May 24, 2006
How to Handle Hedge Fund Activism
We have posted the transcript from the popular DealLawyers.com webcast: “How to Handle Hedge Fund Activism.”
Chairman Cox’s Interview
In the op-ed section of Saturday’s WSJ, SEC Chairman Cox gave this interesting interview. Here are a few observations:
– As a former politician, the new Chairman sure knows how to make friends with the media. For example, the interviewer writes “My pen stops. This is not how regulators speak” when the Chairman uttered the same thought likely spoken by each of the 27 prior chairs of the SEC (ie. the SEC should arm investors with information to protect themselves).
– The Chairman hit the nail on the head when he focused on one of my pet peeves: the inane way that EDGAR displays forms, etc. How many investors do you think recognize “DEF 14A” as a proxy statement?
– I am not sure I agree that XBRL will “cut down on costly errors.” I worry that it will create more new ones as companies (or vendors they hire) mistag their financial data. Tagging errors for XBRL will be more significant than EDGAR or HTML errors because it means that a number gets pushed to a different line item in the financials.
– While I completely agree that the SEC should not (and cannot, since it doesn’t have the authority) to regulate executive compensation levels, I disagree with the statement that CEO pay is set by “market forces.” As I flesh out in Realism #1 of my “Open Letter to All Journalists,” that statement seems to be bandied about without careful thought as to what it really means.
Enron’s Legacy
As long as I am blogging about the Saturday WSJ op-ed pages, I can’t help but rebut this column about how we didn’t need all this new regulation. I agree that Sarbanes-Oxley went overboard, but what do you expect from Congressional legislation? I read the op-ed as basically arguing that if Scrushy and all those fraudsters avoided jail, then there must not have been any widespread issues ripe for reform.
For those of us dealing with these issues on a daily basis, I think most of us would agree that numerous practices have changed “for the better.” Put aside your anger about 404 and think about the bigger picture. [Although remember that in Year 1 after the implementation of Section 404, 17% of companies reported a material weakness. And that’s just large companies – imagine how high that percentage would be if 404 was implemented across the board!]
Here is a list of recent changes that I think illustrate how most companies (and their advisors) are in much better shape today compared to before SOX:
1. Boards no longer conduct one-hour board meetings just several times per year.
2. Outside auditors will no longer do whatever it takes to keep the business.
3. CEOs and CFOs (and some directors) now actually read 10-Ks and 10-Qs before they are filed.
4. Outside lawyers are more careful about who they represent and what they advise.
5. Employees are more apt to blow the whistle on financial mischief and companies are more careful handling these complaints.
6. Investors are more active in keeping boards accountable.
Of course, some serious fine-tuning to the new rules are necessary, particularly as oversea listings of companies grows by leaps and bounds – and I am increasingly concerned about the balance of power shifting to shareholders, particularly those that are in it for the “greenmail.” But I remain convinced that some reform was necessary and that there could be a much higher level of fraud being perpetuated today “but for” Sarbanes-Oxley and the related rulemaking that followed.
More on XBRL
Last week, Corey Booth, Chief Information Officer of the SEC, gave an enlightened speech on the SEC’s efforts to implement XBRL reporting. Over the past year, Corey has noticed significant variation in how pilot companies translate their numbers into XBRL, even on relatively basic issues – and he notes that this variation suggests that significant subject matter knowledge is needed to effectively create an XBRL document (as the preparer must be comfortable with both the technological and accounting aspects of the standard). He also noted little growth in demand for XBRL information from investors – so he doubts that mandatory XBRL filing will be required before voluntary adoption has become widespread.
This all jibes nicely with my recommendation that the SEC go slow here. However, it still is apparent that the SEC will push this initiative – yesterday, it issued a press release announcing three more companies have joined the pilot program. And it’s fascinating that yet another Brazilian-based company has signed up for the pilot program, continuing that country’s very significant representation among the volunteers.
Next Tuesday, May 30th, you might want to check out AEI’s XBRL Conference in Washington DC – it’s free (but you need to pre-register).