Testimony of: Daniel B. Walsh
The Business Council of New York State, Inc.

Before the
Assembly Committee on Corporations, Authorities and Commissions,
Senate Committee on Investigations and
The Senate Committee on Higher Education
September 27, 2002

Chairman Spano, Chairman LaValle, Chairman Brodsky, and other distinguished members of the Legislature:

We appreciate the opportunity to participate in these very important hearings to address some of the issues you raised regarding corporate responsibility.

You correctly state in your invitation to testify that corporations are created by state law and their powers and duties are prescribed by state law. In New York State, those powers and duties are prescribed in the Business Corporation Law. We believe these laws have served corporations, shareholders, employees and other communities well.

Its provisions have been interpreted by the courts over many years and provide guidance to the parties that fall under its jurisdiction.

Today, I would like to talk about another court - the court of public opinion. Corporations are also held accountable in this court.

Our capital markets are built upon trust. Once trust is undermined, the foundations of our free-enterprise system suffer a loss of confidence.

There is no more important mission to the business community than restoring trust. It is vital that the American public believe, as I do, that the vast majority of corporations are run by honest, dedicated, and ethical leaders who are striving to do the right thing for their corporation, their employees, their shareholders and the communities where they do business.

The question before us is what we can do to restore that trust.

The United States has the best corporate governance, financial reporting, and securities markets systems in the world. New York, as the home of many of the leading companies in the United States and the world, is at the center of those systems.

We have been shocked and appalled at the substantial, and in some cases massive, corporate wrongdoing that has been reported over the last year. We believe these actions are unacceptable breaches of the public trust and clear deviations from the ethical norms of behavior that must guide the leaders of America's public companies.

In response to these events, the U.S. Congress, the Securities and Exchange Commission (SEC) , the major stock exchanges, and the business community have moved swiftly and forcefully to produce broad initiatives to improve corporate practices and to implement far reaching reforms in the areas of corporate governance, regulation of the securities markets, and oversight of the accounting profession.

I would like to spend the balance of my testimony describing the more significant reforms.

The Role of Congress: The Sarbanes-Oxley Act of 2002

Without question, the most significant reform is the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act was passed overwhelmingly by Congress and signed into law by President Bush on July 30, 2002. This law represents the most sweeping reform of corporate governance, securities laws, and the accounting profession since the initial passage of federal securities laws in 1933 and 1934. This law applies, in almost all respects, to all public companies and the accountants who audit their financial statements.

The legislation instituted a wide range of reforms, from oversight of the accounting profession to the information public companies are required to file with the SEC to enhanced civil and criminal penalties and enforcement of the securities laws. Specifically, the Sarbanes-Oxley Act.

The role of the Securities and Exchange Commission

The SEC has an important role in implementing the provisions of the Sarbanes-Oxley Act, and it has undertaken a number of initiatives to promote corporate governance and accounting reform. It also has intensified its efforts to protect the investing public by vigorously exercising its broad enforcement powers under the federal securities laws.

Before passage of the Sarbanes-Oxley Act, the SEC implemented "real-time" disclosure rules and required CEOs and CFOs to certify their companies' most recent SEC-filed financial reports. Within weeks of passage of the legislation, the SEC promulgated rules requiring CEOs and CFOs to certify the accuracy of their companies' SEC reports on an ongoing basis. SEC also created rules to enhance and expedite reporting of the securities transactions by corporate insiders. The SEC is scheduled to release rules addressing a number of other areas in the near future. And it must appoint in October the members of the auditor oversight board required by the Sarbanes-Oxley Act.

The role of the stock exchanges

The stock exchanges also have been very active in promoting corporate governance reform for their listed companies. At the request of the SEC, both the New York Stock Exchange and The Nasdaq Stock Market have conducted comprehensive reviews of their corporate governance listing standards and proposed significant enhancements.

The New York Stock Exchange convened a Corporate Accountability and Listing Standards Committee to recommend comprehensive changes to the NYSE's corporate governance listing standards. These changes, which will apply to all companies listed on the NYSE, were approved by the NYSE board of directors and filed with the SEC in August. They will take effect upon approval by the SEC following a public notice and comment period. The reforms require:

The NASDAQ Listing Council also developed a set of corporate governance reform proposals, which have been approved by the NASDAQ board of directors. The proposed rule changes would require

The role of the business community

The business community also has responded with reform proposals and guidance on best corporate practices. The Business Roundtable, an association of chief executive officers of leading corporations, many of whom are active in The Business Council, has long been recognized as an authoritative voice on matters affecting American business corporations. They recently updated their previous statements on corporate governance with the publication of its Principles of Corporate Governance (2002).

These guiding principles are intended to assist corporate management and boards of directors in their individual efforts to implement best corporate governance practices. The principles call on companies to adopt a number of best practices in corporate governance, including:


These reforms, as well as those being pursued by the Financial Accounting Standards Board and others, address all aspects of corporate governance and financial reporting, and are intended to bring an end to corporate wrongdoing. For those to whom it was not obvious before, it is now abundantly clear that anything less than total honesty in corporate financial reporting and ethical conduct will not be tolerated.

As you consider additional potential reforms applicable to New York companies, please keep in mind that additional reforms on a state-by-state basis risk a patchwork of uneven and confusing standards for companies already undergoing extensive efforts to ensure compliance with a large number of changes. New York-specific changes also could make New York a less attractive place to incorporate and do business, and could inhibit the ability of New York companies to compete, create jobs, and generate economic growth for our state.

We also urge you to keep in mind that despite the reports of corporate misconduct over the past six months, the vast majority of businessmen and businesswomen in this state and across the country are honest, hardworking individuals who are committed to generating economic growth through ethical means. Moreover, the substantial reforms that have been, and are being, mandated by the US Congress, the SEC, and the stock exchanges have positioned the United States and New York State, in particular, to retain their positions as the best, and most honest, places in the world to invest and to do business.

Thank you.