Sox First

Six rules to avoid PR disasters

24 May 2007

In light of recent scandals, Fortune's Jia Lynn Ya reminds us how Johnson & Johnson's response to the 1982 Tylenol poisonings is the gold standard for crisis management.

James Burke, then CEO of the company, could have gone down the direction of plausible deniability where, hand on heart, he would declare he had done everything prudently possible to stop trouble happening.

All that would have done would have been to fan the flames of discontent. Instead, the company spent hundreds of millions on a recall and embarked on an enormous public information campaign. It immediately called a news conference, posted a reward for finding the culprit, established 24-hour help lines to deal with inquiries, and instructed doctors to suspend supplies. J&J was just as quick four years later when there were copy-cat poisonings. Straight away it stopped the production of capsules, and introduced tamper-proof caplets.

J&J showed businesses how to turn a negative episode into a triumph.

Of course, history is littered with examples of hamfisted business chiefs who damaged, or nearly destroyed, the reputation of their companies.

Some examples: the 1989 Exxon Valdez oil spill is recognised as the template for PR screw-ups. Its leaders initially refused to talk to media people, and then blamed them for damaging the company's reputation.

Or take Union Carbide's handling of the poisonous gas leak at Bhopal in India that killed nearly 4000 people in 1984, and Shell's performance over environmental issues related to the Brent Spar rig, and the corporate relationship with a brutal regime in Nigeria.

Or the way Nestle's reputation was harmed by the way it marketed formula milk.

And who can forget the Ford and Firestone tyre fiasco in which the companies first blamed consumers for not inflating tyres properly, then turned on each other before they were summoned to Washington to explain the deaths of more than 100 motorists.

PR specialists cite 6 golden rules:

1. Work with authorities and recall faulty products straight away. If the company is stonewalling, agencies will step in.

2. Be upfront providing the public with information and apologise. But won't an apology increase the risk of litigation? Not necessarily. There are hundreds of different ways of saying sorry without jeopardising your legal position, but in the end, you need to express regret and sympathy. Otherwise, you just come out looking like you're protecting your backside.

3. Go out of your way to show you are doing everything possible to solve the problem.

4. Identify your vulnerabilities, find ways to stop them blowing up, have a plan for what to do when the worst happens and keep the plan updated.

5. Develop strong relations with employees and customers.

6. Keep competitors in the loop. That helps stop shockwaves flowing through to the rest of the industry.

IMF warns of private equity boom risks

12 Apr 2007

In the past, I have done a poston regulators like Britain's Financial Services Authority keeping a nervous eye on the buyout boom and I have looked at questionswhether private equity will be brought to heel with its own version of Sarbanes-Oxley.

Now the International Monetary Fund has warned that the boom is creating dangers and risks. And it warns that some private equity deals will fail to deliver.

In its latest Global Financial Stability Report, the IMF says the enoromous appetite for overly-leveraged buyouts is driving up prices and will leave acquired companies saddled with debt.

"With allocations to private equity funds continuing to rise, it appears likely that in the future, more funds will be chasing fewer attractive deals. Already, rating agencies have warned that the number of viable targets has diminished. The strong demand for all elements of the capital structure of these deals means that prices are often bid up to levels that represent high multiples of earnings."

The IMF acknowledges that the boom is happening in a climate of global growth, low real interest rates, big profits and low volatility. But it warns that it would not take much to drive things off the rails.

"If one of these factors changes, deals that looked promising in a benign environment could suddenly appear much less attractive. It is therefore likely that some private equity deals will fail to live up to expectations. The risk from a financial stability viewpoint is that the collapse of several large and high-profile deals during the syndication stage would trigger a wider re-appraisal across a broader range of products.''

Can New York bounce back?

24 Jan 2007

The push to wind back Sarbanes-Oxley continues with US Senator Charles Schumer and New York Mayor Michael Bloomberg releasing a 134-page report urging legal and regulatory reforms to make the United States more attractive for business.

The report, Sustaining New York's and the US' Global Financial Services Leadership, was prepared by McKinsey. It follows the interim report of the Hank Paulson-backed Committee on Capital Markets Regulation.

As a document, it reminds us that all too often, consultants are paid to tell their clients what their clients want to hear. In other words, the clients seek approval for the course of action already decided upon. Not bad work if you can get it.

Still, it does give us some clues about what could be ahead for SOX. Like the Committee on Capital Markets Regulation, this report singles out Section 404 of Sarbanes-Oxley as an impediment but the focus here is on implementation. Backing the Securities and Exchange Commission and Public Company Accounting Oversight Board's moves to ensure less painful implementation, the report suggests the SEC might also consider allowing smaller companies to "opt out" of the more onerous provisions of the Act, providing they disclose this to investors.

Significantly, the McKinsey crew does some opting out itself by failing to define what they mean by "smaller".

The report also says the SEC might consider exempting foreign companies from parts of Sarbanes-Oxley. Other proposals include securities litigation reform, easing restrictions on skilled non-US professional workers and recognising international accounting standards without reconciliation, and promoting the convergence of accounting and auditing standards.

The report warns that the US will lose substantial market share in investment banking and sales and trading over the next five years if the trends are left unchecked and officials have told reportersthat New York could be relegated into a second-tier financial centre if nothing is done.

Still let's get some perspective. The US is still the world's biggest and deepest market, well ahead of Europe, Japan and the rest of Asia. Indeed, the size of the US market is equivalent to Europe and the Asia-Pacific region, minus Japan. New York is at the centre, and it's not exactly fading away.

True, other markets are now growing faster but that has more to do with globalisation than Sarbanes-Oxley.

Fixing Sarbanes-Oxley is laudable but that won't solve the problem. The world's markets are growing faster because other forces are at work as Larry Tabb points out in this piece in Wall Street & Technology.

The world is increasingly flat and that means global capital is finding other places to park. But it cuts the other way too. A flatter world means the issue of where a company has its stock listed is now irrelevant. What's relevant is who actually owns it.

In his Capital Flow Watch blog, John Oswin Schroy says Sarbanes-Oxley is now probably "dead meat".

I suspect not because the Act is simply too extensive to be wiped out completely. But certainly, the McKinsey report adds momentum to the push for more flexibility in the regulatory environment and we can expect to see more changes ahead.

As for New York, it won't be relegated to the sidelines. But bouncing back will mean dancing to a very different tune.

Is SOX unconstitutional?

18 Dec 2006

Totally unconstitutional says prosecutor Kenneth Starr in The Wall Street Journal.

Starr, who lead the charge on Whitewater and Monica Lewinsky, is now heading up the constitutional challenge to the Public Company Accounting Oversight Board by the Free Enterprise Fund, a conservative think tank.

While the case is focused only on the PCAOB, it has the potential to bring down the entire Act. And it's being heard this week, just days after the Securities and Exchange Commission came up with compromise proposals to ease the SOX burden on small business. Last month, I warned in this blog entrythat the changes to SOX won't please all parties, and the FEF case just confirms that point.

Starr argues that the PCAOB is a classic case of over-reaching. "Unelected commissions should not have the power to regulate, tax, and even punish companies and individuals,'' he writes.

You can read Starr's piece here.

In its defence, the SEC refutes refutes the lawsuit's argument that the setup of the PCAOB violated the separation of powers principal under the US Constitution. While the plaintiffs argue that the PCAOB's "inferior officer" need to be appointed by the President, a court, or the head of a federal agency, the SEC argues that these claims are without foundation because of the SEC's "pervasive oversight authority". The regulator accuses the plaintiffs of making "overblown" assertions.

What are the odds of success for the FEF?

Most are saying pretty long but in a post on his blogearlier this year, Professor Larry Ribstein says the effort is worth it. Besides, success would give Congress the opportunity to throw the whole damn thing out, he says.

At the same time, David Katz in the CFO.com blogalerts us to two potential problems with the SEC's attempt to fix Section 404. One is the sheer vagueness, and the second comes with the difficulties implementing the guidance when a "material weakness" can be the sum of many deficiencies.

One thing is clear. No matter what the regulators do, the debate will rage on. SOX rage is not going to go away.

Stock options backdating: six degrees of separation

20 Oct 2006

With at least 140 companies including UnitedHealth and Apple saying they are being examined by federal authorities or are reviewing the way they timed their stock-option grants, the role of company directors is coming under scrutiny.

The Securities and Exchange Commission is now examining whether directors who sit on more than one company board may have spread the practice of backdating stock-option grants, reports Bloomberg. And research from the Corporate Library shows that 40 per cent of the companies under scrutiny have common directors.

All of this is in line with what I have called the "six degrees of separation theory of corporate governance."
The six degrees theory kicks in where directors sit on common boards. These are known as backdoor links.

For example, director A sits on the board of company RST and also company UVW. Director B is on the board of companies RST and XYZ. But these two directors have a link with director C who happens to be with UVW and XYZ. The back door distance between directors A and B is deemed to be two.

Now, a Wharton business school study found that CEOs with a back door link to someone on the compensation committee received, on average, $US453,688 ($A601,294) more than those without such a connection. There was also evidence to suggest each unit increase in back door distance resulted in a $US82,733 drop in CEO pay.

I examine the implications of the study in this piece.

Based on that study, it's not surprising that there's now evidence showing that directors might have spread options backdating. As the Wharton study suggests, it's not what you know but who you know that counts. Or as the SEC's former accountant Lynn Turner told Bloomberg: ''The closely knit network of directors for these companies smells of good old boy cronyism directly facilitating the interests of the CEOs rather than investors."

Still, the directors themselves might be also be benefitting from the close connections. Company directors gave themselves huge pay rises in 2006, right along with their CEOs, according to news reports.

The reason for the increases has been put down to the increased time and effort that goes into attending a handful of board meetings during the year when there's increased regulation and scrutiny from Sarbanes-Oxley and regulators.

Yep, the six degrees theory does not include investors.

Greenspan's SOX Reversal

28 Sep 2006

Former Federal Reserve chief Alan Greenspan has made the headlines again, coming out this week attacking Sarbanes-Oxley and saying it should be scrapped.

According to the former Fed chief, Sarbanes-Oxley regulations hamper business, discourage risk-taking and drive foreign companies to shun the New York Stock Exchange for London. The only bit that's any good, he reckons, is the rule that chief executives have to certify their companies' accounts personally. "The rest we could do without," he said

Earlier this year, he expressed concern about companies shunning New York for London for their flotations when he was talking to an Asian Financial Centres conference in Seoul, organised by the Financial Times.

My, how times have changed!!

Remember back in May 2005, Greenspan gave Sarbanes-Oxley Act his blessing in an address at the Wharton School in Pennsylvania:

"I am surprised that the Sarbanes-Oxley Act, so rapidly developed and enacted, has functioned as well as it has. It will doubtless be fine-tuned as experience with the act's details points the way,'' he said at the time.

Now he wants to scrap virtually the entire thing. Go figure!!

Jim Bianco gives him a serve via The Big Picture blog: "Anything else, Dr. Greenspan, you would like to change your opinion on? Maybe the productivity miracle? The fallacy of using corporate visibility as a forecasting tool? The quit rate? The world awaits your next confession at $150,000/hour."

Bob Geldof on poverty, corporate social responsibility and world trade

14 Jul 2006

Twelve months after Live 8, I interviewed Sir Bob Geldof on the issue of global poverty, corporate social responsibility, the Bill Gates-Warren Buffett mega- foundation and the problems confronting the Doha round of world trade negotiations.

If you prefer, you can read my report of the exclusive interview in The Age or listen to it here.

GELDOF: I don't want to talk about this corporate social responsibility stuff. It's not something I am hugely interested in, I have to say. Business might have a role but it's a minor role. But go on.

SOX FIRST: So does that mean you're not interested in Bill Gates helping fund your work?

GELDOF:But I think that's a phenomenon of individuals rather than corporations inasmuch that at a certain point, this stuff that you've got, money, is literally meaningless, given that currency itself is virtual. I give you a piece of paper and you give me a Coca Cola or something. It's very sophisticated. Instead of me giving you something to the value of that Coca Cola I have given you a notional virtual entity and you have exchanged that with me. At a certain point, this virtual thing that you have earned or created is literally that, it is utterly virtual. What it buys you is meaningless. You can buy all the art in the world but so what? You have to earn that sort of money to get to that point, and yes, the average person would say f—ing hell, give me the $43 billion and I'll spend it. But the reality is you can't.

SOX FIRST: But if it's about individuals and not corporations, don't the individuals get their money from the corporations?

GELDOF: I think there is a realisation of that at a certain point where you earn so much money that that is literally what it becomes, almost meaningless and in Gates' case, that is a fact. I think that he has found by going into this other area, it's far more interesting for him. You can't really use $45 billion. It's inconceivable that you can use that. Certainly you can buy fleets of jets and all the art work on the planet but so what? I think that he has found found by going into this other area, its far more interesting for him. Rather than being what we would classically define as a business entrepreneur, he's become what we call a social entrepreneur. Of course, the essence of entrepreneureurialism is probably in innovation and that in turn is probably one of the essences of life and progress. In business you can't stand still, you can't go back so the only logic is moving forward. The essence of life must be innovation and that's the thing thing that triggers these high worth individuals at a certain point, they are simply repeating that which they initiated in the first place.

SOX FIRST: What about the accountability of these mega-foundations?

GELDOF: I wouldn't have a problem with that simply because of the laws governing accountability and transparency in the UK and I'd imagine they would be fairly strenuous in America. It's so high profile that for them to be opaque or obfuscatory would be totally detrimental to the working of the foundation. They would get hammered. Look, there has to be accountability and transparency in the host government, largely towards their own people, primarily also towards donors. And there certainly has to be transparency and accountability from us to them. DATA just published its first report on what happened to the G8 promises. It's basically good news, okay news and shit news but trying to get the information from the G8, the G7 in effect, is almost impossible. Try to get those figures on aid, and try to break them down as to how they arrived at those figures, and it's a nightmare. Japan point blank refused to give them to us. And yet these are elected by us, they are using taxpayers' money and their figures are 18 months out of date. If you were in business and the board of directors had to tick off a plan put forward by the managing director for the next year and you said what are these figures based on. 'Well, 18 months ago.' I'm sorry you'd fire the f—er.

SOX FIRST: What is your view of Doha?

GELDOF: Doha is is a disgrace. It's a complete disgrace. It started as developmental round at the beginning of this new millenium with noble objectives, to lift the underdeveloped countries out of poverty. But then we got suddenly 9/11, Afghanistan, Iraq, the wholly unexpected emergence of India, Brazil and China so the world has utterly changed in four years. As a result the trade talks have changed. the parameters no longer dictate and this is the last time we will be able to help right the plan for global trade.From now on, it will be largely dictated to us so we should be in there negotiating a deal. If there is failure, it will catastrophic for our world, for Australia, for Europe, for America, for the Chinese and Indians. It really will be a net negative. We lose about $600 billion out of the world economy every year and we will degenerate into bilateralism, protectionism. We will have ludicrous taxes and subsidies to try and promote failing industries in our own countries which will in any case fail. We will be paying tax money to keep these failing industries going to keep out competitors who can give us the goods for cheaper. All that will happen and it will be ridiculous but the ones who will really hurt will be the poorest of the poor because they will be unable to trade their way out of poverty exactly as we did when we were building our society.

Business and climate change

12 Jun 2006

How well prepared are businesses for climate change? How well prepared are insurers? It's going have a massive impact on the bottom line of insurers warns Lloyds of London in a new report Climate Change: Adapt or Bust.

And reading through the report, the message comes through that they better get ready to start reacting quickly.

Consider this: "As climate change causes temperatures to rise further, insurers should be prepared for increased frequency of extreme storms not just in the Atlantic but around the world, as record typhoon seasons in Asia also show. Warmer sea surface temperatures also appear to make windstorm landfall more likely. This combinations means that particularly destructive storms are a likely scenario.

On the question of rising seas, it says: "The trend is probably irreversible and certainly unpredictable, likely to result in sudden periods of catastrophic melting. If the level were to rise in excess of four metres almost every coastal city in the world would be inundated, with severely negative implications for economic and political systems, and a severe impact on the commercial insurance market. Even small rises in sea levels are likely to create severe economic and demographic problems, since large populations are concentrated near present sea level."

No surprises then that more businesses are starting to take climate seriously, reports The Economist.

As the piece points out, it remains to be seen whether customers are prepared to pay the price.