December 21, 2005

Overhaul Begins? Corp Fin’s Telephone Interpretation Manual

Yesterday, Corp Fin added some phone interps on Regulation AB to its Telephone Interpretation Manual – as well as added a new index page. The Manual is now split into discrete PDF sections coded, rather than posted as a single file – although the five Manual supplements are still separate and not integrated yet.

The new look is nice, but I am bummed that the sections are no longer alpha-numbered so that a particular interp can be easily referenced (eg. “I.84” instead of now having to say “#84 in the ‘Regulation S-K’ section” like I just did in answering a query in our Q&A Forum). Other members have complained that they wish a PDF of the entire Manual was still available so that it could easily be word-searched or printed out. Maybe Santa will hear us?

[Of course, we still have our searchable, HTML version of the Manual posted – but it will be difficult to maintain this version if the Staff makes piecemeal changes to the Manual going forward.]

This is an encouraging sign and perhaps means that Corp Fin’s long-standing project to update the Manual will be in full swing during ’06. Quite a challenge for the Staff to undertake as the last comprehensive update was in 1997 – and things sure have changed a bit since then!

Scrushy’s Latest Maneuver: The Shareholder Proposal Angle

Everytime I hear the dude’s name, I roll my eyes. Now Richard Scrushy has been rejected by Corp Fin in his attempt to use 14a-8 to amend the HealthSouth bylaws so that a majority of shareholders could fill board vacancies and set the number of directors on the board. Note that the former HealthSouth CEO submitted his proposal before he was indicted again – this time for political corruption – and before he sued HealthSouth for $70 million in back pay. This guy has some gall, eh?

On December 9th, the SEC Staff agreed with Healthsouth that Scrushy’s proposal could be excluded after the company argued that the proposal would result in a “pro rata” vote that deviates from the “one share, one vote” rule under Delaware law.

S&P 500 Governance Survey

This new Spencer Stuart survey regarding the S&P 500’s corporate governance practices shows considerable progress having been made in recent years. At the same time, it highlights a number of shortcomings. Here are some of those shortcomings, as noted by former SEC Chief Accountant Lynn Turner:

1. 12% of boards still have no women; 43% of these companies are in the high technology industry, often in California.

2. Lead directors are commonplace with 94% of the boards with them, compared to only 36% in 2003. Directors as a whole are more “independent” than before SOX as defined by the listing rules.

3. However, the CEO still chairs most boards, and where they don’t, the chair is usually not independent. As a result, the leader of the vast majority of the boards is not independent. However, the number of boards with a truly independent board chair, something almost unheard of just 5-6 years ago, is now up to 9%.

4. Audit committees appear to have changed little, most likely due to the SEC “watering down” the requirement for a “financial expert” over the objections of investors. As a result, it appears there probably are a lot of people who are not real experts in the field of financial reporting who are still designated as financial experts. As noted in the attached survey, audit committees still often do not have a board member who has been a CFO, controller or CPA. The number of audit committ members with CFO and accounting backgrounds remains at only 9% in 2005, the same as in 2004.

Accordingly, board oversight of the financial reporting process is probably still not what it should be. Often these so-called “experts” are probably challenged at best – if not fully unable – to deal with many typical issues, such as financial reporting questions; discussions of what are the necessary internal controls over accounting and disclosure; and auditor independence issues.