Tag: Usha Rodrigues

Public Companies Fail to Disclose Ethics Waivers

usha rodrigues

According to Usha Rodrigues from University of Georgia Law School and Mike Stegemoller from Texas Tech University – Rawls College of Business, in their paper Placebo Ethics, public companies are failing to disclose ethics waivers.

They focused on Section 406 of Sarbanes-Oxley which requires public companies to disclose when they have granted an ethics waiver to top executives. Section 406(b) states:

“The Commission shall revise its regulations concerning matters requiring prompt disclosure on Form 8-K (or any successor thereto) to require the immediate disclosure, by means of the filing of such form, dissemination by the Internet or by other electronic means, by any issuer of any change in or waiver of the code of ethics for senior financial officers.”

The regulations for Section 406 provide:

§229.406 (Item 406) Code of ethics:
(a) Disclose whether the registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. If the registrant has not adopted such a code of ethics, explain why it has not done so.

(b) For purposes of this Item 406, the term code of ethics means written standards that are reasonably designed to deter wrongdoing and to promote:

(1) Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; …

Rodrigues and Stegemoller were able to take advantage of the overlap between the 406 disclosure requirements and the disclosures required by Item 404 of Regulation S-K for related party transactions with an amount in excess of $120,000. One of the challenges of determining compliance with disclosure requirements is you can’t tell if there was a need for a disclosure unless the information is disclosed. This overlap allowed them to find items in the 10-k proxy statement that should have been reported immediately under Section 406.

Their sample set was 200 public companies. From January 1, 2003 through December 31, 2007 they found only one waiver filed under Section 406 for these 200 companies. They also looked beyond their sample set and found that of the 5,000± public companies there have only been 36 waivers filed using Form 8-K.

They took the next step and looked at the 10-K filings for their sample set of companies for related party transactions. Fifteen companies failed to disclose related party transactions that should have been reported immediately under Section 406. They found lots of other disclosures that were in a gray area. (This should be no surprise to Michelle Leder at Foototed.org who loves finding these things.)

One theory is that the public companies prefer to dump these related party transactions into the 10-K proxy statement where there is already a flood of information rather than specifically calling out the transaction in a separate Form 8-K. (Again, Michelle Leder loves digging up this stuff.) There is a difference between immediate disclosure and eventual disclosure.

Another surprise in the paper was that most of the companies in the sample set did not prohibit related party transactions in their code of ethics. Only 30 prohibited these transactions. These omissions also would appear to be a violation of Section 406 since the regulation requires a code to deal with conflicts of interest. Personally, I don’t see how you can call something a code of ethics if it does not prohibit related party transactions.

References:

Short Bites

Here are a few stories and items that caught my eye, but I have not had time to build-out to a full post:

Reminder to Review Insider Trading Compliance by Melissa Klein Aguilar for Compliance Week

The SEC settled an administrative proceeding this month involving Merrill Lynch based on the firm’s failure to have adequate procedures regarding its “squawk box” to prevent day traders from overhearing and using material non-public information regarding unexecuted institutional orders. That case, along with a 2008 report of an investigation issued last year regarding the Retirement System of Alabama, suggest that “the prudent approach for issuers is to carefully review the adequacy of their procedures for handling inside information,” says Gorman. Those procedures should be carefully tailored to the specific business of the company.

Madoff to Stay Behind Bars Pending Sentencing from the WSJ Law Blog

The Second Circuit earlier Friday affirmed the ruling of the federal district court judge overseeing Madoff’s case, Denny Chin, who had ordered Madoff detained for the months leading up to sentencing, currently slated for June 16. A copy of the Second Circuit’s ruling; A LB post from last week on Madoff and his prison prospects.

Risky Business Did compliance programs fail the test during the financial industry meltdown? by David Hechler for Corporate Counsel

Cox got no argument from his audience of chief compliance officers. But the rest of us may be forgiven for wondering what the compliance officers, and the risk officers, and the ethics officers were doing at the financial services firms when their colleagues were placing those dangerous wagers. Weren’t all those internal controls supposed to protect companies from catastrophe?

Placebo Ethics by Usha Rodrigues and Mike Stegemoller

While there are innumerable theories on the best remedy for the current financial crisis, there is agreement on one point, at least: increased transparency is good. We look at a provision from the last round of financial regulation, the Sarbanes Oxley Act of 2002 (“SOX”), which imposed disclosure requirements tailored to prevent some of the kinds of abuses that led to the downfall of Enron. In response to Enron’s self-dealing transactions, Section 406 of SOX required a public company to disclose its code of ethics and to disclose immediately any waivers from that code the company grants to its top three executives. These waivers offer a unique window not only into ethical practices at public U.S. companies, but also into how disclosure works “on the ground” -whether companies are actually complying with disclosure rules and whether these rules prevent self-dealing transactions.

Federal Stimulus Bill and TARP Mandate Additional Corporate Governance Requirements by Corporate Compliance Insights

After The American Recovery and Reinvestment Act was passed, the Say on Pay provisions for executive compensation received a great deal of coverage and scrutiny from the national media. Certainly, the Say on Pay provision for companies participating in the Troubled Assets Relief Program (TARP) is one of the most important corporate governance mandates in the Stimulus Bill; but it is far from the only concern for companies receiving government funding.

Internal Audit: The Board’s Agent on the Ground by Mr. David Chiang for Corporate Compliance Insights

As the board chair of a university and a member of several audit and finance committees including that of billion-dollar community not-for-profit organization, I’ve seen first-hand why it’s critical to establish and support an effective internal auditing department. Internal audit needs to comply with industry best practices and develop a strong reporting relationship to the audit committee.

Audit Committee Brief – February 2009 (.pdf) by Deloitte

A recent Deloitte survey found that current market conditions have caused audit committees to change their focus. Today, audit committees are examining liquidity, impairments, enterprise risk management, and financial reporting disclosures more closely.