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Oct 31, 2008

Staying one step ahead of the pack

Corporate secretaries at Chicago Think Tank tackle hot-button issues 

At times of great danger or uncertainty, there is safety in numbers. This concept was certainly not lost on September 18 when the current round of financial market upset was igniting and 35 corporate secretaries and general counsel gathered in Chicago to attend the Corporate Secretary Chicago Think Tank.

These executives came together to discuss a range of corporate governance and compliance issues and were exposed to new approaches to some established issues and at least one issue that, while not currently on the radar, certainly will be during 2009.

After two or three years of increased focus on the Foreign Corrupt Practices Act (FCPA) from the Department of Justice (DoJ) and other government investigators, it is hardly surprising that the day commenced with a vigorous discussion of the latest trends in FCPA investigations and prosecutions.

While the FCPA is a touch over 30 years old, prosecutions over the past five years greatly outnumber those that took place during the first 25. The legislation may not be new but this fervent focus from prosecutors is causing US companies to reexamine international practices and compliance systems. Many companies that thought they had their arms around the issue are rapidly discovering that they may not. This is due in part to a lack of understanding of the real state of play and also new investigation resources and techniques undertaken by the DoJ.

Look before you leap


Charles Sklarsky, partner, Jenner & Block, and David Snively, SVP and general counsel, Monsanto, provided unique insight into the various traps a public company can fall into when doing business in other jurisdictions. Snively, whose company has recently emerged from a deferred prosecution agreement with the government, highlighted the need for cooperation but also stressed that it is very important to be well prepared and to not give up control of the situation. Entering into an agreement with prosecutors should not mean that you are handing over the keys to the house. If a company has any reason to believe it may have a problem with FCPA violations, it should conduct its own investigation, get all the details nailed down and then, if it discovers anything that could be viewed as a problem, it should disclose voluntarily to the government. This will result in a much better outcome than if you wait for the government to come knocking and then make it do its own investigation.

It is also possible, as attendees heard, to predict which sectors the DoJ may want to look at in the future. Sklarsky noted that the DoJ likes to leverage success in one case against other companies in the same sector. To date, oil and gas exploration and production has been by far the most heavily prosecuted sector but other areas may be on prosecutors’ immediate hit lists. Telecommunications, pharmaceuticals and the film industry are all areas that were highlighted as facing possible investigations over the coming few years.

The key is to not take anything for granted, the speakers stressed. A responsible company should have ongoing training systems for all employees but it is very important to test the effectiveness and make sure that all objectives and standards are being met. In short, there is a huge difference between training and reality.

A new language


New financial reporting technology, in the form of XBRL, was the focus of the second session of the day. The new reporting language, which requires companies to electronically ‘tag’ a range of financial and regulatory reports, is a central part of the SEC’s new 21st century disclosure initiative and is expected to become compulsory quite soon.

The practical elements of implementation were a major focus and it was on this topic that Katherine Combs, SVP, corporate governance, corporate secretary and deputy general counsel at Exelon, provided particular input. Exelon is a member of a voluntary test group that has been coding and tagging regulatory disclosures since 2005. Her experience is that while it takes some work to begin with and requires a little education and extra focus, it is really a one-off problem. Once a company is up to speed and has its taxonomies sorted out, it should not require many resources going forward.

Glenn Doggett, policy analyst, financial reporting, CFA Institute Centre for Financial Market Integrity, explained that while XBRL is still in its infancy in the US, the analyst community believes it shows strong potential to streamline the process of gathering and evaluating data. At this stage, however, there is not enough data from enough companies to really allow for any meaningful comparison across firms. Having said that, he believes it will not take too long for critical mass to be achieved.

Despite some reservations and a lack of understanding in some areas, companies are taking steps to ensure all relevant data will be tagged and presented to the SEC in XBRL-friendly format. Part of the problem, as Ed Hodder, director of XBRL services at Bowne, points out, is that the SEC rules surrounding XBRL contain some grey areas. This does not mean, however, that companies need to wait for the final rule language. Doing so will likely lead to a very short period for implementation and getting started now will greatly ease the process.

Only about half of the companies in attendance defined themselves as being significantly advanced and a small few believe they would be ready to go if they had to.

What lies beneath


In the tradition of breaking new ground, the Think Tank conversation then turned to an emerging area of governance: cost basis accounting. It is expected that companies will soon be required to provide shareholders with tools to quickly and accurately calculate the cost basis of stock transactions. At first glance, this may appear to be more an accounting problem than anything else, however there are a number of governance and shareholder communication issues. At the time of writing this article the rule has not yet been finalized and there is considerable debate as to who will ultimately be legally responsible for providing information to shareholders. Many companies believe it should be the broker or transfer agent while others think the company itself should do it.

Only a handful of companies at this stage have addressed the issue and, as Joseph Trezza, VP, Depository Trust & Clearing Corporation said, emerging best practice appears to be for companies to place a link on the corporate website to one of several firms that can calculate cost basis for shareholders. Some companies provide this service for free and others require the shareholder to pay. Joan DiBlasi, senior manager for shareholder services at Aflac, points out that whichever way you look at it, this is a shareholder services issue and anything a company can do to make shareholders’ lives easier is a good idea.

John Buonomo, vice president at BNY Mellon Shareowner Services, highlights that most shareholders do not have accurate records of every sale or purchase of stock, especially those who may have received stock over a considerable period of time and invested in a dividend reinvestment plan. Stock splits, mergers and other corporate actions further complicate the situation. All this makes it next to impossible for many shareholders to calculate an accurate cost basis on their holdings and they naturally turn to the company itself for assistance.

Big bucks


After a short break conversation turned to a perennial favorite: executive compensation. Compensation discussion and analysis has received a great deal of attention in recent times and most of the individuals in attendance had been through the expanded reporting requirements at least once.

Rather than looking at the specifics of disclosure, although this topic was raised a number of times, this conversation focused on the compensation itself and how best to ensure that pay really does work as an effective incentive for both short- and long-term success.

It is clear from the comments made by attendees that the concept of pay for performance held by many advisers and investors is not effective. Most people, including panel leader Gerry Miller, managing director, DolmatConnell, feel a more sophisticated model is needed to ensure pay structures truly align the interests of senior management with their company’s long-term health.

The question then is: What should pay really look like? Determining the correct metrics for performance and then accurately measuring these is a serious challenge, explained Paul Hodgson, senior research associate, executive and director compensation, the Corporate Library. It certainly goes beyond share price performance and simple measures of earnings per share or other metrics. Hodgson said he understands companies’ concerns that releasing detailed information about specific targets and their impact on pay could be competitive information. But he also believes that it is more than possible for a company to disclose the relationship between various performance measures and how these impact pay over various time periods.

It is clear from discussions that compensation consultants will continue to play an important role in the process. They are the ones with expertise in the area. However, those involved in formulating or disclosing compensation should push the consultant for more information, better comparisons to peers and new performance metrics. This in turn should indicate to shareholders that the company and the board are actively keeping themselves up-to-date and monitoring executive pay levels.

One thing remains clear on all fronts. The governance and compliance landscape continues to change rapidly and keeping abreast of the latest best practices while also looking out for the ‘next big issue’ is becoming particularly challenging. Sharing thoughts with peers and examining emerging concepts in meetings like this Think Tank is a very effective way to remain ahead of the pack.

Brendan Sheehan

Brendan Sheehan is the former Executive Editor at Corporate Secretary magazine, and is a leading expert in public company governance and compliance. He regularly lectures on cutting edge governance, risk and compliance issues and is a regular...