A. They are fully dedicated and committed to
operating a business on Christian principles, and so I asked
the question, why are we here? Why are we alive, and why are we
in business anyway? We never established a corporate purpose.
But among the conversation of the eight of us spending 2 days
there, we came away that this might be our corporate purpose,
that we might glorify God by being a faithful steward for all
that is entrusted to our care, and that we might have a
positive influence on all the people that we come in contact
with.
We came back and shared this with our staff people, and
they said, well, what else do you do? I said, well, we didn't
have an answer to the current problems, but we did establish
where our goals were, where our corporate purpose was and asked
them to cooperate with. They were kind enough to give to me at
Christmastime a plaque identifying my corporate purpose. So it
was meaningful to them, but it is meaningful even today that
where my responsibility is, how I should conduct myself over
telephone calls and salespeople and people that are not doing
the job that is expected of them.
So being in the restaurant business, I feel kind of a
divine calling to do those things--meeting people's needs,
their physical needs, their emotional needs and even the
spiritual needs. It is a privilege that we have to employ
40,000 or 50,000 young people in our various businesses, and I
am motivated by what I see in young people. A lot of them work
because they have to work. Others work because they just like
to work. I have never seen any objections to people enjoying
their work. I find people that enjoy their work if they are
putting their heart into it and performing at their very best.
When we get in trouble is when we are doing less than what is
expected of us.
But it was brought out the fact of I do teach 13-year-old
boys in Sunday school, and the reason that I do that is I feel
it is the last opportunity to establish some values in life
that will get them over the critical years of a teenager. So I
tell them, you know, it is important that you make good
decisions. Good decisions mean goods results; fair decisions,
fair results; and the sad part about it, bad decisions equal
bad results. So even teaching, I have my former students, some
in prison today that have gone wayward and doing those things,
and I ask, you know, I wondered if I had had just a little bit
more time to spend with that individual.
Also I pointed out--I asked one morning, how many of you
would like to have a million dollars? And all the hands went
up. They could have everything they wanted. Dad could have a
pickup truck with shotgun shelf, and Mom could have a new
dress. He could have a Go Kart. And I said, well, let me tell
you something better than a million dollars; that the Bible
says a good name is rather to be chosen than great riches.
I think that is something we all need to realize, that God
has a plan in our life. I consider the Bible as a blueprint, a
road map for our life. I think instinctively we are all born
with the idea that we want to be somebody and achieve goals
that might be worthy, but somehow or another we are getting our
priorities mixed up. I was asked by a reporter one time, how
would you like to be remembered when you leave here? After
thinking a moment or two, I said, I guess I would like to be
remembered that I kept my priorities in the proper order,
because I have observed business people, highly successful
business, being a complete failure when it comes to the
important things like your conduct with your family and in
society and community.
It is very, very important that we take a look at the
important things. We realize we are in a changing world, but
the important things never have changed. I still feel the
principles of the Bible. I see no conflict between biblical
principles and good business practice. They are there. They are
outlined for us. And we need to read the Bible, and not only
read it, but interpret it.
I have been impressed with attending the national prayer
breakfast where the President was there and his wife, and the
Vice President and his wife, and numerous other peoples. And a
Jewish person read from the Old Testament, and a Protestant
read from the New Testament. Prayer is prayer.
To get in my office and find that a kindergarten group was
coming through, elementary school group, and I have a book at
that time, It Is Easier to Succeed Than to Fail, and I told the
children, I don't have books for each of you, but I will give
you three and put them in the library. And I am signing this
book, and under it I will put Proverbs 22:1. I am not going to
tell you what Proverbs 22:1 is. You look it up, and you can
find it in the Bible. I said, when you go to check out the
book, take a look at what Proverbs 22:1 says. I said, you do
have a Bible in your school, don't you? The teacher said, I am
sorry, Mr. Cathy, we are not allowed to have a Bible in our
school. How is it that people of higher authorities rely on
prayer and Bible reading and character building, yet a child
going to school cannot carry a Bible in their hands?
Mr. Stearns. Mr. Cathy, I am going to have to interrupt
you. We have a vote on the floor, so I am going to recess the
committee, and we will come back momentarily. We just have one
vote. So the committee stands in recess.
[Brief recess.]
Mr. Stearns. The subcommittee will reconvene, and Mr. Cathy
was just finishing up his opening statement.
So, Mr. Cathy, as a courtesy, if you don't mind wrapping up
your opening statement, and then we will hear from Dr. Smith.
Mr. Cathy. Thank you for the time that has already been
given to me. I want to make a closing statement or two that I
would like to relate to you.
Many other things I would like to share with you at the
proper time, but I will close by maybe telling you about a
picture that I have on the wall of my office that was sent to
me by my daughter as a teenager. But on that is a picture of a
mountain climber, had proper attire with his safety rope on,
with the caption that no goal is too high if we climb with care
and confidence. And that is a reminder to all my people there
that no goal is too high, but we have to be careful, and we
have to practice biblical principles and do those things that
will cause us to continue to experience success.
So I would like to close by just making the statement I see
no conflict between biblical principles and our faith, and we
could do well to consider the things that are important in our
life. And I feel that some of our people have been misguided to
think that pressure put on them about the bottom line. We
concentrate on people. And I know sometimes the stock companies
concentrate on the bottom line. We should forget about the
bottom line. It is important that we do things right and do
things right long enough that you will receive the rewards that
you are looking for. That is my closing remark.
[The prepared statement of Samuel Truett Cathy follows:]
Prepared Statement of S. Truett Cathy
Mr. Chairman and members of the Committee, I am honored that you
have asked me to be here today. I cannot think of a greater privilege
than to speak to the leaders of our nation. Further, that you thought
me fit to speak on the issue of ethics is personally humbling.
After agreeing to appear before you today, I had to ask myself
``what is the meaning of `business ethics'?'' I concluded that there is
really no such thing as business ethics. There is only personal ethics.
I believe no amount business school training or work experience can
teach what is ultimately a matter of personal character. Businesses are
not dishonest or selfish, people are. Thus, a business, successful or
not, is merely a reflection of the character of its leadership.
I am deeply disturbed, as you are, by the lack of character I see
in the marketplace. In order to satisfy the increased pressure for
greater profits, some business leaders are making bad choices which
ultimately hurt thousands of employees, stockholders, and the economy.
We all know that the scorecard of any business is the profit it
produces. Without profit, we cannot take care of our employees, our
families, or contribute to the betterment of our communities. The
question is: How do we balance the pursuit of profit and personal
character?
For me, I find that balance by applying biblical principles. I see
no conflict between biblical principles and good business practices.
We've tried to operate Chick-fil-A that way from the beginning . . .
1946 . . . Comments.
In grade schoo . . . (My Proverbs 22:1 story) . . .
There also is the book, ``Everything I Need To Know I Learned In
Kindergarten'', and some of these things are . . . Comments.
So, personal character is something we must teach our children and
enforce through our actions. That is one reason we close on Sunday. Not
everyone has personal convictions about closing on Sunday, but I
believe most people respect my personal convictions in doing so. I once
asked the group of 13 year old boys I teach Sunday school . . . (the
hypocrite story) . . . Comments.
I have a framed poster on my wall of a mountain climber given to me
by my daughter, Trudy when she was just a young teenager, which says,
``No goal is too high if we climb with care and confidence''. Many
businesses today are overextended and have gotten themselves into
financial trouble. I have always tried not to overextend. I am
satisfied stepping from one plateau to the next, making sure we are
doing everything right so that we can move on with confidence. I have
always said I want to make sure we are getting better before we get
bigger.
Mr. Chairman and members of the committee, in closing, I would like
to say that the important things in life haven't changed: those are
faith, family values, and good character among others. I was asked the
other day how I wanted to be remembered. My reply was that I would like
to be remembered as one who kept their priorities in order; that while
I've tried to build a successful business, I've kept focused on my
family, the reputation of my name, on influencing others, and on
incorporating my faith into every part of my life. In other words, Mr.
Chairman, I believe faith works on both Main Street and Wall Street.
Thank you again for the opportunity to be here today.
Mr. Stearns. I thank you.
Dr. Smith, your opening statement.
STATEMENT OF L. MURPHY SMITH, ASSISTANT DEPARTMENT HEAD,
DEPARTMENT OF ACCOUNTING, TEXAS A&M UNIVERSITY
Mr. Smith. Well, first, thanks for allowing me to be here
today.
Ethical values provide the foundation on which a civilized
society exists. Without that foundation, civilization
collapses. On a personal level everyone must answer the
following question: What is my highest aspiration? The answer
might be wealth, fame, knowledge, popularity or integrity, but
if integrity is secondary to any of the alternatives, it will
be sacrificed in situations where a choice must be made, and
those situations will inevitably occur in every person's life.
Allegations of unethical behavior by top management at Enron
helped destroy the company's ability to function.
A goal of a business firm should be to increase its owner's
wealth. To do so requires the public's trust. In the long run,
that trust depends on ethical business practices. In the United
States and other free societies, people often have the freedom
to make their own decisions about the right thing to do. Before
the American Republic, a common belief was that where there was
liberty, anarchy would result, because people would be unable
to govern themselves. Yet Americans were free and well-behaved.
How could this be?
The great English writer G.K. Chesterton observed that
America was the only Nation in the world founded on a creed. He
said that creed was set forth with dogmatic and even
theological lucidity in the Declaration of Independence.
Chesterton was referring to the second paragraph of America's
founding document: We hold these truths to be self-evident that
all men are created equal; that they are endowed by their
Creator with certain unalienable rights; that among these are
life, liberty and the pursuit of happiness.
Whether a person derives ethical values from religious
principle, history and literature, or personal observation,
there are some basic ethical guidelines to which everyone must
agree. In considering the impact of ethical values on a
society, nationally syndicated columnist Chuck Colson made the
following observation: Societies are tragically vulnerable when
the men and women who compose them lack character. A nation or
a culture cannot endure for long unless it is undergirded by
common values, such as valor, public-spiritedness, respect for
others and for the law. It cannot stand unless it is populated
by people who will act on motives superior to their own
immediate interests.
The purpose of ethics in business is to direct businessmen
and women to abide by a code of conduct that facilitates, if
not encourages, public confidence in their products and
services. Educators sometimes wrestle with the question, can
ethics be taught? The 26th President of the United States,
Theodore Roosevelt, put it this way: To educate a person in
mind and not in morals is to educate a menace to society. More
recently the National Commission on Fraudulent Financial
Reporting indicated that the business curricula should
integrate the development of ethical values with the
acquisition of knowledge and skills.
When societal values are deteriorating, maintaining high
ethical standards in accounting and business grows increasingly
difficult. People will undoubtedly ask if everyone else is
cheating, then how can an ethical person succeed? The answer is
in the definition of success. The real measure of success is a
person's character, not fame and fortune. Genuine success is
living a life that reflects high ethical values. President
Abraham Lincoln said it well: Honor is better than honors.
What can government do? Perhaps America's first President
can help answer that question. In George Washington's farewell
speech to public life, he said, the survival of freedom on
American soil would have nothing to do with him and everything
to do with the character of its people and the government they
would elect. He said, of all the dispositions and habits which
lead to political prosperity, religion and morality are
indispensable supports. Reason and experience both forbid us to
expect that national morality can prevail in the exclusion of
religious principle. Passing additional laws and regulations
are often necessary to punish criminal behavior and to provide
moral guidance to law-abiding citizens; however, even more
effective leadership would be for government to inspire its
citizens to act with virtue and honor.
As President Washington pointed out, there is no better
source of inspiration than religious principle. The fact that
governmental institutions have downplayed the role of religion,
particularly Christianity, starting in the last half of the 20
century is arguably a key factor in the decline of national
morality, including the recent ethical failures in business.
Government should include and encourage the active
participation of people of faith and the inclusion of religious
principle in the public arena. This would almost certainly be a
step in the right direction of inspiring ethical behavior in
American society, including the business community.
In the aftermath of 9/11, I am encouraged by the refocus on
valor, public-spiritedness and other godly values. As President
Bush leads our Nation, I am grateful that he reads the Bible
and spends time in prayer. He affirms our national motto, In
God We Trust.
Rules and regulation of government cannot preserve a free
and ethical society whose people lack integrity. Ethics is the
heart of America's economic and social freedom. Unethical
behavior is a dagger in the heart. According to business
textbooks, top management sets the ethical direction for the
firm. Company policies and internal controls are ineffective
without ethical leadership from the top. Likewise, the
political leaders of our Nation set the tone for its citizens.
Laws and regulations will do far less than your example.
And finally, I just thank you for your efforts and all the
Members of Congress who are striving to pass appropriate
legislation and to provide ethical leadership for our country.
[The prepared statement of L. Murphy Smith follows:]
Prepared Statement of L. Murphy Smith, Professor of Accounting, Texas
A&M University
Ethical values provide the foundation on which a civilized society
exists. Without the foundation, civilization would collapse. On a
personal level, everyone must answer the following question: What is my
highest aspiration? The answer might be wealth, fame, knowledge,
popularity, or integrity. But if integrity is secondary to any of the
alternatives, it will be sacrificed in situations in which a choice
must be made. Such situations will inevitably occur every person's
life.
Allegations of unethical behavior by top management at Enron helped
destroy the company's ability to function. A goal of a business firm
should be to increase its owners' wealth; to do so requires the
public's trust. In the long run, that trust depends on ethical business
practices.
In the United States and other free societies, people often have
the freedom to make their own decisions about the ``right'' thing to
do. Before the American Republic, a common belief was that where there
was liberty, anarchy would result because people would be unable to
govern themselves. Yet Americans were free and well behaved. How could
this be? The great English writer, G.K. Chesterton, observed that
America was the only nation in the world founded on a creed. He said
that creed was set forth with dogmatic and even theological lucidity in
the Declaration of Independence. Chesterton was referring to the second
paragraph of America's founding document: ``We hold these truths to be
self-evident, that all men are created equal, that they are endowed by
the Creator with certain unalienable rights, that among these are life,
liberty and the pursuit of happiness.''
Whether a person derives ethical values from religious principle,
history and literature, or personal observation, there are some basic
ethical guidelines to which everyone must agree. In considering the
impact of ethical values on a society, nationally syndicated columnist
Chuck Colson made the following observation. ``Societies are tragically
vulnerable when the men and women who compose them lack character. A
nation or a culture cannot endure for long unless it is under-girded by
common values such as valor, public-spiritedness, respect for others
and for the law; it cannot stand unless it is populated by people who
will act on motives superior to their own immediate interest.''
The purpose of ethics in business is to direct business men and
women to abide by a code of conduct that facilitates, if not
encourages, public confidence in their products and services. Educators
sometimes wrestle with the question: Can ethics be taught? The twenty-
sixth president of the United States, Theodore Roosevelt put it this
way: ``To educate a person in mind and not in morals is to educate a
menace to society.'' More recently the National Commission on
Fraudulent Financial Reporting (Treadway Commission) indicated that
business curricula should integrate the development of ethical values
with the acquisition of knowledge and skills. John C. Burton, former
dean of the Columbia University Business School, in a speech to the
American Accounting Association, stated that the declining influence of
social institutions has increased the role educators must play in
shaping values.
When societal values are deteriorating, maintaining high ethical
standards in accounting and business grows increasingly difficult.
People will undoubtedly ask: If everyone else is cheating, then how can
an ethical person possibly succeed? The answer is in the definition of
success. The real measure of success is a person's character, not fame
and fortune. Genuine success is living a life that reflects high
ethical values. President Abraham Lincoln said it well: ``Honor is
better than honors.''
What can government do? Perhaps America's First President can help
answer that question. In George Washington's farewell speech to public
life, he said that the survival of freedom on American soil would have
nothing to do with him, and everything to do with the character of its
people and the government they would elect:
Of all the dispositions and habits which lead to political
prosperity, religion and morality are indispensable supports.
[R]eason and experience both forbid us to expect that national
morality can prevail in exclusion of religious principle.
Passing additional laws and regulations are often necessary to
punish criminal behavior and to provide moral guidance to law-abiding
persons. However, more effective leadership would be for government to
inspire its citizens to act with virtue and honor. As President
Washington pointed out, there is no better source of inspiration than
religious principle. The fact that governmental institutions have
downplayed the role of religion, particularly Christianity, starting in
the last half of the twentieth century, is arguably a key factor in the
decline of national morality, including the recent ethical failures in
business. Government should include and encourage the active
participation of people of faith and the inclusion of religious
principle in the public arena. This would almost certainly be a step in
the right direction of inspiring ethical behavior in American society,
including the business community. In the aftermath of 9-11, I am
encouraged by the re-focus on valor, public-spiritedness, and other
godly values. As President Bush leads our nation, I am grateful that he
reads the Bible and spends time in prayer. He affirms our national
motto: In God we trust.
Rules and regulations of government cannot preserve a free and
ethical society whose people lack integrity. Ethics is the heart of
America's economic and social freedom. Unethical behavior is a dagger
in the heart. According to business textbooks, top management sets the
ethical direction for the firm. Company policies and internal controls
are ineffective without ethical leadership from the top. Likewise, the
political leaders of our nation set the tone for its citizens. Laws and
regulations will do far less than your example.
Mr. Stearns. Thank you, Dr. Smith.
Professor Cohn.
STATEMENT OF SHERMAN L. COHN, PROFESSOR OF LAW, GEORGETOWN
UNIVERSITY LAW CENTER
Mr. Cohn. Thank you very much for the invitation and for
hearing us out on these very important issues.
I associate myself with what my two colleagues to my right
have already said, and I am not going to repeat it.
Mr. Stearns. You might just move the microphone just a
little. That is good.
Mr. Cohn. Thank you. I would like to focus on the role of
lawyers. I teach legal ethics at Georgetown. I practice it in
many ways. I tell my students that the most important ethical
question is the one you ask yourself in front of the mirror as
to who you are, and that every lawyer at some point will have
to ask that question in a very hard situation. There are many
such situations.
The problem, once you get from the broad ethical precepts
to application, is that there are so often conflicting precepts
and how they apply. For the lawyer, you have two very
fundamental values that come into conflict. One is your duty to
your client, which we all hold as very important. Those of you
who have had occasion to employ lawyers know that you want that
lawyer to be loyal to you and to exercise the duty to you, not
to the other side. But then we have the value of the duty to
the system and to the public.
In the business world, where we have set up a system by
which there should be checks and balances, the accountant and
the accountant statements which we thought we could rely on
until recently, that is a very important protection. That is a
part of what our whole securities law is built on and our
system is built on. The lawyer who stands there should be able
to say, no, you can't do that, or I will not participate in it.
And that is the conflict that occurs, because there should be
some balance where the lawyer is not entirely the handmaiden of
the client.
Now, clients don't generally like to hear that. They want
the lawyer to do their bidding. But the lawyer should have
independent judgment and should be able to say to the CEO, no
matter who he is, or the financial person, or anyone else, no,
this can't be done that way, and I will not participate in it
if it is done. Now, that may mean, and I tell my students this,
you keep your resume ready, particularly if you are in-house
counsel. Whether it is government or private, you have to be
ready to walk and to give up a job and to give up all the
income that comes with that position. And this is true even in
large law firms where quite often you have a client such as an
Enron or a Xerox or a WorldCom that gives so much into the
bottom line of that business called the law firm, and at some
point with your integrity you have to say, no, I can't do that,
and I am ready to walk.
That is the message we convey. It is a lot harder to carry
it out, and, therefore, we have set up various ethical
guideposts. I have given you some excerpts from the rules of
professional conduct. 1.13 says that when the corporate person
with whom the lawyer is dealing is doing something wrong, it is
up to the lawyer to then take it up to the highest level, which
would include the board of directors, and say, there is
something wrong here. Now, of course, once you do that, once
you go past the person who hired you, you have to be ready to
find a new job or find a new client. That is a part of it. But
you go up as far as the board. If the board does not go along
with you, and you think it is wrong, then at that point you
have the ability and, I suggest, the duty to withdraw.
The one thing you can't do is breach your duty of
confidentiality. You can't make it public. All you can do is
resign. That is our system, because the duty of confidentiality
is so very important. You can't participate in fraud. You can't
aid it. You can't abet it.
Now, one of the aspects is where does the SEC fit in all
this? Now, the SEC, does enforce illegal ethics, not as much as
we would like to have them do it. One of the problems is
resources. Government always has a problem with resources, and
that is why this Congress almost 100 years ago, created a
concept which has often been called private attorneys general
in the Clayton Act, having to do with antitrust. Antitrust was
so important to this Congress that it established a process of
treble damages plus attorney's fees when the plaintiff wins in
order to encourage private litigation. In the case of
securities regulation, this Congress, in its wisdom, in 1995,
went the other way and said, we just want the SEC to enforce
these matters. And in the Private Securities Litigation Act
they pulled back on the private attorney general concept in
this area.
Now, about 30 years ago there was a case before the Supreme
Court called J.I. Case Company v. Borak, in which the issue was
whether there was to be a private cause of action to enforce a
public duty. The SEC, in an amicus brief, said, we think there
should be. Why? Because we don't have enough resources to
enforce. I suggest that is something that needs to be
rethought.
Thank you, Mr. Chairman.
[The prepared statement of Sherman L. Cohn follows:]
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Mr. Stearns. And I thank you.
Professor Lidsky, welcome.
STATEMENT OF LYRISSA C. BARNETT LIDSKY, PROFESSOR OF LAW,
LEVIN COLLEGE OF LAW, UNIVERSITY OF FLORIDA
Ms. Lidsky. I thank you. It was nice to be invited to speak
on this important topic, and I am glad that the committee has
chosen to address truth-telling in the business world. I have
gotten where I dread reading the papers, like most of the
public, because I am worried that I will read about a web of
lies that has taken down a corporation and taken its investors
with it. But when I read the papers as a legal ethics
professor, my question is, where were the lawyers? Now, I am
not the first person to ask that question. A judge asked it
about the lawyers in the S&L scandals. And so my second
question is, what didn't we learn in the 1980's during the S&L
crisis about how to prevent these kinds of things from
happening?
Looking at the legal ethics rules, believe it or not, the
legal ethics rules clearly state that lawyers may not tell
outright lies, and the legal ethics rules also clearly state
that a lawyer cannot remain silent and assist a client to lie
to a court. But when it comes to transactional lawyers, the law
is less clear about what a lawyer's duties are when a client is
trying to perpetrate a lie on the public.
The problem with the recent cases is that they appear to
involve a lot more than lawyers simply remaining silent and
adhering to their duty of keeping a client's confidences. They
actually seem to involve lawyer enablement or lawyers as
enablers of client lies, and that is important because lawyers
serve as gatekeepers for clients like Enron. If lawyers didn't
assist Enron, it never could have gained access to the capital
markets, securities markets, and so lawyer assistance was
absolutely vital for it to do what it did.
Now, let me enter a disclaimer here. I am not claiming to
know any more than the general public about the specific law
firm's actions in Enron. In fact, Vincent and Elkins probably
employs many of my former law school classmates. I am from
Texas, and it is a big Texas firm. But nonetheless, it seems
that there was lawyer enablement in the sense that lawyers were
doing things like drafting press releases, structuring
transactions that didn't have any substance behind them,
drafting opinion letters, and so they were lending their
expertise and credibility to a corporation that couldn't have
done what it did without their assistance. Also, the assistance
of the accountants and the bankers was crucial.
So the question is what should they have done to avoid
enabling this kind of fraud by the client? The question for us
today might be who is going to fix the problem? And I have to
say that I don't have faith in the bar to fix the problem of
its own. The bar is largely self-regulating, and the bar has
shown a failure of will when it comes to resolving the conflict
between the duty of confidentiality and the duty not to assist
a client in fraud.
The bar recently had an opportunity to draft clear rules
that told lawyers what they have to do to avoid enabling client
fraud, and they just didn't do it. So I think it is going to
require the government to take action. I think the SEC has to
be involved with more civil enforcement actions against law
firms that draft documents they know to be false and enable the
client to lie to the public. I think the SEC--it is useful if
the SEC promulgates rules that clearly state the lawyer's
disclosure obligations when a client is trying to lie to the
public. That was what was done partly in the wake of the S&L
scandal, and it has been somewhat successful for those lawyers
that are involved in banking.
But I don't think that is enough. SEC simply doesn't have
the resources to deal with a problem of this magnitude. And I
don't think it is a problem restricted to a few bad apples. I
think there is a systemic cultural problem where people just
don't want to take responsibility for calling a halt to actions
of a client that are improper. So I think the solution has to
come from private litigation, unfortunately. And I say
unfortunately, because private litigation has costs. Once you
enable more lawsuits to be brought against law firms, it means
that there are going to be a number of frivolous suits brought,
too. But nonetheless, the prospect of having to be held
accountable in dollars to investors who were harmed by a
client's lies will make law firms sit up and take notice.
Attorneys who prosecute these type of actions have the
resources to pursue them. They have the sophistication to deal
with cases that involve complexity of the type that Enron,
WorldCom, all of those cases present. And unfortunately, it is
one of the few solutions to curbing this kind of lawyer
enablement that we have been seeing. The criminal penalties
don't hurt either, but they can only deal with the most extreme
cases.
It was said earlier that you can't legislate morality. I
agree, you can't legislate morality, but what you can do is
create laws that support people who exercise moral courage,
people like Sherron Watkins, and you can create cultures that
support people who exercise moral courage, and that starts in
law school. It starts with telling lawyers that there are
things--young lawyers, they are not lawyers yet--that there are
things more important than their law degree, things more
important than their law license that they have to adhere to.
Mr. Stearns. I thank you.
And, of course, I want to just recognize you come from the
University of Florida. I had the opportunity to represent the
university for 4 years, and now that is in a new congressional
district where I am running, so I certainly want to commend you
and that wonderful university.
I will start with my questions. I had the opportunity to
participate in the oversight hearings on Enron in which we
dealt with Vincent and Elkins, which was a law firm for Enron.
And, Professor Lidsky, when you talk about lawyer enabling,
when Sherron Watkins came to the CEO and said, there is a
problem, he gave it to the law firm. Now, you would think at
that point that law firm would recognize immediately, like we
did on the committee, every Democrat, Republican recognized
immediately, that she was, one, a whistle-blower, and, two,
that this company is going to implode. Yet Vincent and Elkins
put together a memo which created a camouflage, a smokescreen
to the whole thing and allowed people to say there is not a big
problem.
You are telling me right now the bar is not stepping
forward to put in a code of ethics preventing enabling lawyers
to help their clients because they have fiduciary
responsibility and confidentiality. But don't they have an
ethical responsibility to say, no, we can't go forward? Sherron
Watkins is telling the truth. There is no use camouflaging it.
So what can the United States do with this lack of ethics, with
lawyers enabling clients to participate in a cover-up or a
smokescreen like we saw in the Enron situation?
Ms. Lidsky. I think the only thing you can do is make it
clear that they are going to be held accountable for that
later. In the situation you described, what a law firm might
tend to do when it is a huge client for the firm is they don't
want to be complicit in the client's fraud, but one of the ways
they try to assuage their own fears of being complicit in the
client's fraud is by kind of avoiding knowing too much. And so
you can comfort yourself by saying, I didn't tell an outright
lie. I didn't know anything that would have made me change my
opinion, because you put blinders on so you couldn't see what
you know was going on around you.
And so I think that is kind of a tendency that a law firm
might have in a situation like that, is to try to block off so
you don't find out anything that would trigger a duty to have
to put a halt to it if you were the whistle-blower yourself.
Mr. Stearns. Professor Cohn, Professor Lidsky has alluded
to the fact that we have to hold the lawyers personally
responsible in terms of money. I think you had indicated that
the way to solve this problem is to say a lawyer or a law firm
that is involved with enabling, and is found guilty, has a
monetary penalty on them, possibly jail.
I mean, the bar is not doing it; should Congress? I mean,
how should we do something like she is talking about? And do
you agree or disagree?
Mr. Cohn. No. I agree that for those bad apples--and let us
hope that the whole bushel isn't bad, either for the CEOs or
the lawyers or the accountants; that there are a lot of good
people out there. But for those who are tempted by greed--and
that is what it is, even for the professionals, because the
professionals see that fee coming in and want to keep it coming
in.
Mr. Stearns. Wants it to get larger.
Mr. Cohn. And wants it to get larger, and wants to keep
that client. So that there has to be a real sanction--and a
real sanction.
Mr. Stearns. Coming from the government and the Security
Exchange Commission?
Mr. Cohn. It can come from there. But we know through
history that--and this Congress has recognized it for almost
100 years now--that government interest in an area goes up and
down, sometimes depending on politics, sometimes depending on
other demands. And there are never enough resources. And
therefore we, this Congress, in the Clayton Act established the
whole concept of the private attorney general to help enforce
government policy that the Congress sets.
Mr. Stearns. Okay. So are you saying that Congress should
legislate something or the SEC should institute brand-new laws
that make lawyers monetarily responsible in the event of
enabling?
Mr. Cohn. I think that the SEC probably has enough laws
now. They need to enforce them.
Mr. Stearns. So, is that your opinion, too?
Ms. Lidsky. I think they have enough laws to enforce in
terms of making lawyers pay. I think there should be more clear
disclosure rules.
Mr. Stearns. Okay. Dr. Smith, my questions are almost over.
I have attacked this questioning from the lawyer side, but let
me go from the accountant side. We also saw Arthur Anderson
dealing with Enron--that Arthur Anderson was involved because
they wanted more business. Is this same kind of problem that we
saw in the attorney/client also true in the client and the
accountant?
Mr. Smith. Absolutely. I think when Professor Lidsky was
talking about the challenge of practicing as a lawyer and
facing a situation where you need to maintain your
confidentiality with your client, but you are also trying to be
sure you do the right thing, I mean, that is an issue that the
accounting profession has to deal with.
I guess the question that came to my mind when Professor
Lidsky was talking was it seems like when the accountants fail
in their role, that they are being held accountable and they
are being sued. And, obviously, that is one of the problems--
well, one of the things that led to the demise of Arthur
Anderson. Frankly, I was wondering, well, doesn't the same
thing happen to law firms when they have a really difficult
situation like the one with Enron?
Mr. Cohn. The answer is yes. Yes, it is the same. And
Vinson & Elkins, Kirkland & Ellis, and other law firms are
being sued out of the Enron matter now.
Mr. Stearns. Okay. My time has expired. We will go--we have
a vote, but we are going to go to the ranking member for his
questions.
Mr. Towns. Thank you very much, Mr. Chairman.
Of course, even though we may not be able to legislate
morality, there is a role for government to establish legal
boundaries for what is acceptable behavior in business and
elsewhere. Would you all agree with that statement?
Mr. Cohn. Absolutely.
Mr. Smith. Absolutely.
Ms. Lidsky. [Nodding in the affirmative.]
Mr. Towns. Yesterday both the House and the Senate passed
the accounting standards bill and have now sent it to the
President for signature. And let me ask you, Professor Cohn,
Professor Lidsky, and, of course, Dr. Smith, whether you are
familiar with the legislation and whether you think it sets out
the appropriate boundaries for behavior in the business world.
Mr. Cohn. I think it makes a good start. It is good
increment--as Professor Coffee at Columbia said, and as is
reported in the paper, it is a good incremental move. I don't
think it goes far enough, but it is an important start.
Mr. Towns. When you say--could you sort of expound on that,
far enough, some of the things you think that should be in it?
Mr. Cohn. Well, I would certainly go back and reexamine
that 1995 Private Securities Act, because, if you take a look
there, it withdrew some very important threats against exactly
what happened. What we did learn out of the savings and loan
scandals is that you could go after law firms, and there were
many law firms who paid tens of millions of dollars out of
Lincoln Savings & Loan and other scandals like that. And we
also know there were a lot of private suits that were able to
help the SEC or the OTC there in its work. And yet, in 1995,
this Congress decided to pull that back and take that private
attorney general concept and reduce it in the securities area,
not in the antitrust area where it started, but the securities
area, even though the SEC in the Borack case told the Supreme
Court, we need this because we don't have enough resources to
do the job.
So I suggest there is a contradiction there that this
committee might address.
Mr. Towns. Next.
Mr. Smith. Well, the day I arrived, yesterday, of course
the stock market had a great day, and I think the general
public clearly reacted very favorably to the fact that Congress
was taking action. And people need reassurance. And I think, as
you were saying, Mr. Towns, the point that government may not
be able to legislate individual morality, but clearly it sets
moral direction by the laws that are passed, and government is
necessary to punish misbehavior.
But I guess I would like to go back and say that I just
wanted to agree with something that Mr. Cathy said earlier. I
think one of the tragedies in our country is that while people
here today have had the freedom and felt very comfortable
sharing their faith perspectives and showing appreciation to
Mr. Cathy's example--which I totally agree with--you know, I
think it is a shame that there is an educational system in
America where many educators feel that they are unable to share
their faith and feel that they are unable to have a Bible in
the school. And I think without those foundational principles
laid down early in children's lives, that you wind up--and the
incredible pressure to make money and to, you know, be as
successful as possible without regard to their character is a
huge problem. And I think that would be something that will be
great for this committee to address, along with the problems in
law and business and accounting.
Mr. Towns. Thank you very much. Do you have something very
quickly to add to this?
Ms. Lidsky. Yes. I would say that there is the possibility
of lawsuits against law firms, as Vinson & Elkins is finding
out. But the 1995 act took away the biggest hammer, which was
aiding and abetting liability for 10(b)(5) violations. And so I
think that that needs to be rectified.
Mr. Towns. Thank you.
Mr. Chairman, I would like to enter into the record the
accounting bill H.R. 3763, the Sarbanes bill: ``not later than
180 days after the date of enactment of this Act, the
Commission shall issue rules--''.
Mr. Stearns. So ordered.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] 81956.020
Mr. Towns. And the last thing I want to say before I yield
back, Mr. Chairman, litigation is fine, you know. But, you
know, it still doesn't get to the problem that I really--and
the way I think we need to get there, and that is that the
little people who have lost money, even though we litigate, it
doesn't solve that problem. They are still out of their money.
And I don't know what we do to be able to address that issue.
And do you have any comments on it? Because we have some
folks that have lost everything. They are at the age to retire
and they have absolutely nothing. I mean--and that to me is a
very dis- turbing thing, and I don't know how we get there. Do
you have any comments on that?
Mr. Cohn. Well, that is the hard one. And it goes back
decades and centuries where this has been going on, where greed
will end up robbing the little people. I have seen my own
retirement fund go down in the past year.
I suppose there is the possibility, though I am not sure
that I favor it, of in effect a securities fund. I pay to the
State of Mary-
land every year money into what is called the Attorneys
Securities Fund. So for attorneys who steal from clients, there
is some money to help them. That concept might somehow come
into this with some kind of an insurance, a premium paid on
every stock transaction. It is a possibility.
I haven't thought it through well enough to say I am even
in favor of it, but there are certainly examples, as we did in
the banking business. We did that, and the banks are insured up
to--each one of us, up to $100,000 per account. And that is
because of a premium that the banks pay into the FDIC, and that
might very well be a precedent to take a look at.
Mr. Towns. Thank you.
I yield back, Mr. Chairman.
Mr. Stearns. Thank you, my colleague. And again, we ask
your patience and indulgence. The subcommittee is going to take
a recess to go vote, and we will be right back.
[Brief recess.]
Mr. Stearns. The subcommittee will reconvene. The
gentleman, Mr. Deal, from Georgia is recognized.
Mr. Deal. Thank you, Mr. Chairman.
Mr. Cathy, we are not going to ignore you. I am going to
get back with you with some questions in just a minute, if I
have the time, but I want to pursue an issue that Professor
Cohn has raised, and also Professor Lidsky. And that relates to
the 1995 securities reform legislation. As I am sure both of
you recall, that was legislation that was bipartisanly
supported, and in fact required--and, I believe, was the only
instance in which we overrode the veto of President Clinton on
that issue.
And what led to that legislation was the extreme abuse that
had occurred by the plaintiffs trial bar with regard to what
many of us would perceive to be frivolous litigation and, in
fact, lawsuits being filed not for the purpose of trying to
convince a jury, but simply to try to leverage, and in many
instances to the extent to almost extort settlements from
corporations, of what probably would have ultimately proven to
be frivolous lawsuits. But obviously, because of the costs that
were associated with it, plaintiff's counsel knew that it was
going to probably settle because it was going to be cheaper to
do so.
That was the abuse that the reform of 1995 was aimed at. It
was a legitimate concern, one that I think is still--would have
been a legitimate concern had we not taken corrective action.
With regard to the ruling about aiding and abetting, it is
my understanding that the Supreme Court had ruled in the
Central Bank case that the statute did not confer the control
over aiding and abetting. And we simply did not, I suppose,
incorporate that and extend that in the authority granted to
the SEC. Perhaps that is something we might look at, but I
don't think it is fair to say that we took it out of the 1995
act. We did not. I don't think it was ever there by virtue of
the interpretation of the Supreme Court.
But let me ask you a related question, because I think this
is one that as a member of the bar, and as one who at age 23
was very excited when I was admitted to the bar, and I think
during my legal education was impressed with the fact that it
was an ethical profession and one that the bar itself would
hold you to a standard by virtue of the licensing process,
whether anyone else did or not.
As one who has been chairman of the judiciary committee at
my State level for a number of years before coming to Congress,
I was always concerned that we were granted a peculiar
situation by virtue of my State law and, I am sure, in some
other States. And that is, all other licensed professions were
regulated through our Secretary of State's office, with someone
assigned to monitor and control that activity. But the bar was
unique in that it was an integrated bar, and that by law was
assigned to the bar itself to do that.
And I think overall the bar has done a fairly good job of
disciplining and disbarring its members, but invariably--one of
the cases that I am familiar with--it has always been the
situation where the lawyer was in effect defrauding or
mistreating his client. It was rarely anything in a third-party
atmosphere where the lawyer and his client were mistreating a
third party.
Would either of you care to comment about whether or not
disbarment for that kind of collusive activity is being dealt
with by the bar through the disbarment process?
Ms. Lidsky. Well, first I wanted to say that the lawyer
self-regulation process does work very well for some things.
Lawyers are held to ethical standards by the bar that are very
high in some instances. So my condemnation of the bar's failure
in this area shouldn't be taken as a global condemnation of the
bar, because I do think they set high standards for lawyers in
many instances.
And indeed, 41 States have said that--at least that lawyers
may reveal fraud in some instances. But the problem is partly
the complexity of the kind of transactions that we are taking
about here--rarely are they going to go in after a
transactional lawyer as opposed to a lawyer in litigation. So
it is harder to find out about the fraud in the first place,
ordinarily. Rarely will they go after a transactional lawyer
who was in what is perceived to be a complicated situation in a
lot of these circumstances.
I can't answer your question specifically; you know, name
how many cases that the bar has pursued, but it is not their
primary focus. I can say that with confidence.
Mr. Cohn. You are absolutely right. There are very few
situations in which the bar--and we are speaking of the bar
here, we are speaking about something that is under the control
of the Supreme Court of each State. So, it is not entirely
separated from a public body. But it is very seldom that a non-
client will be able to have charges brought against a lawyer,
either civilly or in the disciplinary situation. There are
some, but not very many.
In the area of fraud, it is interesting to me that until
1983, the ethical rules said that a lawyer could disclose any
crime, and that included when fraud was criminal, a criminal
fraud. That was taken out of the rules by the ABA in 1983 at
the hue and cry of the corporate bar because of their dealing
with their clients.
In the proposals that are now the Rules of Professional
Conduct, the proposals of the Kutak Commission back there,
there was an explicit provision about disclosure of fraud,
fraud that would hurt the public. But at the house of
delegates, that was shouted out mainly by the corporate bar.
Now, curiously too, to me, when that went out to the
States, it was only a minority of States that followed what the
ABA proposed. Most States at least permit the public disclosure
of upcoming fraud--not past fraud, but upcoming fraud. And some
States such as New Jersey require it. They make it mandatory.
The SEC has on occasion enforced this type of requirement
on lawyers for public corporations on the theory that this
feeds into the reports that get filed to the SEC. That needs
more of that by either SEC having the resources to do it or
expanding the possibility of private litigation.
I am aware that the 1995 act was meant to eliminate or at
least deal with a very real problem of frivolous suits, which
is real. It is still real. That is not going to go away so
easily, either. But my personal view is that it also
established an atmosphere by which anything seems to go. And so
the act was--is a very important benchmark as to the atmosphere
that Congress has conveyed to the public and the corporate
public.
Mr. Deal. Mr. Chairman, would you indulge, and I would just
make a very brief concluding statement. I think this has been
very revealing and I think a good discussion. I would hope that
Congress has corrected any misinformation or misinterpretation
that was sent anywhere by virtue of our actions this week. And
I think in fact we have done exactly that.
I would simply say with regard to professional status of
the bar in terms of self-regulation and licensing and the
deferment that has being given by the States to them, that I
would hope the ABA will go back and reexamine that disclosure
rule, and I would also hope that we would see the bars of the
States taking their own initiative, maybe even in the absence
of an outside complaint, when by virtue of disclosure of
information it becomes very obvious that something ethically
was wrong. I think if the bar doesn't begin to do that on its
own initiative, instead of waiting for the complaint process,
then I think, very well, it is going to lose its peculiar
ability to regulate itself that has been given to it.
But thank you very much. Thank you, Mr. Chairman.
Mr. Stearns. Thank the gentleman.
The gentleman from Nebraska.
Mr. Terry. Thank you, Mr. Chairman. And as a member of the
bar from Nebraska, it has been an interesting discussion. And I
agree with Mr. Deal; unless the bar associations are willing to
do this sua sponte, without complaint, I am not sure how we can
ever go after the lawyers who do this, because they are
incognito; we don't know who they are as a shareholder. We
can't file a specific complaint as required by most bar
associations across the State. You just can't say, ``I think a
lawyer has been bad'' to initiate an investigation into whether
there has been an ethics violation.
So it has been an interesting violation, but I want to
raise it from the lawyer level to the CEO level within the
corporation, and ask in a philosophical question here--well,
not so philosophical. But we are now mandating, and soon
financial disclosure reports have to be filed with the
signature of the CEO affirming the authenticity and
truthfulness of the information therein.
I just wonder, though, philosophically--waxing
philosophically here, without a code of conduct, is this enough
to change behavior? Do you think this goes far enough? Will the
fact that we have just coupled them with mandated jail
sentences change behavior?
What are your thoughts on this mandated signature and
affirmation? And I will--anyone on the panel; it is not
specific to anyone.
Mr. Cathy, since you or somebody in your position has to
sign on that, what are your feelings?
Mr. Cathy. Well, you know, Chick-fil-A is still a private
company, and we have a lot of privileges that I have. And I am
sometimes asked, why don't you go public? That is the way to
make money. That you can sell, you know, many, many times of
what the company is worth and you can walk off with a gold mine
in your hands.
But one reason I don't go public is, No. 1, is I might lose
my job. Second, is if I had some friends and widows and so
forth to invest their life savings in my company, I would feel
personally responsible for that. I would think I ought to be
the loser before they would be the loser. I think they should
sacrifice--whoever might be identified as guilty--sacrifice
what material things they might have to rectify some of the
damage that has been done for those that cannot help
themselves. And I would feel--that in itself led me to be able
to borrow money that I needed to grow at the pace I wanted to
grow, so I take the personal liability. And I feel that any CEO
should take the responsibility to take care of that one who is
a stockholder. And they should be making the calls, and then we
should be--they should be protected, and that right might be
right. And certainly we put too much confidence in signatures
of maybe the chief executive officers and the auditors and so
forth that has become wealthy because of some of the schemes
that have been invented by those where pressure is put on them,
the bottom line, the bottom line. It doesn't make any
difference on how you reach it, but let us keep an eye on the
bottom line.
Mr. Terry. Yeah.
Mr. Cathy. And so we are more interested in people than the
profits.
Mr. Terry. Well, and you are a man of integrity and honor.
And it is amazing that we have heard testimony in this room of
CEOs that are willing to take all the credit when the company
was going up, and had absolutely no knowledge of anything going
on when it was going down. Which just baffles me because, as a
captain of a ship, you take responsibility for the actions of
your crew. And it is with great dismay that we have heard that
type of testimony here.
Any of you other--Professor Lidsky, would you like to
comment?
Ms. Lidsky. I think a signature requirement is an excellent
idea. If somebody put their name to something, there is a
formality there that makes them really think about what they
are doing. And truly dishonest people will still be dishonest
and be willing to put their name on it, but people--it will
make them think twice and make them really think about what
they are doing. Especially with lawyers. There is a culture
amongst lawyers that when you sign your name, you had better
have read what you signed and understood it and know what it
was about.
And I think that that would be an excellent formality that
would make people really think about the significance of what
they do before they do it.
Mr. Cohn. And it has worked from the standpoint of the
liability of people who sign prospectuses when stock is being
offered on the market and--with their personal liability. So
there is that precedent out there that, since the Securities
Acts of the 1930's, has built a very good market.
Mr. Smith. I would like to interject one thing on that. I
think the general public needed reassurance that our elected
leaders were taking the problems seriously. And so I can
appreciate the legislation that has recently been--that has
already been enacted and that is coming down the line.
But I would like to say, when I was an accounting student
roughly 30 years ago, one of the things that is taught in all
the business books and in the accounting books is that the
financial statements are the responsibility of management. And
so I think that there has always been that responsibility, and
management could have always been held accountable.
I am always impressed when I get to meet legislators like
yourselves, just what great people of integrity and wanting to
do the right thing I see, and I really appreciate your efforts.
But I guess you all know this: There is always that balance
between when you have too much legislation. And sometimes I
wonder if the legislation we had before the current economic or
stock market crisis had been really rigorously enforced, maybe
things would have been better. And you all have mentioned the
ethics rules that lawyers have to face and deal with, and the
idea that was shared that, if the bar did a better job of
enforcing what is already there, maybe that would have helped
us avoid the current dilemma.
Mr. Stearns. I thank the gentleman. I think what we are
going to do is--we have a vote, so I think we are each going to
go around and probably ask one question, so we can get through
and let you go so you don't have to wait for us.
Dr. Smith, do accounting programs have a mandatory
accounting ethics course?
Mr. Smith. No, they don't.
Mr. Stearns. And, Dr. Cohn, they do, though, in the law.
Mr. Cohn. Absolutely, since Watergate.
Mr. Stearns. Since Watergate. And do you think, Dr. Smith,
based upon all these problems that we have had, that the
accounting industry should have a mandatory ethics course in
the program?
Mr. Smith. I don't know that a single course is absolutely
necessary. I think ethics should be integrated into the
existing courses. I teach ethics in my courses. Every course I
teach, I integrate ethical issues into some of the other issues
that we discuss, and I have 1 day in particular that I
specifically talk about it.
Mr. Stearns. When an accountant gets his degree, is there
an oath he has to take?
Mr. Smith. Yes.
Mr. Stearns. And, obviously, for the law there is an oath.
And is this oath, do you think, encompassing enough that it
makes an impression, like Mr. Deal mentioned when he took the
oath as a lawyer? I have never heard of the accountants talk
too much about this oath.
Mr. Smith. I think that is something for us in accounting
to look at and think about.
Mr. Stearns. Mr. Cathy, my last question is--I had the
opportunity to run a very small operation, not like yours. But
I notice I had sometimes employees would display unethical
behavior; there would be stealing and other things like that.
How do you create a climate of high morality and ethics? I know
it starts from the leader down. But do you have a code of
ethics that you have the employees read? I mean, what do you do
when somebody, for example, has an ethical problem? When you
encounter an ethical dilemma, what do you do?
Mr. Cathy. We used to place on cash registers the
commandment, ``Thou shall not steal.''
Mr. Stearns. Right. Okay.
Mr. Cathy. As a reminder to these individuals that you
shouldn't steal. But we have some of that in spite of all the
advantages we offer. We think maybe some try to discover a new
way to do it that may be more profitable. But I think it starts
from the top, as you say. We set the tone. And we think all of
our operators know what is expected of them. They are expected
to be honest, although some of the operators from time to time
slip up and take a little bit more money than what they are
getting. You know, Chick-fil-A is getting rich, I need the
money. So they excuse themselves----
Mr. Stearns. Rationalize.
Mr. Cathy. [continuing] for taking things that don't belong
to them. Going back to the kindergarten situation. There are a
lot of things, but you can't teach character unless you have
got something to start with.
So if a person is going to lie, he is going to steal. So
they go hand in hand. I have never seen anybody that has stolen
that couldn't justify their actions by saying that they had a
sick mother at home and didn't have any money and they needed
that, or food, or other things that they can put up as an
excuse. But they all--they should be accountable. And we don't
mind discharging a person if we test the test. But I realize
that others, in spite of all opportunities you offer, that is
not good enough for them, they need a little bit more.
Mr. Stearns. Thank you, Mr. Cathy.
And my ranking member.
Mr. Towns. Thank you very much, Mr. Chairman.
Let me begin by saying, Mr. Cathy, listening to you is a
breath of fresh air. I want you to know that. Because when we
look at where we are today and what is going on, and then to
hear you and to listen to the way that you have gone about your
business, I tell you, it makes a major difference. Your
situation is very unique than what we see in here today. Let me
just ask this question, Mr. Chairman--and I will conclude--to
Professor Cohn, and I guess Professor Lidsky.
Are you familiar with section 307 of the Sarbanes bill that
just passed the House and the Senate and that the President has
indicated he will sign into law? That section 307 of the
Sarbanes bill requires the SEC to adopt rules requiring outside
counsel to report to chief legal counsel or chief executive
officer of a corporation any material violation of security
laws or any breach of fiduciary duty. If neither of those
officers take appropriate remedial or disciplinary actions, the
outside legal counsel must then notify the audit committee or
another committee comprised of independent directors of the
board for that corporation.
Do you believe that this provision will help outside legal
counsel to exercise more independent judgment in these issues?
I would like to get Professor Cohn and Professor Lidsky to
comment on that.
Mr. Cohn. I believe this is very helpful because it makes
it clear and specific. However, this is now included in Rule
1.13, which every State has adopted, so that it is there now.
That obligation is there now. I am interested to know what the
SEC will do about enforcing it. If this gives the SEC
enforcement power for what is now 1.13, then it is--in my
judgment an advance forward and it is a good move. If the SEC
doesn't enforce it and it just sits there, it is no more than
1.13 is now.
Ms. Lidsky. I am in complete agreement. It is excellent, in
the sense that it reiterates the duty under the current ethics
rules to ascend the corporate ladder, to try to prevent a
client who is trying to insist on committing a fraud. And it is
nice, because it gives you enforcement potentially. But the
question is, is anybody really going to enforce it. I think it
can't but be helpful.
Mr. Towns. Let me--just a last comment, very quickly, Mr.
Chairman.
You know, when you think about disbarment, you think about
all these other things, but do you feel that severe penalties,
more severe penalties--you know, as Mr. Cathy pointed out, that
if you just take whatever they have and sort of give it back to
the people that they have robbed from--you know, do you support
that philosophy, having more severe penalties?
Mr. Cohn. I think one thing that might be examined is
whether the SEC now has the power to order a disgorgement of
all profits made under an illegal situation or a fraudulent
situation. And not disgorgement into the Federal Treasury, but
back to the people who have been harmed. In some States you can
get disgorgement and repayment to the people who have been
hurt. And if the SEC does not have that power, I suggest that
that is something this committee might take a look at.
Mr. Stearns. Thank the gentleman. And last, to wrap up, the
gentleman from Georgia, Mr. Deal.
Mr. Deal. Thank you, Mr. Chairman. Again, thank you for
having this hearing and for inviting this very distinguished
panel. I am not going to ask a question, mainly because we have
got only a few minutes left on this vote that is still pending
right now. But particularly to all of you, and especially to
Mr. Cathy and your son and your grandsons, we thank you for
being here today setting the kind of example that all of us
believe is the example that Corporate America should hear. And
I especially like your slogan, ``Eat More Chicken,'' because,
as you know, my congressional district in north Georgia is the
No. 1 chicken producing, poultry producing district in the
entire United States. And we appreciate what you do for the
poultry industry as well as what you do for setting the kind of
corporate example.
You know, we just can't pass up those opportunities to plug
what is happening in our district and our State. And we are
proud of you, and I especially appreciate the fact that you
would be here today.
Thank you, Mr. Chairman.
Mr. Stearns. You are welcome. And that is an unpaid
political advertisement.
Mr. Cathy, Dr. Smith, Professor Cohn, and Professor Lidsky,
thank you very much for your patience. And the subcommittee is
adjourned.
[Whereupon, at 12:43 p.m., the subcommittee was adjourned.]
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