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Sarbanes-Oxley legislation News & Views



Sarbanes-Oxley legislation News & Views


U.S. Securities & Exchange Commission Chairman Arthur Levitt: Pres. Bush & Sec. Paulson are rolling back corporate governance standards

History & Developments

Sarbanes-Oxley - the critics & Hank Paulson

Executive Turnover doubles in wake of US Sarbanes-Oxley Legislation

Sarbanes-Oxley may effect non-profits

Links to Enron & WorldCom Timelines


orporate governance news articles

Insurer Seeks Shareholder Opinion on Executive Compensation

Board Compensation Committee's Face Increasing Criticism

Warren Buffett's Succession Plans

Spotlight on CEO Compensation

CEO Calls Governance Researchers Birdbrains!

HP's Governance Woes & Resurgence

Governance Issues Arising from Corporate Scandals

Sarbanes-Oxley Legislation News & Views

Enron Timelines

WorldCom Timelines

Governance Best Practices - TELUS Governance Page

Governance Page



U.S. Securities & Exchange Commission Chairman Arthur Levitt:
Pres. Bush & Sec. Paulson are lowering corporate governance standards and rolling back reforms

Arthur Levitt, former Chairman of the U.S. Securities & Exchange CommissionFebruary 8, 2007. Arthur Levitt, former Chairman of the U.S. Securities & Exchange Commission is sounding the alarm to anyone who will listen. Speaking at a Midtown Manhattan conference of RiskMetrics, Levitt says that US President Bush, Treasury Secretary Henry Paulson, and the Wall Street lobby of big business are rolling back the gains made in corporate governance reform and standards since the enactment of the Sarbenes-Oxley legislation (SOX), legislation enacted in the wake of the Enron and Worldcom disasters where investors lost millions to the greed and fraud of corporate executives.

Appointed by Bill Clinton in 1993 Levitt was the SEC's longest-serving chairman, holding the post until 2001.

On the one hand, Levitt and other advocates of shareholder rights are striving to keep the Sarbanes-Oxley Act of 2002 intact. "There are enormously well-funded lobbies doing everything they can to stop your efforts at reform,” Levitt warned his audience of institutional investors representing $8 trillion in assets. Levitt encouraged his audience to keep pushing for corporate governance reform, including the right to nominate their own director candidates, greater access to top executive compensation data, and a greater say on how that compensation is set.

"Board elections are exclusively one-party affairs. Proxy fights are prohibitively expensive. As a result an (independent) director has a better chance of being struck by lighting than being elected to a board," he said. However, corporations like Hewlett Packard are slowing making reforms. Following its governance problems, HP is considering changes in its bylaws to enable proxy voting.

Levitt was very critical of corporate directors who award chief executive officers huge compensation packages with no justification and no concern for the impact on the rights of shareholders.

On the other hand, groups such as the Committee on Capital Markets Regulation, sometimes called the Paulson Commission after the US Treasury Secretary, have complained SOX and the resulting SEC regulation mandated by the legislation harms American competitiveness in world markets, a somewhat hollow complaint given the rise in US equity markets at the same time when the regulations were being enforced. The cause of the big business lobby has found champions in US President Bush and his Treasury Secretary who are working to relax regulations while discouraging shareholder lawsuits.

Uncovering the fallacy of the business lobby's stated objections to corporate governance reform, greater accountability and shareholder rights, Levitt noted that November 2006 saw the largest number of U.S. IPOs - initial public offerings - since 2001, an indication of the growing strength of the US market during the time SOX is being implemented.

Sarbenes-Oxley legislation (SOX) critics have pointed to the growth of the London Stock Exchange operating under weaker UK law. Once again Levitt contradicts this claim. He points out that not only are the LSE returns down, but financial fraud at the London Stock Exchange so-called AIM listings. "The bloom is really off the rose of London’s AIM. is up as much as 40%, according to one U.K. accounting firm" says Levitt.


US' Sarbanes-Oxley legislation Background:
History & Developments

Updated December 2, 2006.
In July 2002, The US Congress passed the Sarbanes-Oxley Act following the Enron and WorldCom scandals, other major corporate bankruptcies and a severe downturn in the US equity market that sent the benchmark US indices to new post September 11 lows.

The purpose of the legislation is to prevent fraud, misuse and unauthorized access to any financial information on which public companies base their published financial reports. The Sarbanes-Oxley Act requires public companies to comply with specific auditing, corporate governance and reporting requirements. It also requires executives to certify that corporate financial systems are secure.

The legislation authorized the US Securities and Exchange Commission (SEC) to develop the rules and regulations needed to implement the legislation. The SEC has since drafted stringent new rules on disclosing the dating of stock options, pay and perks to corporate executives. These regulations state that U.S. companies have to report each year on the annual pay for chief executives, chief financial officers, and the next three top-earning executives.

Critics of the legislation have warned that the legislation will decrease the attractiveness of the U.S. capital markets to foreign issuers. Until Sarbanes-Oxley, foreign private companies raising capital in US markets had different reporting requirements than US companies and the legislation comes close to eliminating these differences. Many foreign companies in the process of making public offerings felt that the rules imposed exceptional burdens on them and chose to make their public offerings in the UK and the rest of Europe rather than the US. In addition, the cost of raising capital is higher in the US because of higher underwriting fees in the US compared with Europe.

On August 9, 2006, the SEC responded to the critics and the negative effects the legislation on the capital markets, by granting smaller companies and foreign private issuers a year to comply with Sarbanes-Oxley's internal control reporting and auditing provisions. Earlier, on May 17, the SEC said that it would work with the Public Company Accounting Oversight Board to revise the auditing standards that external auditors must apply when assessing a company's internal controls. The critics, however, maintain that the changes will be insufficient to stem the move away from the US capital market.

More Time to Comply with Reporting Requirements but Major Changes Unlikely

While critics of the legislation are lobbying hard for changes that will ease the reporting requirements of the legislation, consumer advocates are opposed to the changes, and it is unlikely that the lobbying will succeed.

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Sarbanes-Oxley Legislation - The Critics & Hank Paulson

Updated December 2, 2006.
Critics: There is an obsession with corporate governance that is hurting business. The US Treasury Secretary takes up their cause.

The critics of the Sarbanes-Oxley Legislation - primarily corporate leaders - have spent much of 2006 mounting an assault on the legislation. They say that there is a global obsession with corporate governance that is making many boards of directors risk-averse and overly cautious. Corporate executives and board members fear that the possibility of legal action and even jail time has increased substantially as a result of the legislation.

The assault on the Sarbanes-Oxley Legislation is closely connected an assault on corporate governance. The critics of the legislation add that corporate governance is becoming 'compliance focused' in approach and this mindset is stifling the entrepreneurial spirit needed to keep industry vibrant and productive. The Sarbanes-Oxley Legislation has put the compensation of corporate executives under close scrutiny, since corporations must now disclose the dating of stock options, pay and perks to corporate executives. InterActiveCorporation (IAC) CEO Barry Diller, whose 2006 compensation is estimated at $295 million, called (on November 27, 2006) corporate governance activists "birdbrains" who are hurting American business.

While it is the SEC that is responsible for developing the reporting requirements under the legislation, the critics have made governance practitioners their whipping boy rather than risk raising the ire of the SEC. They have felt criticism of the SEC, via its regulations, to the US Treasury Secretary, Hank Paulson.

Henry PaulsonUS Treasury Secretary, Hank Paulson, is a prominent spokesperson for the critics. At the outset of his appointment, Paulson a former Goldman Sachs chief, in a August 2006 speech at the Columbia Business School, argued for the need to reform the Sarbanes-Oxley Act and relax many of its provisions. While Paulson said "corrective measures to address corporate scandals" "increase investor confidence," he added "often the pendulum swings too far and we need to go through a period of readjustment." "The challenge before us now is how to achieve the right regulatory balance to allow us to be competitive in today’s world while guarding against the recurrence of past abuses."

Then, in early November 2006, Paulson said that while the Sarbanes-Oxley Act does not need to be changed, the US government should review and relax the manner in which the rules are being enforced.

Paulson was joined by the Committee on Capital Markets Regulation (CCMR) in criticizing the regulations (and indirectly the SEC). The CCMR is headed by Paulson's former colleague at Goldman Sachs: former White House advisor Glenn Hubbard and ex-Goldman Sachs president John Thornton. In a 135-page report, the CCMR said that there is too much regulation and revising the rules under the Sarbanes-Oxley Act would make US markets more attractive.

The CCMR concludes that the US should revise the Sarbanes-Oxley Act limit penalties for companies, and reduce costs.

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Executive Turnover doubles in wake of Sarbanes-Oxley

August 23, 2006. 17,612 CEO's and vice presidents changed jobs in the first six months of 2006 compared with 7,251 in the same period last year according to Liberum Research .

Compliance requirements of the Sarbanes-Oxley legislation and greater share-holder scrutiny are being cited among the reasons.

Putting a face to the statistics are present U.S. Treasury Secretary Henry Paulson and Nike's ex-CEO, William D. Perez.

Henry Paulson, 60, CEO of Goldman Sachs Group Inc. announced in May 2006 that he was stepping down as CEO to become U.S. Treasury Secretary, (see Sarbanes-Oxley Legislation - The Critics below).

Nike Inc.'s CEO William D. Perez, 60, abruptly resigned in January 2006 after being in his job for thirteen months. Differences with company founder and chairman Philip Knight are said to be the reasons for Perez' departure. Knight, who along with Bill Bowerman founded Nike in 1968, had stepped down as CEO on December 28, 2004 at 66, though he continued as "an active chairman." His 35% stake in Nike, reported to be worth $7.4 billion, makes him the 22nd richest American.

Nike agreed to pay Perez $4.55 million (2 year's salary worth $2.8 million and bonuses worth $1.75 million), buy his Portland house and reimburse him for remodeling expenses of about $3.6 million. This information was contained in a filing with the Securities and Exchange Commission.

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Sarbanes-Oxley Legislation May Effect Non-Profit status of Organizations

August 18, 2006. Following the enactment of the Sarbanes-Oxley legislation, Senator Charles Grassley (R-Iowa), a frequent critic of non-profit organizations and Chair of the Senate Finance Committee, held hearings on potential changes in the regulation of non-profit organization.

The American Bar Association's Coordinating Committee on non-profit governance issued a report recommending reforms in May 2005 and a further group of interested parties produced a report proposing certain changes to The Panel on the Non-profit Sector in June 2005. One of the suggestions is that the IRS re-qualify organizations for tax exemption every five years.

Regardless of whether the recommendations become law, the boards of directors of non-profit organizations everywhere are best advised to take proactive measures in keeping with the principles of good governance contained in the Sarbanes-Oxley legislation, rather than reacting to forced requirements.

The boards of all non-profit organizations need to ensure that the non-profits deliver a benefit to the community at large in order to benefit from tax-exempt status. A periodic review of the organization’s mandate and programs for compliance with this principle is good governance practice least the non-profit provide their critics the ammunition they need to eliminate this preferential status.

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