Speech by SEC Chairman:
'Plain Language and Good Business'
Keynote Address to the Center for Plain Language Symposium
by
Chairman Christopher Cox
U.S. Securities and Exchange Commission
Washington, DC
October 12, 2007
Thank you, Bill [Lutz, Board Member of the Center for Plain Language],
for that generous introduction. You’ve had an exciting day here thus far,
and I'm very pleased to be included in your program.
I'll get right to the point, because after all, this is a plain language
conference. I've been asked to “discuss the need for plain language in
promoting transparency.” Well, the need is rather obvious. If the promoters
of something called a "plain language" conference can't think of a better
word than "transparency," we all need help. I think the basic idea is to
make things clear. So right off the bat, I'm going to chuck out the $10
Latinized words with four or more syllables, if there is a good old
Anglo-Saxon one with just one or two syllables that's handy.
Disclosures intended for retail investors should be concise and clearly
written. In prospectus and proxy writing as in other areas of life, it's
usually the case that the more profound something is, the fewer words it
takes to say it. The most important thing I ever said was just four words —
and my own wife beat that record by a mile. I said, "Will you marry me?" and
she said, "Yes."
So, the fact that I'm scheduled to speak for 20 long minutes pretty much
destroys my chance at being profound. But I do promise that, before I'm
finished, I will say something very important to all of you.
Making investor communications easier to read and understand is going to
be a big job. If this effort is to succeed, we're going to have to change a
lot of ingrained bad habits. It's going to have to be a sustained national
effort — and it's going to need real leaders. Bill Lutz, the Center for
Plain Language, and all of the people in this room fit that description.
With the prototype executive compensation section of a proxy statement that
Bill, Peggy [Foran of Pfizer], and Gordon [Akwera of Addison] have unveiled
today, you've helped provide a concrete example of what a little bit of
creativity and a lot of elbow grease can produce. And Bill, along with
Madeleine [Yates of Merrill Lynch] and Max [Dietshe of Addison], have done
an outstanding job this morning of demonstrating how plain English and the
visual presentation of information can improve life for investors.
Just now, Thia Reggio of Siegal+Gale told us how good intentions can
block the road to clear communication. Possibly one way to overcome those
roadblocks is to ask ourselves: how would one of America's plain-spoken
cowboy heroes say it — John Wayne, for example, or Clint Eastwood? Imagine
one of them behind your desk. Their paperwork would be just like their
speech: clear and simple. It may be hard to keep that vision in mind when
you're responding to government rules and regulations written by thousands
of pen-pushers at some 60 federal agencies, issuing more than 1,800 rules a
year, in so many billions of words that the Code of Federal Regulations is
now more than 130,000 pages thick. But let's stick with this idea for a
minute.
Remember Clint Eastwood's classic role in Dirty Harry? For those
of you here who are too young to have seen every rerun from the 1970's on
AMC, suffice to say that Inspector Harry Callahan didn't waste words.
One of the most famous scenes from the movie has the wounded bad guy
trying to decide if he should draw his gun on Callahan, or if Callahan might
have one shot left. Harry Callahan just squints at him, steely-eyed, and
says:
"I know what you're thinking. Did he
fire six shots or only five? Well, to tell you the truth, in all this
excitement, I've kind of lost track myself. But being as this is a 44
Magnum, the most powerful handgun in the world, and would blow your head
clear off, you've got to ask yourself one question: Do I feel lucky?"
Not much question that Dirty Harry got his point across. One of the
reasons that all of us, as moviegoers, admire Harry's delivery is that we
know it's actually difficult to speak that directly. In fact, if those same
lines of dialogue were to appear in your average prospectus or proxy
statement, they'd probably sound more like this:
"I imagine that you are harboring
significant uncertainty concerning the precise number of times that the
hammer of this particular multishot firearm was cocked, its cylinder was
advanced, the hammer was then released at the rear of its travel, the round
in the chamber was fired, and the cylinder was then advanced once again —
and specifically whether the exact figure is six, or possibly only five.
Indeed, given the ambient commotion, my preoccupation with the need to make
multiple, simultaneous and consequential decisions with alacrity, the
surrounding high-decibel acoustic percussion, and the substantial
ramifications of the firearm having already been discharged multiple times,
I myself am experiencing difficulty in quantifying the discharges with
exactitude. But inasmuch as the instrument in question, having been
manufactured by NASDAQ-listed Smith & Wesson (stock symbol SWHC) with a
horizontal barrel dimension of 8 3/8" to propel a projectile with a diameter
of nearly 1/2" at a velocity of over 1,000 feet per second and an energy of
more than 1,400 joules, is arguably the most powerful firearm in the world
(the uncertainty being a function of the particular metric that one might
choose, such as overall terminal ballistics, external ballistics, or some
combination of other factors), you should be advised that were the
projectile from this instrument to strike you in the region between the apex
of the cranium and the base of the lower mandible, it would completely sever
this entire portion of your anatomy, and in addition transport it a
considerable distance from its original location. As a result, it is
appropriate that you pursue a specific and directed line of inquiry and
self-examination: viz., in view of all the facts and circumstances,
and giving due weight to the relevant risk factors, is it your considered
judgment that you are more likely than not to be relatively fortunate?”
Sadly, it was all too easy for me to write that ... the words seemed to
flow quite naturally. Too many years of 10-K writing, I guess. The truth is,
we've all got some distance to travel — so let's get started, with alacrity.
First, let’s recap the bidding on the subject of why we’re here. Why is
cutting the fat out of investor communications important? Well, for
starters, none of us likes to have our time wasted. And that's what verbose
and hyper-technical writing does — it wastes our time. Since investors in
particular tend to search for rational economic tradeoffs, rather quickly
they decide they won't put up with impenetrable disclosure documents. So as
the legal jargon spreads across investor communications like weeds in a
garden, increasingly the investors just stop reading it.
Of course, even the chore of discarding unwanted documents that come to
you via the Postal Service or your email can be time consuming. That’s one
of the reasons that our investor protection mission includes stamping out
financial spam that’s clogging your inboxes. We’ve started an aggressive
program of shutting down trading in companies whose stocks are being touted
through spam. And the results have been impressive. Not only have monthly
complaints to the SEC about stock spamming fallen from over 220,000 per
month as of last December to less than 70,000 last month, but an independent
assessment by Symantec, the Internet software and services company, has
credited the SEC with cutting financial spam nationally by 30%. Since time
is money, we’re committed to giving investors their money back.
In addition to helping investors quickly focus on what’s important, and
treating their time like the precious asset that it truly is, putting
disclosures for retail investors into plain English is important for another
reason. It exposes the truth about a company to the light of day.
George Orwell made the point best: muddled language is both the result
and the cause of muddled thought. And sometimes, kicking a lot of dust up in
the air is exactly what cover-up artists intend to do. One need look no
further than the most notorious corporate scandal of our time, Enron, to
find an example of legalese and jargon being used to hide wrongdoing in
plain sight.
Most importantly, when investors and analysts can use their time more
productively and when information is presented clearly, every market
participant will be able to make better decisions. Overall, price discovery
will be more efficient. The more direct sunlight that shines on every public
company, the more honest our markets will be, and the stronger will be
investor confidence.
These are all good reasons to promote plain English. That's why the SEC
has plain English initiatives underway across the board — in mutual fund
disclosure; in offering documents and periodic reporting; and even in
Sarbanes-Oxley compliance, where in the next few days you can expect to see
a user-friendly plain English brochure for small businesses that introduces
the subject of how to conduct management's assessment of internal controls
under the new, streamlined guidance from the SEC.
I want to point out that this is not a "do as I say, not as I do" SEC
campaign. We at the agency have to step up as well. We have a responsibility
to purge our rules of bad writing. And since we’re all in this together, we
don't need the SEC to be our national nanny when it comes to good English.
But we do need the SEC, and every public company in America, to work
together to produce annual reports and proxy statements that investors
actually want to read.
If we were to look at the SEC as a company, one of its most important
product lines would be disclosure documents. After all, it's our rules that
result in proxy statements and annual reports getting mailed to investors
across the country. The reason we are in this business is that we firmly
believe informed investors will make better choices. But in order for
investors to make better choices based on disclosure, they have to read it.
If investors don't read the disclosure documents — if instead, they just
throw out the proxy statement or the annual report when it comes in the mail
— then the entire purpose is defeated.
We have some empirical evidence that in fact, most retail investors are
throwing away the disclosure documents that the SEC requires, rather than
reading them. When your customers routinely throw your product away, you’ve
got a problem. There can be many reasons that our customers might be
dissatisfied, but the most obvious is that investors are busy people. Wading
through dense legalese isn't their day job, and they ordinarily just don't
have time for it. Once again, if time is money, then poorly written proxy
statements are wasting one of investors' most important assets.
At the SEC, we're doing everything in our power to correct that. We want
to make sure that public companies take the same care in making their
investor materials readable that they apply to sprucing up their catalogs
and sales materials so customers will be interested in buying their
products.
This is one area where the SEC will be able to measure the effects of our
efforts. Under the leadership of Kristi Kaepplein, the Director of the
Office of Investor Education and Advocacy, the SEC will soon conduct a
baseline survey of America's investors to find out whether they find proxy
statements, 10-Ks, and other SEC-required disclosure documents to be useful.
One of the questions we will ask is this: when your proxy statement comes in
the mail, do you spend more than three minutes reading it? Or do you just
throw it away? Periodically, we will go back into the field and ask that
question again. Over time, we will want to see a decline in the percentage
of investors who routinely put SEC documents in the trash.
So, how did it get this bad? Well, it didn’t happen overnight. It took
decades. Years ago, annual reports and proxy statements were a lot less
cumbersome than they are today.
When securities lawyers first drafted these documents in the 1930s, they
started with essentially blank slates. Today, they have seven decades of
judicial common law, regulatory interpretation, congressional enactments and
industry statements to ponder. Increasingly in recent years, the threat of
litigation — which can instill a healthy fear into managers of other
people's money when conscience is lacking — has also had an unhealthy
influence when it comes to the way companies and their lawyers write
disclosure. That's because slowly but surely, they have shifted the purpose
of their drafting from informing investors to insuring against liability,
writing for the plaintiff's lawyer instead of the shareholder. In the
process, the jargon of lawyers has taken over.
The lawyers' understandable concern, of course, extends not only to the
full disclosure of all material facts — in that the SEC wholly concurs — but
equally if not more strongly to the recital of magic words from court
opinions, rules, and regulations that have definitively addressed some topic
or other. I think we've all observed that there is a near-religious
scrupulousness in this adherence to "legally correct" boilerplate language.
If a competitor in the same industry has faced a disclosure issue that has
survived a court test, by all means someone in the company's legal
department will want to mimic the very phrases.
While it’s certainly true that securities market participants can realize
substantial benefits from computer and information technology, some of the
people who draft disclosure documents are over-using one particular feature
of their word processors: the cut and paste.
Choosing words to describe the company's business that no other company
has used in exactly the same way might seem indefensibly risky to some
securities lawyers. But isn't it also risky to be a slave to boilerplate
disclosure? While undoubtedly the model language used by others may have
served at one time as a sturdy defense in court, that same language might
not be the best way to describe another company in a different situation.
Each company's circumstances are different, and the cut-and-paste strategy
can easily backfire — for example, where it causes the drafter to omit
material information.
The truth is, companies can better control their litigation risk if they
present material information to their investors in plain English.
And while I’m exhorting public companies to do a better job of writing in
plain English, let me quickly add that we at the SEC have a responsibility
to make our rules and explanations clear and understandable. That’s why,
from the forms issuers file to the accounting standards they use, the SEC is
working to be a plain-English leader. Across the board, we're waging an
all-out war on complexity. Just as companies are beginning to work to ensure
their periodic reports and proxy statements are more clearly written, we too
are dedicated to making disclosure more useful to investors.
An outstanding example of this is our new executive compensation
disclosure regime, and the staff's ongoing review of how companies are
faring with it. In the past, executive compensation was among the most
complicated subjects for investors to sort out, and it presented some of the
biggest challenges when it came to analyzing and comparing data. We enacted
our new rules to address this problem, so that investors could see clearly
how the executives who work for them are paid.
When we unanimously approved the new rules, each of my fellow
Commissioners and I expressed high hopes that companies would provide
investors with more useful disclosure. The most dramatic change in the new
rules was that there would be one number — a single figure — reflecting the
total compensation that the top executives earned in the prior year. The
number captures not just salary but also the many forms of non-cash
compensation including perquisites, retirement benefits, and contingent
rewards such as options that make up each executive’s pay. This new total
figure, which makes comparisons far easier than ever before, is accompanied
by comprehensive tables that clearly display each element of the total pay
package.
Another important feature is the new narrative discussion of the
company’s compensation policies. The Compensation Discussion and Analysis
offers an opportunity for the company to cast aside the boilerplate, and
explain to the shareholders the how and why of its approach to executive
pay. The new rules explicitly require that this be written in plain English
to provide the necessary overview and context for the numbers in the tables
that follow it.
At the SEC, we knew that this year's executive compensation disclosure
would look different from past years, and we were confident it would be
better. We also recognized that writing it for the first time might not be
easy, since there was no pattern to follow. This, of course, also
represented an enormous opportunity to introduce genuinely plain English
disclosure, since the lack of precedent would give companies an opportunity
to start from scratch. There's simply no boilerplate available.
To make sure that we seize this opportunity for investors, and that
legalese and jargon do not find their way into the new disclosure, we
decided to undertake an across-the-board review of the first year's
experience under the new rules. This has also offered a way to provide
companies with the feedback they deserve as we all work together to
implement these sweeping changes to the disclosure of executive
compensation.
In the spring of this year, Commission staff from the Division of
Corporation Finance began a systematic review of the executive compensation
disclosure of 350 public companies. Their aim was to evaluate compliance
with the new rules, and provide guidance to companies on how they might
improve their disclosure. Over the past two months, the staff issued
individual comment letters to each company in the sample.
Reviewing 350 proxy statements for compliance with a new set of rules is
a big job, of course. Over a dozen staff members worked full time on this
project for many months, and the reviews are still ongoing. But we thought
it was a valuable use of the agency's time and resources, because making
this disclosure truly useful is very important to investors. Many of the
staff members who performed the reviews are here today, and I want to
publicly and personally thank each of them for their important work.
The report from the staff on their findings is overall very positive.
They've found that in the very first year, most companies have met or
exceeded the Commission's high hopes for better disclosure. They have
provided investors with the most informative executive compensation
disclosure ever. For the first time, investors can quickly see what each
executive's total compensation is, and they can compare these figures from
company to company. The disclosure of perquisites, which has been so spotty
in the past, is clear and robust. Stock options, restricted stock awards,
and other forms of equity compensation are finally understandable. Director
compensation, about which investors used to know very little, is now far
more detailed and complete. The new and improved tabular form has made the
presentation easy to understand and quickly readable. Even such previously
obscure features of potential executive pay as termination and
change-in-control arrangements are now being clearly described, with many
companies presenting this information in tabular or other more readable
formats.
I understand that many companies have had to expend more time and
resources this first year to comply with the new rules. It is a credit to
these companies, and a great service to investors, that most firms have
taken the new rules very seriously. The staff review has found clear
evidence of this high level of effort in many of this year's proxy
statements. These overall very positive findings provide an opportunity for
me to thank our nation's public companies and their advisers for their hard
work.
Still, although the learning curve will certainly flatten as we go
forward, this year it was steep. And as the staff noted in its comment
letters, there are specific disclosure areas where many companies can do
better. These comments are summarized in a report that the Division of
Corporation Finance posted this past Tuesday on the SEC's website. For the
practitioners in the audience, I recommend that you read the report if you
haven't already. Meanwhile, I want to discuss it very briefly and note a few
of the staff's observations.
There were two principal themes to the comments. One is substantive, and
the other concerns the manner of presentation.
First, the substance. The staff found that in many cases the Compensation
Discussion and Analysis could do a better job of explaining how
particular levels and forms of compensation were determined. There is also
need for clearer explanation of why companies pay what they pay. This
doesn’t necessarily mean we need longer narratives. A company can provide
more informative analysis while at the same time shortening the disclosure,
as our Inspector Callahan example illustrates. Brevity and clarity are
hardly mutually exclusive aims, as Mark Twain so wryly observed when he
apologized for the length of one of his own pieces of correspondence by
saying, "I'm sorry this letter is so long, but I did not have time to make
it shorter." What's needed in the Compensation Disclosure and Analysis is
incisive disclosure of the key facts and figures, and genuine analysis of
the how and why. That will make what the investor gets both educational and
succinct.
Just using plain English would shorten many companies' CD&As. That's why,
when the Commission approved the new executive compensation rules, we made
it a point to include new plain English rules that specifically apply to
these disclosures. I recommend to the practitioners here that you read the
full text of those rules when you get a chance. And while a talk on the
subject of plain English shouldn't get bogged down in legal citations, this
one is important enough for me to identify: Our plain English requirements
for executive compensation can be found in Exchange Act Rule 13a-20. While
this rule doesn’t specifically apply to other disclosures, the preparers
among us should also consider applying its principles in any document you
draft.
A shorter CD&A being the happy result of writing in plain English, it's
important quickly to add that brevity alone is not the full measure of
quality or usefulness to investors. Substance matters. A shorter narrative
that lacks important information and qualitative analysis isn't better than
a slightly longer one that's more complete and written in plain English. If
your compensation policies are highly complex, or your decision-making
process is truly Byzantine, then it's going to take a few more paragraphs,
tables, or charts to provide a satisfactory explanation. In the end, while
keeping it short is important to the overall goal of getting investors'
attention focused on what truly matters, it's not the number of pages that
counts — ultimately it’s the quality, readability, and usefulness of the
disclosure.
Which leads us directly to the second theme, the manner of presentation.
Presentation matters, too. The first and most essential ingredient of
presentation is the subject we're focused on here today, plain English. But
beyond that, the visual presentation of quantitative information is also
enormously important in getting the compensation message across to investors
clearly and understandably. By organizing data in tables, graphs, and
pictures, companies can help the reader to more easily grasp the key aspects
of what might otherwise be just a jumble of numbers. In the best examples of
doing this well, companies used a layered approach, with the CD&A providing
the top layer of context for the progressively more detailed tabular
information that follows. This layered approach is particularly suitable for
Web-based disclosure, which will be increasingly important as companies use
the new e-proxy rules. It will enable investors to click through to the
level of detail that suits them.
In its report, the staff noted that many companies made good use of
graphics to explain their particular executive compensation programs. The
staff found these graphics to be, most often, quite helpful. They issued
comments on the graphics and the more creative approaches, including
additional tables, only in limited circumstances — such as asking companies
to make clear that their custom presentations aren't substitutes for the
information the rules require.
It's precisely because the visual presentation of information is such a
key element of making disclosure understandable to investors that what Peggy
Foran, Bill Lutz and Gordon Akwera have done with their prototype disclosure
based on a re-working of Pfizer's proxy statement is so important. You’ve
shown us some truly creative ways that a company might use graphics to
present executive compensation information more clearly and understandably.
Your imaginative approach has challenged every company, and all of us at the
SEC, to be more creative in using innovative design formats to emphasize and
explain the information the rules require.
I should make it clear that the staff at the SEC have not formally
commented on the prototype disclosure. But they have had a chance to see it,
and they've told me they really like the way the authors have used tables to
present change-in-control and termination payments. They like the overall
look and feel of the tables, and the use of techniques such as color
shading, and the crisp look of the presentation. They like the use of bar
graphs, and especially the break-out of the talking points in the CD&A that
appear in teal print. And they found it very creative to think of using
“pictures” of disclosure such as, for example, the boxes showing the
elements of compensation. Overall, they found your efforts to be an
excellent way of highlighting the fact that our rules don't describe the
upper bound of what a company can do to inform investors, but rather just
the baseline. The rules don't prohibit custom presentations — they only
require that the more creative elements not be featured more prominently
than the required information.
To sum up: Plain English and investor-friendly graphics, solid substance
and creative presentation, all are important to improving investor
understanding of executive compensation — and beyond that, every aspect of
public company disclosure. This is a vitally important effort for the good
of investors and the health of our markets, and I'm thrilled to have the
kind of enthusiastic support and energy behind the effort that is here in
this room.
So I'll return to my office with renewed inspiration for the effort,
because your enthusiasm is so contagious. I want to thank you for what you
do every day — since without your private sector leadership, the federal
government leading the charge for clear writing and plain English might be
greeted with more than a little skepticism. After all, the gobbledygook in
laws and regulations has been a major headache for many years. And we all
know how the Congress, where I served for many years, likes its legalese.
But every once in a while, there's a maverick in Congress who leads the
battle for clearly written legal rules. In fact, the very first reported
appearance of the word "gobbledygook" was in 1944, when it was coined by a
Congressman actually named Maverick. U.S. Rep. Maury Maverick was a Texas
Democrat who wrote a memo that banned all "gobbledygook language" from his
office. He said he made up the word to imitate the noise a turkey makes. And
to show you just how serious he was about plain English, he added in his
memo, “Anyone using the words 'activation' or 'implementation' will be
shot."
At the SEC, we have more modest penalties in store for both staff and
public offenders. But we’re dead serious about plain English. And I couldn’t
be happier that so too are all of you. Every one of us at the SEC is proud
to be your partner.
And now, for my promise that I'd say something very important, and of
great interest to all of you. Just two words: The End.
http://www.sec.gov/news/speech/2007/spch101207cc.htm
