The Few Make Business Tougher
Since last summer, securities regulators have promulgated, implemented or begun to implement more than two dozen new rules designed to restore investors’ confidence and prevent or crack down on the kinds of fraud that occurred at Enron and WorldCom.
The new regulations require increases in public disclosure and bar certain practices.
“That’s definitely a dynamic here,” said Harvey Koning, a partner in the Corporate Practice Group at Varnum, Riddering, Schmidt & Howlett PLC in Grand Rapids.
He explained that many of these rules are a direct reaction to flagging investor confidence and were necessary and appropriate to prevent future WorldComs or Enrons.
“The trend toward more disclosure and accountability is a good trend,” Koning said.
Koning said the new rules “are not an overwhelming burden” for most corporations and — in terms of having certain policies and practices in place — it’s his view that the new requirements represent a number of steps that many public corporations already have been taking internally.
“The vast majority of public companies are doing very well in terms of corporate behaviors and disclosures,” Koning said. “The vast majority of public companies are honest and these rules represent in large part a reaction to a few high-profile cases.”
Among the new rules the U.S. Securities and Exchange Commission has implemented or begun to draft are:
- Requirements that chief executive and chief financial officers personally certify the completeness and accuracy of quarterly and annual financial reports to the SEC. The measure would require CEOs and CFOs to forfeit certain compensation and profits were a company to make an accounting restatement based on misconduct.
- A ban against personal loans by a company to its own executives.
- A rule prohibiting directors and officers in a company from trading certain securities during retirement plan blackout periods.
- A rule prohibiting directors and officers from directly or indirectly influencing auditors to render financial statements materially misleading.
- A requirement that annual financial reports must contain an internal control report that’s attested to by an outside auditor. Such reports also must disclose whether a corporation has adopted a code of ethics for certain executive officers.
Any waiver of such a code must be immediately disclosed to the public.
- A requirement that a company reconcile generally accepted accounting principles (GAAP) with any non-GAAP information released to the public. The rule would impose tougher standards on the use of non-GAAP information in SEC filings.
- A regulation that subjects corporate audit committees to new independence standards and expands their authority and responsibility.
Those and other SEC actions taken or planned are designed to implement the Sarbanes-Oxley Act of 2002 that Congress enacted last summer and the president signed in reaction to the corporate scandals.
The government hopes the requirements will help restore investor confidence in public companies and equities markets.
In an April 7 address to the National Economists Club in Washington, D.C., SEC Commissioner Cynthia Glassman said the goal of the new rules was three-fold:
- To ensure an effective corporate governance process
- To punish bad behavior
- To promote an ethical corporate culture.
The last factor is one that neither Congress nor the SEC can legislate, Glassman stressed.
She said that the restoration of investor confidence is ultimately a question that comes from “the tone at the top” and the behavior and example set by corporate executives and directors.
“More than any regulatory body, corporate officers and directors have it within their power to restore public trust,” she said.
“Trust depends not just upon putting new rules on the books, but more importantly, on whether there is a widespread consensus that those rules are accepted and will be implemented effectively and in good faith,” Glassman added.
“Corporate officers and directors hold the ultimate power and responsibility for restoring public trust by conducting themselves in a manner that is worthy of the trust that is placed in them.”