October 30, 2003

Corporate Governance in Europe Early

Early last week, I blogged about a speech by Ira Millstein during which Ira identified global governance reform as one of the two most significant trends arising from this spate of corporate scandals. To illustrate his point, consider that, in Germany, the Deutsche Bank CEO and some other supervisory board members of Mannesmann AG have been criminally charged with approving bonuses for Mannesmann executives following approval of Mannesmann’s acquisition by Vodafone.

In the United Kingdom, a reform kicked off by the Higgs Report now requires that a company’s remuneration policy – as included in the annual Remuneration Report, which is part of the Annual Report – be put to shareholders at an annual shareholders’ meeting for approval. If shareholders vote against the policy, this does not directly affect the terms of employment or compensation – but it would put pressure on the board to review those terms.

This new requirement has proved quite controversial already because – in July 2003 – the shareholders of GlaxoSmithKline refused to approve its remuneration report, largely because they were unhappy about the terms of compensation for the US CEO. In response, the company’s board stated that they commissioned an outside report and will report to shareholders on this matter in the near future. Investors still are up in arms and more significant changes appear inevitable at the company as a result.

For subscribers, learn more about how investors are feeling in the UK from an interview with Merlin Underwood on United Kingdom’s Governance Practices.

Costs of SOX

Frequently, I get asked if I know of surveys analyzing the cost of SOX. There have been a couple, but I still think its too early to pinpoint an accurate range of the true costs as many rules have either only recently become effective – or have not yet been implemented. Regarding internal controls, a study by the Johnsson Group – as noted by an article in FEI’s magazine – notes:

“In looking at initial one-time expenses for a “typical” $3 billion company, The Johnsson Group estimates incremental unanticipated expenditures totaling $1.1 to $3.5 million, itemized as follows:

Initial one-time costs estimates:

– Independent audit scope changes/fee increases – $500,000 – $2 million
– Internal audit expansion – $200,000 – $500,000
– Outside consulting services – $400,000 – $1 million
SubTotal – $1.1 – 3.5 million in one-time

In addition, the study states that companies can reasonably expect to incur ongoing incremental costs in the range of $800,000 to $2.8 million (Independent audit scope changes/fee increases
$500,000 – $2 million; Internal audit expansion $200,000 – $500,000; Outside consulting services $100,000 – $300,000).”

John Huber jokes that companies should make “404 costs” a line item in the income statement. Later today, we will post an announcement regarding a Tuesday, November 18th webcast with John and Teri Iannaconi, who is a Partner in KPMG’s national office and former Deputy Chief Accountant in Corp Fin regarding “Internal Controls and Attestation – and the Procedural Ball of Wax.”