September 19, 2005

Disclosure Controls and Disclosure Committees: Quick Survey

We have posted a new quick survey on disclosure controls and disclosure committees. Please take a moment and fill out the 4 questions. This new survey supplements last year’s quick survey on disclosure committees.

Survey Results: Audit Committees and Earnings Releases

Here are the results from last month’s quick survey on audit committees and earnings releases:

1. Does your Audit Committee review your company’s earnings releases prior to their release to the media? Yes – 90%; No – 10%

2. If the answer to #1 is “Yes,” how many days prior to public issuance of the earnings release is a draft typically sent to the Audit Committee?

– One day or less – 15%
– Two days – 31%
– Three days – 25%
– Four days or more – 29%

3. If the answer to #1 is “Yes,” does the Audit Committee hold a meeting for the purpose of discussing each earnings release?

– Yes, and mostly (or all) by telephone meetings – 81%
– Yes, and mostly (or all) by face-to-face meetings – 13%
– No – 6%

4. If the answer to #3 is “No,” is the Audit Committee informed about issues that will be discussed in the related earnings release?

– Yes, in writing – 7%
– Yes, at a meeting – 72%
– No – 21%

5. Does your Audit Committee hold a separate meeting to review draft Forms 10-Q and 10-K (and at the same meeting, review the CEO’s and CFO’s certification of the Forms 10-Q and 10-K)? Yes – 68%; No – 32%

The Executive Compensation Revolution

Below is an interesting excerpt from my interview with Paul Hodgson of The Corporate Library. Paul says: “In the U.K. there was a real groundswell of protest against excessive executive pay during the early 1990s. This was primarily caused by the government privatizing utilities at a price well below their market value. Stock prices for these utilities exploded once they hit the market, and the executives – who had all been awarded substantial stock option awards in line with typical practice – were millionaires overnight. And these were people who had been public servants up until this point.

Well, the press just had a field day. There were pictures of pigs dressed up in pin striped suits, headlines like “Snouts in the trough”. You know what the British press is like. Anyway, it was a disaster for corporate Britain.

In response to the protest, there was a corporate governance revolution. The government set up a series of corporate governance committees, and put them in charge of solving the crisis in executive compensation. These committees did not look to the institutions or to the regulators for what should be done. They looked to those companies which they felt had already introduced best practices.

More important, they looked to those companies that had already introduced best practice compensation policies without any negative impact on their ability to recruit talented executives or any negative impact on the performance and commitment of their existing executives. These best practices were then enshrined in a series of corporate governance codes. But the inspiration for these codes came from business, not regulators.”

Paul is part of the panel – “The Institutional Investors’ New Focus on Executive Compensation: What It Means For You” – during the “2nd Annual Executive Compensation Conference.”

S&P Exits Governance Rating Field in US

As expected, the shakeout in the governance rating industry continues as S&P has dropped out. S&P’s “pay-to-play” model never made sense (ie. companies had to pay in order for S&P to rate them) and it didn’t help that S&P’s marketing efforts centered on its voluntary rating of Fannie Mae (to which it gave a high rating before Fannie’s bottom fell out).

S&P remains active in providing ratings in other markets around the world -primarily emerging markets – where governance concerns remain strong and where stand alone governance analysis continues to have merit.

In the US (and elsewhere), S&P also remains focused on applying corporate governance analytics in the context of their credit ratings. Specific feedback from investors was that S&P needs to continue to monitor corporate governance as a risk factor, but investor preference is to factor this into credit ratings rather than provide it as a separate service. This is what Moody’s does also.

SEC Posts New Periodic Report Forms

To add in the new shell company disclosure items, the SEC posted this new Form 8-K, Form 10-K and Form 10-Q on its website last week. Besides shell company changes, the Form 8-K changes relate to Item 6 for extensive asset-backed issuer disclosure provisions (previously Item 6 was “reserved”).

You can tell they are new by the date in the lower left corner of the first page – check those against the forms you might be using.