| Hony.
Editor |
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Dr.
Bindi Mehta
(Director,
Research at ICSI - CCRT, Formerly, Chief economist, CRISIL)
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| Fine
print - companies keep an eye on auditors' remarks |
The
notes and fine print to companies' results have several important
pieces of information, which are usually overlooked. But after
a wave of corporate scandals, some of these ‘notes to accounts’
have come under a scanner, one of them being the auditors' qualifications
and comments and management’s response to these. Usually, the
auditor’s qualifications and comments of the previous year are
nearly always forgotten by the time the next results are out.
Both
investors and analysts are prone to focus on qualifications
in current financial statements due to their likely impact on
future performance. However, when one looks at what exactly
happened in the form of action taken on points raised earlier,
one can get a better picture of the way things are moving. In
many cases companies have taken action to resolve the issues
raised in the comments.
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| Costs
rise as US businesses act to meet governance laws |
Medium
sized US companies are starting to report soaring costs from
complying with new corporate governance laws and market demands
for greater checks on financial statements. Audit fees for public
companies with market capitalization of about $ 1 billion rose
by 35 per cent over the last year, according to a survey of
the recently filed annual reports of 450 groups. Director compensation
was up 10 per cent, and insurance for directors and executives
has at least doubled in many cases.
Legal
fees from complying with the Sarbanes-Oxley Act passed last
year by Congress in the wake of corporate scandals at Enron,
WorldCom and elsewhere - are up by double-digit percentages.
Companies are having to revise guidelines for governance committees,
put in place disclosure mechanisms and prepare codes of conduct.
The
rising costs were reported in a survey by Foley & Lardner,
a law firm and KRC Research. Many of the act’s provisions have
only just come into force and the survey is the first indication
of its financial impact. The authors suggest costs will grow
further. The Public Company Accounting Oversight Board was created
by the new law to replace the US audit profession’s tarnished
system of self-regulation. It said in a press announcement that
non - US audit firms that worked on companies with listings
in the US would have to register with it by May 2004.
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| Directors
find holes in their insurance security blankets |
US
Company director’s security blanket - otherwise known as directors
and officers liability insurance (D&O) - is beginning to look
increasingly shredded these days. The latest hole on coverage
can be found in the small print, which invalidates the policy
of the directors if the company restates its published figures
- exactly the point which board members might need the insurance
cover against lawsuits.
Directors
and officers liability insurance, which covers board members and
executive against lawsuits, is going through a period of almost
unprecedented upheaval. US courts are hearing a variety of cases
as insurers attempt to rescind policies written during the 1990s
for companies that have since gone bankrupt or been hit by fraud
allegations.
Meanwhile,
premiums are continuing to rise sharply following corporate scandals
and the rising tide of shareholder suits. That is a far cry from
the late 1990s, when premiums fell dramatically and companies
were able to dictate terms to insurers. Lawyers and consultants
said unwary directors risked being trapped because their companies
have bought cheaper policies that can easily be challenged if
anything goes wrong. “Whenever you’re in a hard insurance market,
you need to pay particularly close attention to the policy wording
because this is the point in time when insurers cut back”, said
Jim Swanke, principal at Tillinghast-Towers Perrin, the actuarial
consultancy.
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| NYSE
plans to hold sessions on its Corporate Governance |
The
New York Stock Exchange responded to a regulatory request to examine
its corporate governance procedures by announcing plans to hold
hearings on the matter. That special committee had already been
impaneled with “a view to making appropriate reforms”. Mr. Dick
Grasso wrote in a letter sent to SEC Chairman “To encourage our
constituents to share their views with us on how to improve our
governance, the committee will ask organisations and individuals
representing our constituents to make written submissions”.
It
hasn’t yet been determined how long the hearings will last or
whether they will be conducted in public or in private, the spokesman
said. But the governance committee will ultimately produce a report
that will be available to the public. The NYSE has been criticized
for its practice of allowing top exchange officials to sit on
the boards of NYSE listed companies. The exchange says it has
firewalls in place to prevent conflict of interest.
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| Investors
and auditors voice concern over power of ISS |
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Investors and audit firms are worried about
the growing influence of Institutional Shareholder Services (ISS),
the US proxy advisory firm now staking a claim to be the global
market leader in corporate governance ratings. Criticism focuses
on ISS’s methods and the potential conflict of interest between
the group’s growing corporate advisory services and its core business
of providing voting recommendations on shareholder proposals.
ISS
recommendations are used by institutional investors and can swing
as much as 20 per cent of the vote, according to some shareholders.
The groups support contributed to Hewlett-Packards narrow victory
in the vote on its takeover of rival computer group Compaq last
year. Some shareholders are now worried that ISS’s push for corporate
clients might affect the objectivity of its proxy recommendations,
particularly on votes about sensitive issues.
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©
2001 Academy of Corporate Governance |
