| Making Corporate
Governance Decisions that Work. According to a new survey the big four accounting firms have doubled their audit fees because of the work mandated by the Sarbanes Oxley act. The act was originally drafted to protect investors by curtailing the powers of these very firms who were found to be at the heart of each corporate scandal. In the bargain investors feel having been ripped off. The survey quoted above was conducted by Corporate Executive Board, a consulting firm and involved 43 companies that have had to comply with section 404 during 2004. The average increase in audit fees at 134% was highest in the case PwC followed by 109% for KPMG, 96% for E&Y and 78% by Deloitte. The survey found that the companies spent on average $5m to $8m dollars to comply with Sarbanes Oxley legislation. In Europe, one major energy firm listed in the U.S. market puts the annual cost of complying with Sarbanes-Oxley at over $100 million. Even US companies feel that the new regime is draining their resources. Paul Schmidt, controller for General Motors, says GM's chairman and CFO are spending more time on accounting and certification issues, “instead of strategy”. Coupled with this is the remuneration of independent directors. An analysis of 2004 compensation data showed independent directors of top 200 companies are being paid £97000 for barely 7 days work in a year. Would you expect such directors to give “independent” and “unbiased advice”? As cost of compliance of regulations such as Sarbanes Oxley is increasing astronomically the question most frequently asked is whether the onerous and unnecessary expenditure on compliance is worthwhile and is it really in the interest of investors who eventually have to foot the bill? This has resulted in corporate opposition to compliance and demand from European companies to delist from US Stock Exchanges. A delegation of European business leaders, including top officials from leading companies such as BASF, SIEMENS & UK’s CBI has met William Donaldson, SEC Chairman, to relax rules that compel companies to comply with US reporting requirements if they have more than 300 US investors. A growing number of European companies are considering delisting. According to a US quoted German company half the DAX 30 companies with US listings want to withdraw from US market. Sir Christopher Bland, Chairman of BT Group said it would delist if it had the option. This is one of the issues which is going to be debated in the forthcoming 6th International Conference on Corporate Governance being held in London on 12-13 may 2005. The theme of the conference is “making corporate governance decisions that work”. Sarbanes Oxley Act has split the corporate community. Companies, specially the ones based outside the US, feel that they can do without the excessive cost of compliance of SOX. There is another view that this is an investment that offers significant opportunities of competitive advantage in an environment where each stakeholder is looking for greater transparency and disclosure. A survey by PwC involving 1300 chief executives indicated that those who think that compliance of SOX is an investment, outnumbers the “cost” group by almost 2:1. Most CEOs understand that improving corporate governance by strengthening board expertise, board oversight and exercise of better internal controls to manage risks, would improve managerial effectiveness and add significant benefits and savings. The compliance can result in enhanced reputation, increased operational effectiveness, higher employee moral, improved customer loyalty and more transparent engagement with civil society. Transparency is the heart of corporate governance. With the increasing demands on disclosures, companies cannot survive without putting in place internal control architecture that will enable timely disclosures without risking reputation. The globalisation today offers huge opportunities for proactive businesses. Today’s business is dealing with only a fraction of the infinite field of available options. There are enormous opportunities for innovation and creativity. But innovation does require investment. Transparency can work wonders in improving company’s credibility and access to global capital. The real management challenge for global companies lies in creating systems for global governance that comply with stakeholder expectations right across their global operations and help them to build new markets and increase profitability. One of the nagging worries of the businesses after Enron and WorldCom directors accepted to compensate company losses from personal funds is to attract quality independent directors. Companies that have developed robust compliance programme and transparent structures would make them ideal choices for qualified directors. William Donaldson is currently reviewing the effectiveness of Section
404 of SOX. The question that he should be addressing himself is why the
cost of compliance should be so prohibitive and how he can reduce the
wages of sin for these auditing companies, minimise their hegemony so
that he can achieve the goal of creating value for investors.
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