International Corporate Governance

Remodeling an Office the Wal-Mart Way

2009-04-17T14:53:00.000-07:00

Last night, Mike Duke, the new CEO of Wal-Mart, spoke at the awards banquet for Oklahoma Christian University's School of Business. He also received the Christian Business Leader of the Year Award from the School of Business.

During his speech, he noted that while some executives may be spending upwards of $1 million to remodel their offices, he didn't when he moved into the CEO's office at Wal-Mart. Instead, Duke and his wife put on their jeans after church on Sunday, February 1. They headed over to the Wal-Mart home office and dusted and moved his things into the office. Grand total for the Mike Duke move into the CEO's office? The $5 he spent to buy lunch for his wife that day. My bet is that he paid for that out of his own pocket.

IASC Monitoring Committee Created

2008-06-18T07:58:00.000-07:00

Earlier today, the SEC issued a press release announcing that the SEC, Japan's Financial Services Agency and the European Commission have established a roundtable to discuss creating a monitoring group as part of the International Accounting Standards Committee. The monitoring group would help to create channels of communication relating to the IFRS.

Convergence of GAAPs

2008-04-21T14:01:00.000-07:00

The Committee of European Securities Regulators recently published its advice to the European Commission regarding the
"equivalence of Chinese, Japanese and US GAAP." The document recommends that the Commission:
1. Find US GAAP equivalent to IFRS for European markets;
2. Generally consider Japanese GAAP equivalent, provided the Accounting Standards Board of Japan follows the timetable set forth in the Tokyo Agreement; and
3. Wait to decide on Chinese GAAP until there is more evidence on whether issuers are using it.

Maybe this is the anti-SOX. SOX guaranteed full employment for accountant and this helps them avoid overwork from restating financials to comply with GAAP of other countries.

JP Morgan / Bear Stearns: A Play in [3] Acts?

2008-03-25T06:28:00.000-07:00

The Cast:
Bear Stearns Directors: A group of individuals who may (or may not have) violated their fiduciary duties to shareholders. The business judgment rule applies to directors' decisions. The duties of directors in a corporation teetering on the edge of bankruptcy are murky; when a corporation is near bankruptcy, the directors' duties flow more to the corporation's creditors than its shareholders. Exactly when those duties shift is not always clear. There's already at least one class action filed against the Bear Stearns Directors.
JP Morgan Directors
Bear Stearns CEO Alan Schwartz
Bear Stearns Shareholders: Some are already suing, upset over the fact that the stock closed around $30 and the directors agreed to sell for $2. All this for a stock that had been over $60 just two weeks before. Ouch!
Extras: The Shareholders of Bear Stearns, The Bear Stearns Lawyers, The JP Morgan Lawyers, Assorted Federal Officials, Other Bear Stearns Constituencies

The Script: You can see assorted deal documents here: The Agreement and Plan of Merger, The Guaranty (an exhibit to the Agreement and Plan of Merger), Amendment No. 1 to the Agreement and Plan of Merger, with more to come.

The Plot: The Feds push Bear Stearns to enter into a buyout deal so that the Fed doesn't have to bail Bear Stearns out. JP Morgan swoops in and offers $2 per share, which is amazing considering that the stock had just closed around $30 (Where can I get a deal like that?). Bear Stearns shareholders balk; some sue. JP Morgan and Bear Stearns renegotiate certain provisions.

PCAOB on Evaluating Consistency of Financial Statements

2008-02-05T06:25:00.000-08:00

Last week, the PCAOB adopted new Auditing Standard No. 6 on Evaluating the Consistency of Financial Statements. The press release states that it is intended to align auditors' responsibilities with SFAS No. 154 and to update auditors' responsibilities to evaluate and report on consistency of financial statements. In particular, this should clarify auditors' responsibilities in reporting on adoption of new accounting principles or corrections of material misstatements.

New SEC Guidance on Stock Options

2008-01-01T05:15:00.000-08:00

Just before year end, the SEC staff issued Staff Accounting Bulletin 110 on accounting for stock options. The new guidance allows "eligible public companies [to] continue to use a simplified method for estimating the expense of stock options if their own historical experience isn't sufficient to provide a reasonable basis." The ability to use this approach would have expired last night without further action by the SEC.

Executive Compensation by US Multinationals

2007-07-31T12:48:00.000-07:00

Towers Perrin recently released a survey of compensation strategies used by US multinationals. Among the findings are that US MNCs have cut the equity awards (options, restricted stock) to executives outside the US.

Companies are also changing their approaches to long-term incentive plans by differentiating award amounts baed on geography. Only 5% of companies differentiated on this basis in 2001, and the percentage has risen to 42%.

Finally, the survey found that guidelines for compensation differ according to tiers or regions established by the parent company. Some companies set award amounts as a percentage of the amount that would be awarded in the US.

A press release explaining the survey is available here.

SEC Solicits Public Comments on IFRS Use by U.S. Issuers

2007-07-27T06:27:00.000-07:00

Yesterday, the SEC voted unanimously to publish a Concept Release seeking public comment on allowing U.S. issuers to use International Financial Reporting Standards. This would be change from current requirements mandating that U.S. issuers prepare their financials using U.S. GAAP. According to a statement by SEC chairman Christopher Cox, almost 100 countries either require or allow the use of IFRS.

The SEC's press release is available at http://www.sec.gov/news/press/2007/2007-145.htm.

New Going Concern Court Decision

2007-07-24T16:17:00.000-07:00

The Seventh Circuit recently affirmed dismissal of a suit against Ernst & Young this week in an opinion available here (http://www.ca7.uscourts.gov/fdocs/docs.fwx?submit=rss_sho&shofile=06-3366_020.pdf). EY's audit opinion on the status of its client's financials in FYE 1995 did not did not contain a going concern qualification. And, in fact, EY's client did not go into bankrupcy until 2 years later. The trustee in bankrupcy sued EY on theories of negligence and breach of contract for failing to include a going concern qualification in its opinion.

Corporate Kleptocracy

2007-07-16T09:41:00.000-07:00

Conrad Black's company, Hollinger, hired Richard Breeden (a former SEC chairman) to investigate the frauds at the company on behalf of a special committee of the board of directors. Breeden's investigative team issued a report in August of 2004 that referred to the environment at the company as a "corporate kleptocracy." As is so often the case, where widespread corporate fraud occurs, it is because the directors had their heads in the sand.

Frauds are, by their very nature, self-concealing. So it's no surprise that a fraud -- even one at the highest levels within an organization -- would go undetected for some period of time. Eventually, though, others learn of the fraud as the fraudster must engage others to perpetuate it. Red flags also appear, such as over-the-top perquisites, fees to related companies that are not at arm's length, and resignations of individuals in key positions who may be getting wise to the fraud.

Conrad Black's fraud conviction substantiates the claims made in the Breeden report that "Hollinger wasn't a company where isolated improper and abusive acts took place. Rather, Hollinger was a Company where abusive practices were inextricably linked to every major development or action."

Transactions between Black and the company are judged under the Delaware standard of "entire fairness." Instead, what we saw at Hollinger is what Breeden described as "private behavior in a public company."

Principles-Based Accounting

2007-04-18T08:20:00.000-07:00

James Kroeker, the SEC's Deputy Chief Accountant, recently spoke on the topic of principles-based accounting. The text of the speech is here.

He noted that principles-based accounting sounds odd in view of the fact that accountants in the U.S. are governed by Generally Accepted Accounting Principles -- not Rules. Although GAAP includes the word "Principles," it is very much a rules-based approach to accounting.

The Sarbanes-Oxley Act (section 108(d)) required the SEC to study adoption of a principles-based accounting system. That study, released in 2003, is available here. The SEC staff coined the phrase "objectives-oriented" to distinguish GAAP from pure rules-based or principles-based standards. The use of the terminology focuses on the fact that bright-line tests must be used in some areas, while subjective judgment may be called for in other areas.

In the international arena, comparability will be difficult to achieve even where a rules-based approach is used. Kroeker notes that transactions will be structured in a very deliberate manner to fall on one side of the line to achieve a desired accounting treatment. Objectives-based standards, on the other hand, can be written to get at the economic substance of transactions. A focus on substance rather than legal form, will better educate investors regarding the company's transactions.

The task faced by the FASB and IASB to draft guidance that gets to economic substance of transactions will be difficult. In particular, where the guidance requires the application of professional judgement, comparability may be lost. I am skeptical about whether guidance can be drafted that will achieve the objectives of comparability and accounting treatment based on economic substance.

What Backdating is Not

2007-04-17T10:43:00.000-07:00

Judge Alsup of the N.D. of California issued a decision on April 11 in In re CNET Networks, Inc. Shareholder Derivative Litigation. Judge Alsup reviewed the option grant practices at CNET. He noted that companies might use an incorrect grant date for reasons other than fraud. In particular, the court declined to infer backdating where the grants were issued under a plan with a pre-determined grant date, such as annual option grants to directors. Where Form 4s are filed in a timely manner, grants are made to new employees or in connection with a merger, this is further evidence that the grants were not backdated.

Judge Alsup noted that CNET's board appointed a special committee to investigate allegations of backdating and that the company repriced some options and restated financials. Because of these corrective actions, the court could not -- without more -- infer that a fraud occured.

The plaintiffs had already amended their complaint numerous times. The court invited briefing on the issue of whether plaintiffs should be allowed to conduct limited discovery on the issue of whether the members of the compensation committee were aware of backdating.

New Deferred Compensation Regs

2007-04-10T14:19:00.000-07:00

The Treasury has issued new final regs on executive and director deferred compensation. If you're suffering from insomnia, try reading this 400-page tome. The link is here. The regs are essentially the same as those proposed in the fall of 2005.

Congressional Research Service Backdating Report

2007-04-05T17:32:00.000-07:00

The Congressional Research Service issued a report last month on stock option backdating. The report is available here. Of particular interest are pages 8 through 10 in which the CRS lists -- without attempting to quantify -- possible costs associated with the backdating scandals. Companies take earnings hits, their debt rating is downgraded increasing their cost of capital, some companies will be delisted because they cannot produce earnings in a timely manner, companies may owe additional taxes and many companies will spend a tremendous amount of money investigating or responding to backdating allegations.

New SEC Rule 144 Interpretation

2007-04-05T17:25:00.000-07:00

Earlier this week, the SEC's Division of Corporation Finance posted new interpretations of Rule 144, specifically addressing "Persons Deemed Not to be Engaged in a Distribution and Therefore Not Underwriters." The interpretations are available here.

The new interpretations of Rule 144 replace those from the July 1997 Manual, the March 1999 Supplement and the November 2000 Current Issues and Rulemaking Project Outline. Some of the new interpretations were originally in the Manual of Publicly Available Telephone Interpretations, but even some of these have been revised by the SEC in its latest release.

New SEC Approach to Regulation of Cross-Border Securities Transactions

2007-03-05T06:58:00.000-08:00

Eric Sirri, the SEC's Director of Market Regulation, spoke late last week about cross-border securities transactions. The text of the speech is here. He described a two-way street, in which U.S. markets are attracting foreign investments and U.S. investors are investing abroad.

Sirri noted that the SEC may need to act under its authority to exempt certain types of transactions from the reach of the U.S. securities laws, but that in so acting the SEC must not "abdicate its obligation to protect investors and further market integrity."

Sirri noted several examples of the SEC's willingness to be flexible in adopting new rules to govern the U.S. markets. He then explained that "the time has come to reconsider our approach and to allow access under conditions that protect U.S. investors and maintain the integrity of U.S. markets." Sirri reviewed the U.S. approach to regulating markets and broker-dealers, including foreign broker-dealers, explaining that the "practical effect of current law is that foreign exchanges and foreign broker-dealers dealing directly with U.S. investors in the United States must either register or be exempt from registration."

Other jurisdictions have questions whether this approach is necessary to protect U.S. investors, or is simply protectionism of U.S. firms and markets. While the SEC must comply with its mandate to protect investors, Sirri posits that the Commission can do more "to reduce costs and frictions of obtaining foreign securities in the US, without jeopardizing investor protection for US investors."

With respect to the SEC's exemptive authority (Exchange Act § 36, 15 U.S.C. 78mm, enacted as part of the National Securities Markets Improvement Act of 1996), the SEC would have to determine that exempting foreign broker-dealers and exchanges is in the public's best interest. Sirri proposes a cooperative approach under which U.S. brokers could join foreign exchanges in other jurisdictions, provided that the other jurisdiction cooperates with the SEC to protect investors. He noted that this approach "would avoid the foreign exchange from needing to file its changes in rules for approval by the SEC."

On the flip side, the SEC would ease requirements for foreign brokers that are subjected to a regulatory scheme comparable to the SEC's. In particular, he believes that foreign broker-dealers could be allowed to deal directly with qualified institutional buyers regarding purchases of government or foreign securities in the U.S. without the need for registration here.

For more on this proposal, read the recent article, A Blueprint for Cross-Border Access to U.S. Investors: A New International Framework, by Ethiopis Tafara and Robert Peterson, two SEC staffers, at 48 Harv. Int'l L. J. 31 (2007).

CEO and CFO Certifications in Canada

2007-03-01T13:27:00.000-08:00

Stikeman Elliott, a top-notch Canadian law firm, has posted a newsletter on its web site about The current status of CFO and CEO certifications in Canada. The newsletter discusses the certification rules (Multilateral Instrument MI 52-109 (2003)), which are effective for most Canadian issuers for filings covering FYE December 31, 2006. Like certifications under Sarbanes-Oxley, in Canada the CEO and CFO must also certify that they have reviewed the annual financials and MD&A and that based on their knowledge there are no untrue statements of material fact, nor are there material omissions. The certifications also cover disclosure controls.

South Korea is Courting Foreign Issuers

2007-02-23T10:32:00.000-08:00

South Korea's Financial Supervisory Service rolled out its DART system in English at the first of the month. DART stands for "Data Analysis, Retrieval and Transfer System." Like EDGAR, the system is a repository for corporate filings. Issuers can be searched by name, and users can also review recent filings. The DART home page is available here.

South Korea also recently issued disclosure guidelines for foreign issuers. Those guidelines are available here. The Financial Supervisory Service says that it issued the guidelines because of recent increased interest of foreign companies in issuing stock or listing in Korea. To facilitate registration of foreign issuers, the FSS is also rolling out an electronic registration system.

It looks as if South Korea is effectively facilitating the capital flight predicted in the recent Interim Report of the Committee on Capital Markets Regulation.

EU Parliament Adopts Resolution on Shareholders' Voting Rights

2007-02-20T14:39:00.000-08:00

This past week, the EU Parliament voted on a proposal about shareholders' voting rights. The text of the resolution, along with explanatory material, is available here. The intention is to resolve problems associated with cross-border voting by shareholders in listed companies. Shareholders who reside in countries other than the listed company's home country should be able to vote their shares just as easily as shareholders in the listed company's country. The company should allow for electronic participation in the meeting by the shareholders (Article 8).

Shareholders must receive disclosure documents in a timely manner and sufficiently in advance of the meeting to allow them to consider the documents and then to cast their votes. Specific information about the meeting must be included in the disclosure documents (Article 5). The shareholders should also have a mechanism to place items on the agenda and to ask questions regarding items already on the agenda (Articles 6 & 9). Proxy holders should observe instructions provided to them by the shareholders (Article 10).

Following the meeting, the results of the voting should be disclosed. At a minimum, the results of the meeting should be disclosed on the company's internet site (Article 14).

The provisions in the EU directive set minimum expectations of the information and procedures that should be available to shareholders. EU member states may go beyond the EU directive in establishing rules and procedures to facilitate even better the shareholders' exercise of their rights.

Springloading at Tyson

2007-02-14T06:52:00.000-08:00

On February 6, Delaware Chancellor Chandler ruled on several issues in a case against Tyson Foods. Among the issues addressed were:
1. Futility of pre-suit demand;
2. Tolling of the statute of limitations; and
3. Whether the business judgment rule protected directors from liability for issuing springloaded options.

Springloaded options are those granted just prior to the announcement of positive news. In other words, options are granted at today's price but with near certainty that today's price is too low. This creates an almost automatic built-in gain for the executives receiving the options.

On the springloading issue, Chancellor Chandler noted that "A committee of independent directors enjoys the presumption that its actions are prima facie protected by the business judgment rule." In this case, though, plaintiffs appear able to overcome this strong presumption.

Chancellor Chandler described granting of springloaded options as a "much more subtle deception" than backdating, which has received a lot of press in the past few months. But, according to Chandler, "[g]ranting spring-loaded options, without explicit authorization from shareholders, clearly involves indirect deception. A director's duty of loyalty includes the duty to deal fairly and honestly with the shareholders for whom he is a fiduciary. It is inconsistent with such a duty for a board of directors to ask for shareholder approval of an incentive stock option plan and then later to distribute shares to managers in such a way as to undermine the very objectives approved by the shareholders. This remains true even if the board complies with the strict letter of a shareholder-approved plan as it relates to strick prices or issue dates."

The Chancellor views the question before the court as one of bad faith and breach of the directors' duties, rather than as a question of violation of the federal securities laws. Based on the plaintiffs' adequate allegations of breach of fiduciary duty and bad faith, the Chancellor denied the defendants' motion to dismiss that count of the complaint.

By way of background, the SEC has gone after Tyson before on various issues. In 2004, the SEC investigated Tyson's inadequate disclosures regarding perquisites to Don Tyson and John Tyson. The SEC determined that from 1997 to 2003, Tyson's proxy statements were incomplete and misleading.

Tyson has also litigated important matters in Delaware previously. When Tyson agreed to purchase IBP, it put a "material adverse change" clause into the purchase agreement. Then, when Tyson learned that the SEC had issued a comment letter about IBP's financials, Tyson tried to back out of the deal. Protracted litigation ensued, with the Delware courts eventually telling Tyson it had to move forward with the deal. Then, the Compensation Committee at Tyson gave the executives cushy bonuses for doing the deal they fought so hard to avoid.

The EU Transparency Directive UK Implementation

2007-02-09T10:20:00.000-08:00

On January 20, the U.K. implemented the EU's Transparency Directive. The Transparency Directive contains periodic reporting requirements and applies to issuers listed on the London Stock Exchange and other EU markets. The Financial Services Authority's publication on implementation of the Transparency Directive is available here.

NYSE and Tokyo Stock Exchange Establish Alliance

2007-02-04T08:26:00.000-08:00

Last week, the NYSE and the Tokyo Stock Exchange announced that they had entered into a strategic alliance "to jointly develop and explore new opportunities in trading systems and technology, investor and issuer services, investment products, and governance and regulation." The press release is here.

Working groups will begin to meet regularly regarding each of these areas of interest. From the international corporate governance perspective, the measures that will be taken to assure that issuers who list on one exchange "have improved access to investors in the other" is critical. This is one more example of the mechanisms of convergence that is occurring with respect to international corporate governance issues.

And You Thought FAS 5 Was Bad: 27 Levels of Likelihood

2007-01-30T16:16:00.000-08:00

I recently ran across a handy table from PWC on the terminology used in the IFRS to describe varying levels of likelihood. The table and PWC newsletter are available here.

As it so happens, there are 27 levels of likelihood or similar concepts used in the IFRS. 27!!!! In order, they are (with thanks to PWC for compiling the list): virtually certain, no realistic alternative, highly probable, reasonably certain, substantially all, substantially enacted, highly effective, principally, significant, major part, probable, more likely, likely, may but probably will not, reasonably possible, possible, unlikely, extremely unlikely, minimal probability, sufficiently lower, insignificant, remote, extremely rare, virtually none, not genuine (highly abnormal and extremely unlikely to occur).

All of this makes you wonder how those of us in the U.S. got along under FAS 5 with the terms probable, reasonably possible and remote all these years.

I believe that it is at least "highly probable" and probably even "virtually certain" that the auditors and the lawyers will bill quite a lot for the discussions necessitated by these terms. All of the debate on the likelihood of a certain event is "extremely unlikely" to yield any real benefit to the financial statement users.

Re-Thinking SEC's Regulations

2007-01-29T07:31:00.000-08:00

Christopher Cox, Chairman of the SEC, spoke last week on 'Re-Thinking Regulation in an Era of Global Securities Markets." The text of the speech is available here.

Cox noted how important global consolidation of the world's capital markets has become, stating "Ever more public companies are raising capital beyond their geographic boundaries, and investors large and small are increasingly allocating their capital -- and their business assets -- outside their home countries." On the plus side, global integration gives investors more choices,lower transaction costs and opportunities to diversify risk.

National regulators must provide a strong regulatory scheme that will protect investors. The SEC is allying with other regulators in order to protect investors and provide timely and accurate information. Cox noted that because of globalization, he has spent a tremendous amount of time meeting with his counterparts in other countries.

CEO Blogging Update

2007-01-24T06:07:00.000-08:00

I've blogged previously about CEO blogging (see my posts here and here). Now, The Economist is reporting that the 800 or so CEOs and chairmen in attendance at the World Economic Forum in Davos, Switzerland are being encouraged to start blogging.

Although I favor giving shareholders more timely and useful information, I am skeptical that CEO blogging is the way to do it. And if I were a CEO, I would avoid blogging until the liability issues are addressed. Even The Economist notes that most CEOs probably view blogging "as a reckless risk in the liability-laden world. . . ."

A CEO blog could be a good way to reach certain groups of people and make the CEO seem human, but unless the general counsel is peering over the CEO's shoulder, it's too risky without the creation of safe harbors. In particular, I believe that corporations face Reg FD compliance issues and security issues. In addition, there's no body of law to address what a company's liability will be under the federal securities laws if misleading information is posted.