October 20, 2003

SOX II! Now that is

At the NACD Annual Conference today, PCAOB Chair William McDonough gave an excellent speech on “Restoring Trust” and explained how the number one topic on the Hill these days is not the Iraq occupation – but rather sheer rage over executive compensation. He noted how many in Congress were asking him if it would be feasible to pass a law regulating compensation.

Much to Chairman McDonough’s credit (my 1st time hearing him and he was simply great!), he recognizes that Congress’ last foray in this area probably played a role in where we have gotten today (i.e. Section 162(m)). However, he believes that companies are not acting fast enough to curb excessive compensation and warns that SOX II could very well happen and that it “would curl your hair.”

In addition, he noted that Wednesday is the deadline for audit firms to register with the Oversight Board, with just under 500 firms registering so far. As it will do every year, the PCAOB has begun investigating the Big 4 and have already moved from checking the “tone at the top” to an examination of individual audits (with next year promising to be more intrusive as the PCAOB grows from its 88 staffers to a much larger agency).

Ira Millstein, the Guru Speaks

The luncheon speaker was Ira Millstein, Senior Partner at Weil Gotshal, who was widely recognized at the NACD conference as the ultimate governance guru. A second edition of his book, “Recurrent Crisis in Corporate Governance” is due out in December (as an aside, Nell Minow was sporting the 3rd edition of her governance book that will be available soon – its a great book).

Ira pointed out that conceptually, two important events have occurred that outweigh the immediate impact of SOX and its related rules. First, he pointed out that the current governance revolution is a global one – not just localized here in the States. Second, he observed that governance has become a political issue – as governance undeniably impacts the company’s economic growth and plays a role in the integrity of our retirement system (i.e. most retirement funds are in equities).

Regarding shareholder access, Ira’s view is that the current system has not performed well – and that access clearly would be better (albeit perhaps not the best solution). Most of all, it would add to the other new incentives that should help ensure that directors are thinking about what they are doing, so that they would “be proud to tell their mother” about the decisions they have made.