Risk & Compliance

Bush on ”The State of the Economy”

President cites a ''strong'' economy, favors pay-for-performance but not necessarily shareholder say-so, and says that rather than changing Sarbane...
Stephen TaubJanuary 31, 2007

President Bush said executives’ pay should be linked to their company’s performance and urged board members to better monitor executive compensation, but he expressed opposition to government efforts that would give shareholders more say in the matter.

Bush also called for certain changes regarding the Sarbanes-Oxley Act.

The President made these remarks on Wednesday in a speech he called “The State of the Economy,” which he delivered just steps from the New York Stock Exchange, at Federal Hall in Manhattan.

“Ladies and gentlemen: The state of our economy is strong,” he asserted. Earlier, the Department of Commerce had reported growth of 3.4 percent last year, up from 3.1 percent in 2005.

The President also pointed out that exports of goods and services have jumped by nearly 35 percent and that the Dow Jones Industrial Average has set a new record 26 times in the last four months. “Productivity is strong, and that’s translating into higher wages,” Bush added.

Even so, he joined the chorus of critics who have raised questions about the compensation of certain top executives, and how their pay was determined. “Salaries and bonuses of CEOs should be based on their success at improving their companies and bringing value to their shareholders,” insisted the President. “America’s corporate boardrooms must step up to their responsibilities. You need to pay attention to the executive compensation packages that you approve. You need to show the world that American businesses are a model of transparency and good corporate governance.”

Bush also applauded new Securities and Exchange Commission rules that require more detailed and clearer disclosure of pay packages of a company’s top executives. “When people analyze their investment, they ought to see loud and clear — they ought to be able to see with certainty the nature of the compensation packages for the people entrusted to run the companies in which they’ve got an investment,” he said.

However, he implicitly criticized legislation favored by Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, that would require shareholder approval for executive pay packages. Said Bush, “Government should not decide the compensation for America’s corporate executives.”

The President also called for legislative relief that, he maintained, would better enable the country to compete in the global marketplace.

He agreed with some business groups and a number of top SEC officials who want to scale back certain provisions of Sarbanes-Oxley, such as the Section 404 requirements regarding internal controls over financial reporting.

“We don’t need to change the law,” Bush stressed. “We need to change the way the law is implemented. The principles of Sarbanes-Oxley are as important today as when they were passed. Yet complying with certain aspects of the law, such as Section 404, has been costly for businesses and may be discouraging companies from listing on our stock exchanges.”

Bush also stressed the importance of litigation reform, such as the Class Action Fairness Act. “Excessive litigation and over-regulation threaten to make our financial markets less attractive to investors, especially in the face of rising competition from capital markets abroad,” he said.

In addition, the President promoted the benefits of free trade. “Every time we break down barriers to trade and investment, we open up new markets for our businesses and our farmers,” Bush stated. “As we improve free trade, consumers get lower prices.”

He pointed out that jobs supported by exports of goods pay wages that are 13 percent to 18 percent higher than the average. The President also noted that since he took office, the United States has increased the number of countries with which it has free trade agreements to 13, from just 3.

“These agreements are leading to direct benefits for America’s businesses and, equally importantly, America’s workers,” Bush stated.