|
 |
|
|
contents
Sarbanes-Oxley legislation News & Views
orporate governance news articles
U.S. Securities & Exchange Commission Chairman Arthur
Levitt:
Pres. Bush & Sec. Paulson are lowering corporate governance standards and
rolling back reforms
February 8, 2007. Arthur Levitt, former Chairman of the U.S. Securities &
Exchange Commission is sounding the alarm to anyone who will listen.
Speaking at a Midtown Manhattan conference of RiskMetrics, Levitt says that
US President Bush, Treasury Secretary Henry Paulson, and the Wall Street
lobby of big business are rolling back the gains made in corporate
governance reform and standards since the enactment of the Sarbenes-Oxley
legislation (SOX), legislation enacted in the wake of the Enron and Worldcom
disasters where investors lost millions to the greed and fraud of corporate
executives.
Appointed by Bill Clinton in 1993 Levitt was the SEC's longest-serving
chairman, holding the post until 2001.
On the one hand, Levitt and other advocates of shareholder rights are
striving to keep the Sarbanes-Oxley Act of 2002 intact. "There are
enormously well-funded lobbies doing everything they can to stop your
efforts at reform,” Levitt warned his audience of institutional investors
representing $8 trillion in assets. Levitt encouraged his audience to keep
pushing for corporate governance reform, including the right to nominate
their own director candidates, greater access to top executive compensation
data, and a greater say on how that compensation is set.
"Board elections are exclusively one-party affairs. Proxy fights are
prohibitively expensive. As a result an (independent) director has a better
chance of being struck by lighting than being elected to a board," he said.
However, corporations like Hewlett Packard are slowing making reforms.
Following its governance problems, HP is considering changes in its bylaws
to enable proxy voting.
Levitt was very critical of corporate directors who award chief executive
officers huge compensation packages with no justification and no concern for
the impact on the rights of shareholders.
On the other hand, groups such as the Committee on Capital Markets
Regulation, sometimes called the Paulson Commission after the US Treasury
Secretary, have complained SOX and the resulting SEC regulation mandated by
the legislation harms American competitiveness in world markets, a somewhat
hollow complaint given the rise in US equity markets at the same time when
the regulations were being enforced. The cause of the big business lobby has
found champions in US President Bush and his Treasury Secretary who are
working to relax regulations while discouraging shareholder lawsuits.
Uncovering the fallacy of the business lobby's stated objections to
corporate governance reform, greater accountability and shareholder rights,
Levitt noted that November 2006 saw the largest number of U.S. IPOs -
initial public offerings - since 2001, an indication of the growing strength
of the US market during the time SOX is being implemented.
Sarbenes-Oxley legislation (SOX) critics have pointed to the growth of the
London Stock Exchange operating under weaker UK law. Once again Levitt
contradicts this claim. He points out that not only are the LSE returns
down, but financial fraud at the London Stock Exchange so-called AIM
listings. "The bloom is really off the rose of London’s AIM. is up as much
as 40%, according to one U.K. accounting firm" says Levitt.
US' Sarbanes-Oxley legislation Background:
History & Developments
Updated December 2, 2006.
In July 2002, The US Congress passed the Sarbanes-Oxley Act following the
Enron and WorldCom scandals, other major corporate bankruptcies and a severe
downturn in the US equity market that sent the benchmark US indices to new
post September 11 lows.
The purpose of the legislation is to prevent fraud, misuse and unauthorized
access to any financial information on which public companies base their
published financial reports. The Sarbanes-Oxley Act requires public
companies to comply with specific auditing, corporate governance and
reporting requirements. It also requires executives to certify that
corporate financial systems are secure.
The legislation authorized the US Securities and Exchange Commission (SEC)
to develop the rules and regulations needed to implement the legislation.
The SEC has since drafted stringent new rules on disclosing the dating of
stock options, pay and perks to corporate executives. These regulations
state that U.S. companies have to report each year on the annual pay for
chief executives, chief financial officers, and the next three top-earning
executives.
Critics of the legislation have warned that the legislation will decrease
the attractiveness of the U.S. capital markets to foreign issuers. Until
Sarbanes-Oxley, foreign private companies raising capital in US markets had
different reporting requirements than US companies and the legislation comes
close to eliminating these differences. Many foreign companies in the
process of making public offerings felt that the rules imposed exceptional
burdens on them and chose to make their public offerings in the UK and the
rest of Europe rather than the US. In addition, the cost of raising capital
is higher in the US because of higher underwriting fees in the US compared
with Europe.
On August 9, 2006, the SEC responded to the critics and the negative effects
the legislation on the capital markets, by granting smaller companies and
foreign private issuers a year to comply with Sarbanes-Oxley's internal
control reporting and auditing provisions. Earlier, on May 17, the SEC said
that it would work with the Public Company Accounting Oversight Board to
revise the auditing standards that external auditors must apply when
assessing a company's internal controls. The critics, however, maintain that
the changes will be insufficient to stem the move away from the US capital
market.
More Time to Comply with Reporting Requirements but Major Changes Unlikely
While critics of the legislation are lobbying hard for changes that will
ease the reporting requirements of the legislation, consumer advocates are
opposed to the changes, and it is unlikely that the lobbying will succeed.
» Top
Sarbanes-Oxley Legislation - The Critics & Hank Paulson
Updated December 2, 2006.
Critics: There is an obsession with corporate governance that is hurting
business. The US Treasury Secretary takes up their cause.
The critics of the Sarbanes-Oxley Legislation - primarily corporate leaders
- have spent much of 2006 mounting an assault on the legislation. They say
that there is a global obsession with corporate governance that is making
many boards of directors risk-averse and overly cautious. Corporate
executives and board members fear that the possibility of legal action and
even jail time has increased substantially as a result of the legislation.
The assault on the Sarbanes-Oxley Legislation is closely connected an
assault on corporate governance. The critics of the legislation add that
corporate governance is becoming 'compliance focused' in approach and this
mindset is stifling the entrepreneurial spirit needed to keep industry
vibrant and productive. The Sarbanes-Oxley Legislation has put the
compensation of corporate executives under close scrutiny, since
corporations must now disclose the dating of stock options, pay and perks to
corporate executives. InterActiveCorporation (IAC) CEO Barry Diller, whose
2006 compensation is estimated at $295 million, called (on November 27,
2006) corporate governance activists "birdbrains" who are hurting American
business.
While it is the SEC that is responsible for developing the reporting
requirements under the legislation, the critics have made governance
practitioners their whipping boy rather than risk raising the ire of the
SEC. They have felt criticism of the SEC, via its regulations, to the US
Treasury Secretary, Hank Paulson.
US Treasury Secretary, Hank Paulson, is a prominent spokesperson for the
critics. At the outset of his appointment, Paulson a former Goldman Sachs
chief, in a August 2006 speech at the Columbia Business School, argued for
the need to reform the Sarbanes-Oxley Act and relax many of its provisions.
While Paulson said "corrective measures to address corporate scandals"
"increase investor confidence," he added "often the pendulum swings too far
and we need to go through a period of readjustment." "The challenge before
us now is how to achieve the right regulatory balance to allow us to be
competitive in today’s world while guarding against the recurrence of past
abuses."
Then, in early November 2006, Paulson said that while the Sarbanes-Oxley Act
does not need to be changed, the US government should review and relax the
manner in which the rules are being enforced.
Paulson was joined by the Committee on Capital Markets Regulation (CCMR) in
criticizing the regulations (and indirectly the SEC). The CCMR is headed by
Paulson's former colleague at Goldman Sachs: former White House advisor
Glenn Hubbard and ex-Goldman Sachs president John Thornton. In a 135-page
report, the CCMR said that there is too much regulation and revising the
rules under the Sarbanes-Oxley Act would make US markets more attractive.
The CCMR concludes that the US should revise the Sarbanes-Oxley Act limit
penalties for companies, and reduce costs.
» Top
Executive Turnover doubles in wake of Sarbanes-Oxley
August 23, 2006. 17,612 CEO's and vice presidents changed jobs in the first
six months of 2006 compared with 7,251 in the same period last year
according to Liberum Research .
Compliance requirements of the Sarbanes-Oxley legislation and greater
share-holder scrutiny are being cited among the reasons.
Putting a face to the statistics are present U.S. Treasury Secretary Henry
Paulson and Nike's ex-CEO, William D. Perez.
Henry Paulson, 60, CEO of Goldman Sachs Group Inc. announced in May 2006
that he was stepping down as CEO to become U.S. Treasury Secretary, (see
Sarbanes-Oxley Legislation - The Critics below).
Nike Inc.'s CEO William D. Perez, 60, abruptly resigned in January 2006
after being in his job for thirteen months. Differences with company founder
and chairman Philip Knight are said to be the reasons for Perez' departure.
Knight, who along with Bill Bowerman founded Nike in 1968, had stepped down
as CEO on December 28, 2004 at 66, though he continued as "an active
chairman." His 35% stake in Nike, reported to be worth $7.4 billion, makes
him the 22nd richest American.
Nike agreed to pay Perez $4.55 million (2 year's salary worth $2.8 million
and bonuses worth $1.75 million), buy his Portland house and reimburse him
for remodeling expenses of about $3.6 million. This information was
contained in a filing with the Securities and Exchange Commission.
» Top
Sarbanes-Oxley Legislation May Effect Non-Profit status of Organizations
August 18, 2006. Following the enactment of the Sarbanes-Oxley legislation,
Senator Charles Grassley (R-Iowa), a frequent critic of non-profit
organizations and Chair of the Senate Finance Committee, held hearings on
potential changes in the regulation of non-profit organization.
The American Bar Association's Coordinating Committee on non-profit
governance issued a report recommending reforms in May 2005 and a further
group of interested parties produced a report proposing certain changes to
The Panel on the Non-profit Sector in June 2005. One of the suggestions is
that the IRS re-qualify organizations for tax exemption every five years.
Regardless of whether the recommendations become law, the boards of
directors of non-profit organizations everywhere are best advised to take
proactive measures in keeping with the principles of good governance
contained in the Sarbanes-Oxley legislation, rather than reacting to forced
requirements.
The boards of all non-profit organizations need to ensure that the
non-profits deliver a benefit to the community at large in order to benefit
from tax-exempt status. A periodic review of the organization’s mandate and
programs for compliance with this principle is good governance practice
least the non-profit provide their critics the ammunition they need to
eliminate this preferential status.
» Top
Links
email this page • © Ed Eduljee, Heritage Institute