The Practical Corporate & Securities Law Blog

By Broc Romanek

Go to TheCorporateCounsel.net

 
A recent study by ISS - using the ISS definition of independence - shows that the media industry has the least degree of independence in the make-up of its boards while utilities ranked best.

Media companies ranked last in comparing wholly independent audit and compensation committees, and second-to-last for nominating committees. The industry also ranked last when ranking where entire boards comprised at least 75 percent, or 50 percent, independent directors. Still, the media could claim the lowest percentage of staggered boards within an industry.

Utilities topped the lists for wholly independent compensation and nominating committees, as well as the 75-percent and 50-percent benchmarks for total board comparisons. But two-thirds of utilities' boards are staggered and the industry had the lowest percentage of companies with separate CEOs and chairs.

We already have a winner of most provacative comment letter to the SEC regarding shareholder access. Way to get your personal beefs in the public domain, Mr. Smith! And nice email address...
posted by broc at 8:11 PM

 
Grant Thornton has made a big deal announcing that it would not perform certain services involving internal control documentation and evaluation for its audit clients. This falls within the debate noted in "Nugget No. 35" from our "50 Nuggets in 50 Minutes" webcast about the extent to which companies can use their independent auditors to help upgrade and document their internal controls.

As noted in that webcast, the pros of doing so include the fact that the same auditors will be attesting to the controls later - so they are the ideal one to ensure they are "up to snuff" now. The cons of this approach is that independent auditors are limited in what they can do since they will be the entities that later attest to what is developed at their clients - and the SEC has warned that the auditor clearly must be independent when it provides its attestation.

Grant Thornton probably has made such a public announcement of its decision in a bid to attract companies that use one of the Big 4 as their auditors to hire Grant Thornton to perform their pre-attestation work. So far, many companies have hired their own audit firm to perform this service (which may be risky) - but some companies have hired other auditors to do so, including another Big 4 firm.

On September 11th, the SEC is taking its first foray into rulemaking in the Section 402 area to exempt qualified foreign banks from the insider lending prohibition along the same lines as domestic qualfied banks are exempt. Unfortunately, no further 402 rulemakings/interpretations are on the SEC's horizon.

At the same time, the Commission will also consider whether to propose an amendment to Form F-6 that would add an eligibility requirement making the form unavailable to register American depositary receipts if the foreign issuer has separately listed the deposited securities on a registered national securities exchange.

For TheCorporateCounsel.net subscribers, thanks to Tom White and Connie Neigel of Wilmer Cutler & Pickering for adding model reporting-up policies - one for companies and one for law firms - as well as a model QLCC charter to our "Attorney Responsibility Portal."
posted by broc at 7:32 AM

 
The September issue of Eminders is up - and so is a great interview with David Hardison of Fried Frank giving the "low down" on the SEC's Auditor Independence FAQs. Below is one of questions that David handled:

Broc: You mentioned that some of the FAQs address the provision of non-audit services by accounting firms to their audit clients. Did the Staff use this as an opportunity to impose further restrictions in this area?

David: One could certainly argue that the Staff did. Under the January, 2003 rules, there were five categories of non-audit services, including bookkeeping, valuation services and actuarial services, that auditors are prohibited from providing to an audit client, unless it is reasonable to conclude that the results of the services will not be subject to audit procedures during the audit of the financial statements.

The question then becomes “When is it reasonable to the conclude that the results of a non-audit service will not be subject to audit procedures.” In the FAQs, the Staff rejected the seemingly plausible view that, if the non-audit services were to be provided to a clearly immaterial subsidiary or segment of an audit client’s business, one might reasonably conclude that they would not be the focus of audit attention and that the potential concern that the auditor would be placed in the position of engaging in “self review” would not arise. Instead, the Staff’s position is that the process that an auditor undertakes to decide which portions of a client’s business are immaterial is itself an audit procedure.

As a result, before deciding whether there are ever circumstances in which an accounting firm can provide these types of non-audit services to an audit client, the firm and the client’s audit committee will need to focus on the nature of the services themselves, and not on the size or importance of the entity within the corporation.

As a former head of the NYSE, SEC Chair William Donaldson has taken offense with the pay package of current NYSE head Dick Grasso and has demanded details of what is involved. Chair Donaldson says that the NYSE chair should be paid more like a regulator and not like the CEO of a financial services firm. Not much room for disagreement there...



posted by broc at 9:04 AM

 
My hunch is that a "town hall" website for shareholders to vote on proposals year-round - as recommended in Breeden's MCI bankruptcy filing - would not be used much by saavy institutional investors. Instead, those investors would continue to rely on the Rule 14a-8 process and submit shareholder proposals in the normal course. This is because those investors often have other agenda items they wish to discuss with management and the proposal is more of a "calling card" to open a dialouge.

In many cases, investors will withdraw their proposals after satisfactory talks with management before the proposals are ever publicized. The ability to use a proposal as leverage to enter into broader negotiations would not exist with the town hall website because once posted, the proponent arguably would no longer be able to control the destiny of the proposal (although we have not seen details about how the town hall site would work, the logic is that once posted, all shareholders would have an interest in it).

Instead, the town hall website likely would be used primarily by retail investors and perhaps by institutional investors at companies that either are generally unresponsive to reasonable shareholder requests or have pressing performance issues.

For TheCorporateCounsel.net subscribers, we have posted a sample "reporting up" policy for law firms in our Attorney Responsibility Portal.
posted by broc at 8:56 AM