Debate Continues Over Auditor Independence, Audit Rotation
In late March, the Public Company Accounting Oversight Board convened a public meeting to collect commentary on its concept release relating to auditor independence and audit firm rotation. The two-day meeting assembled nearly 50 experts in the fields of audit and accounting, including audit firm executives, audit committee chairs, former Securities and Exchange Commission members and investors. There is a range of viewpoints on this issue. Those supporting mandatory audit firm rotation were primarily concerned with a perceived lack of independence in audit engagements and contend that long-term engagements have the potential to weaken the auditor’s work performance. What’s more, audit firms may try to please their clients in order to keep the engagement instead of remaining objective. As panelist Richard Kaplan, professor of law at the University of Illinois at Urbana-Champaign, put it, “Auditors are prone to bias their conclusions to best preserve the client relationship that pays their bills.”
Panelists opposed to tenure limits for auditors dismiss this argument for lack of clear and convincing evidence. While the NACD supports the PCAOB’s initiative to improve audit quality, it has issued a comment letter to outline why a term-limit system may be the wrong approach. Alex Mandl, chairman of the audit committee at Dell, shared the director’s perspective on behalf of the NACD, stressing that audit committees have dramatically improved their performance since the passage of Sarbanes-Oxley. While there remains room for improvement, mandatory audit firm rotation is not the appropriate method, he said.
Catherine Lego, chairman of the audit committee at SanDisk, suggested that audit quality improvement might lie in the education and training of directors. Greater audit committee engagement with the PCAOB and director education groups such as NACD may be the most effective route in maintaining proper oversight of audit firms, she asserted.
The PCAOB accepted comment letters until April 22.
A Call for Academic Papers
NACD has joined with BlackRock to issue an invitation to undergraduate and graduate students, PhD researchers and university faculty to participate in a global challenge to apply the latest in academic theory to develop innovative corporate governance practices. Papers will be judged based on how effectively the presented ideas can be implemented to improve investment business practices and corporate governance. In addition to cash awards, winners will be recognized at NACD’s 2013 Spring Forum where they will have an opportunity to present their winning ideas to corporate directors. “This is a great opportunity for the next generation of corporate leaders—college students and faculty—to articulate their ideas to strengthen corporate trust and confidence,” said NACD President and CEO Ken Daly.
Yahoo Sues Facebook Over Patents
Facebook knowingly and improperly violated Yahoo’s intellectual property rights, according to a lawsuit filed in Federal District Court in San Jose, Calif., alleging violations of 10 of the company’s advertising, privacy, customization, social networking and messaging patents. The amount of damages remains unspecified, though the company called for any potential damages to be tripled “in view of the willful and deliberate nature of the infringement,” a company spokesman said in a statement. The suit is the first major one of its kind in the social-networking realm and follows an escalation in patent suits in the smart phone and tablet computing sectors.
Proxy Access Attempts Denied
The SEC has allowed a half dozen attempts to add proxy access provisions to companies’ bylaws to be removed from voting ballots this year, after shareholders made more than one proposal in their requests or were not specific enough about eligibility requirements, The Wall Street Journal reported. Textron, Bank of America, Goldman Sachs, Chiquita Brands, Sprint Nextel and MEMC Electronic Materials were allowed to remove the proxy access provisions from their ballots, now surviving as a possible amended bylaw following the U.S. Court of Appeals’ rejection of the SEC’s rule that would require all public companies to allow shareholders who own at least 3 percent of stock for at least three years to nominate directors to the company’s distributed proxy materials. The 2012 proxy season so far has seen 20 such individualized proposals, exceeding expectations.
Sprint Board Seeks Distance
The Sprint board of directors has increased its presence in talks with major shareholders and in “day-to-day” operations, joining Sprint Chief of Strategic Planning Keith Cowan in negotiations with potential partners, The Wall Street Journal reports. The board’s move is seen as a possible attempt to defend themselves from unhappy investors, following five years of losses, by distancing themselves from CEO Dan Hesse, who does not attend the meetings with investors. A number of institutional investors have questioned Hesse’s management abilities, including hedge-fund manager David Einhorn, the WSJ reported.
Repeat Filers Explore Chapter 22
Four of the 17 companies that filed for bankruptcy in the first two months of 2012 are repeat filers, with Hostess Brands, Buffets, TBS International and Fountain Powerboats Industries making a second trip through Chapter 11—sometimes dubbed “Chapter 22”—compared with six companies that entered bankruptcy in all of 2011. “There is too much emphasis on getting out, and getting on with business rather than whether it is going to work,” Ed Altman, the Max L. Heine Professor of Finance at the Stern School of Business at New York University, told Reuters. Though bankruptcy judges must approve a feasible reorganization plan before allowing the company to exit bankruptcy, an uncertain economy can create unforeseen circumstances leading to an additional filing.
Fannie, Freddie CEOs See Pay Limited
Congress capped Fannie Mae and Freddie Mac’s chief executives’ compensation at $500,000 per year, and annual bonuses for all employees of the two government agencies have been nixed. The Federal Housing Finance Agency, which oversees the organizations, has pledged to cut pay for 50 other executives, though they are still eligible for salaries higher than the cap. In 2009 and 2010, Fannie Mae CEO Michael J. Williams received $9.3 million in compensation, while his Freddie Mac counterpart Edward Haldeman Jr. earned $7.8 million. Both are expected to be paid $5.4 million this year, the last of their employment. Officials note the salary cap will be applied to their successors.
‘Buffett Tax’ Popular Across Party Lines
Individuals earning $1 million or more per year should be subject to a minimum 30 percent tax rate, said 64 percent of Americans surveyed in a recent Reuters/Ipsos poll on a proposed “Buffett tax,” named for Berkshire Hathaway Chairman Warren Buffett, who has advocated for the wealthiest Americans to pay a larger share to the federal government. Democrats were largely in favor of the increase, at 76 percent, along with 46 percent of stereotypically tax-increase-opposed Republicans. The survey, which polled 1,084 adults across the nation, also found that 57 percent of respondents would support eliminating a mortgage interest tax deduction if it resulted in a lower tax rate overall.
Business Judgment for Officers
The oft-cited “business judgment rule,” which protects directors who perform a reasonable amount of due diligence, is raising questions in the California court system, where former Indy Mac Bank CEO Michael Perry is testing whether the rule’s protection extends to corporate officers in the state. A federal district judge ruled that the line ends at directors, but Perry, facing a lawsuit brought by the FDIC over a pool of $10 billion in risky home loans, has appealed the decision to the 9th U.S. Court of Appeals.
Anti-Smoking Images Violate Free Speech
Federal Judge Richard Leon ruled that a provision in the Family Smoking Prevention and Tobacco Control Act of 2009 that would have required both written and graphic warnings on cigarette packs, including images of corpses and smoke-damaged lungs, is unconstitutional and violates tobacco companies’ First Amendment right to free speech. “Unfortunately, because Congress did not consider the First Amendment implications of this legislation, it did not concern itself with how the regulations could be narrowly tailored to avoid unintentionally compelling commercial speech,” said Leon in his 19-page ruling. The images, he said, did not serve to dispel confusion or increase consumers’ awareness of the risks of smoking, but rather to “evoke a strong emotional response calculated to provoke the viewer to quit or never start smoking.”
Groupon Recruits Directors
Groupon is reportedly seeking to add at least two directors to its board in a bid to regain investor confidence after a restatement of revenue last month, the Los Angeles Times reports. The daily deals website is apparently trying to recruit a new director to eventually lead its audit committee. The LAT reports potential candidates include CFOs at publicly traded companies.
NACD Exclusive: Public vs. Private Practices
With the JOBS Act and the widely discussed Facebook IPO, the governance practices of private companies are squarely in the news. In response, NACD’s Research Department compared trends in governance between private and public companies, using the data from the 2011 NACD Private Company Governance Survey and the 2011 Public Company Governance Survey as well. The most interesting data points were found in board operations and processes.
Under listing exchange standards, all public companies have to conduct full board evaluations. However, private companies are not far behind their public counterparts, nearly three-quarters conduct full board evaluations.
Public company directors generally commit more hours on average to their board than their private company peers, 227.5 hours vs. 179 hours, respectively. However, private company directors are more likely to make on-site visits to the company more than once a year—slightly more than half vs. one-third of public company directors. —Kate Iannelli