dangletech

Once upon a time, in a land far away, or at least south of the 49 th parallel, the guys with the black hats grabbed the cash and rode out of town. Sheriff Paul Sarbanes and his deputy, Mike Oxley, sprang into action and, well, you know the rest. The Sarbanes-Oxley Act of 2002, also known as the Public Company Accounting Reform and Investor Protection Act of 2002, is a US federal law passed in a hasty and somewhat controversial reaction to the corporate and accounting scandals that plagued corporate America at the turn of the century. It got its name from its two chief proponents, Senator Paul Sarbanes and Representative Michael G. Oxley. Their bill was passed quickly and with little dissent in the House of Representatives (the vote was 423-3) and a unanimous 99 to 0 in the Senate. The legislation is wide ranging, to say the least, for it established new or enhanced standards for all US public company boards, for the management of public companies, and for public accounting firms. The act contains 11 titles, or sections, ranging from additional corporate board responsibilities to criminal penalties. It caused the SEC to implement rulings on how companies and boards are meant to comply with the SOX regulations.
 
There are many opinions on “SOX” and they divide roughly into two camps, for and against. My view agrees with Alan Greenspan in The Age of Turbulence: Adventures in a New World (Penguin Books, 2007): He said, reasonably enough, that while US corporate governance has had its share of shortcomings, it has to be admitted that the US economy has done rather well in spite of them, or at least it did until the advent of the asset backed paper fiasco. This would support the idea that corporate directors must have got it right at least some of the time.
 
Canadian directors are familiar with the resulting “harmonized” regulations that are now part of their landscape and those on both sides of the border now spend a major portion of their time complying with regulations rather than guiding the fortunes of their companies. We seem to cling to a rather quaint belief abroad in the land, to the effect that when rules are written they will be obeyed, ergo the problem is solved. Perhaps not.
 
Fraud: the Livent Affair is still before the courts so comments must be restrained, but we have learned is that either the accounting system was altered in a systematic way or the Chief Financial Officer constructed a careful and thorough scheme to assassinate the characters of the owners. Time and the courts will tell the tale but neither of the probable outcomes will be a bedtime story. Clearly, the rules were known in sufficient detail to be avoided or manipulated, and we will discover which it was over the next few months.
 
More fraud: All across North America the Boomers are retiring and over the next 20 years about $18 trillion will move from pension funds, RRSP and, in the United States, 401K plans. The “financial advisors” have moved into high gear, playing to an audience where 65% to 75% are totally unprepared to move from earning to spending, according to studies by companies like MetLife. Retirement planning seminars are suddenly in vogue, with well-rehearsed presentations and confidence-inspiring answers to questions from the audience. In spite of extensive publicity (One headline read, “Ruined by 401(k) Predators”) many have been taken in and more will be. All this, of course, has happened well after the proliferation of regulations of the post-Enron era.
 
Manipulation and smuggling: Two major Canadian tobacco companies have just been assessed fines and settlements of about $1.5 billion in criminal and civil penalties for a scam that shipped wholesale cigarettes into the United States and smuggled them back to Canada to be resold at bargain prices. Unlike a similar case between the European Union and Phillip Morris, which tendered a similar fine but without an admission of guilt, the two companies in this case both admitted “aiding persons to sell and be in possession of tobacco manufactured in Canada that was not packed and was not stamped in conformity with the Excise Act.” Smuggling into the US and return was courtesy of the porous scrutiny of First Nations traffic. Once back in Canada distribution was by sales “on the street” or in convenience stores. The company motives seem to have been to push consumers towards particular brands. “This was done with the intention of maintaining - their share of the Canadian tobacco market,” Crown attorney Graeme Cameron told Judge Robert Bigelow of the Ontario Court.
 
Ethics: Business Week called it “The GMAT Cheat Sheet” when it ran the story of MBA applicants who used a test site to prepare for their entrance exams. On June 23 rd 2008 the Graduate Management Admission Council announced that it had won $.3 million in a copyright infringement suit against ScoreTop.com. It also obtained a hard-drive with the names of some 6,000 aspirants who had paid $30 each to gain access to a restricted area of a web site providing access to test questions posted by others who had recently taken the exam. GMAC has announced its intention of cancelling the scores of anyone who posted questions on the site or knowingly read them. GMAT tests are created by pulling questions from a very large bank of possibilities, so those using ScoreTop.com did not gain much. The ethics of those who posted the questions is another matter.
 
One might repeat Peter Dey’s famous question on the first three (“Where were the Directors?”) while last example is, sadly, an indication of the values of a rather large sample of those expecting to study for an MBA and thus enter the business world. What are the implications for directors? Are those on the boards of smaller companies more - or less - likely to face such situations? What do we make of this? First, humans will unerringly behave like humans, warts and all, so we should expect that some small percentage will cut a few corners. The second comment is that directors ought to equip themselves for the eventuality because they will encounter it at some point. Preparedness is neither impossible nor very difficult, as I will describe in my next article.