This Guest Column is one in a series of first-hand accounts written by senior executives at U.S. public companies. The goal of the column is to provide "lessons learned" during the implementation of various governance and compliance programs. To be considered as the author of a future column, public company executives should email the editor of Compliance Week. Only public company executives will be considered; partners at law firms or accounting firms, or executives at companies that market products or services to the compliance/governance markets, will not be considered.

OFourteen disclosure committees? You cannot be serious!”

This is quite frankly the quip I would expect to hear from a well-known tennis star of yesteryear upon learning the number of disclosure committees currently in place at Southern Company, a large investor-owned electric utility operating in the Southeastern United States.

Yes, even John McEnroe would perhaps wonder if we had indeed faulted because of the framework we’ve created. Needless to say, we took to heart—in fact, deep to heart—the SEC’s rather strong recommendation detailed in its 2002 final rule relating to the establishment of these committees in connection with the CEO and CFO certification process.

But probably, you too are wondering, “Why 14 committees?” Hopefully, I’ll answer that question as well as provide you with an overview of the coordination and operation of our certification process, at least as it relates to the information gathering aspect.

Further, early last year when the new Form 8-K rules were finalized, we discovered to our delight that the extensive disclosure committee network that we had in place proved to be very effective in bringing together the necessary processes required in order to timely react to “real time reporting.”

More on that later.

Finally, this column would not be complete without conveying at least a few of the lessons we have learned from our experiences as we continue our journey along this particular section of the Sarbanes-Oxley highway.

As for the thinking on the number of disclosure committees, Southern Company is a holding company with some 70 active subsidiaries under its umbrella. In addition to Southern Company, six of these subsidiaries are reporting companies and thus are separately required to file periodic reports under Exchange Act rules. Given that disclosure considerations not only needed to be considered at the consolidated level but also at the individual reporting company level, it was our view that maintaining separate disclosure committees would be the best alternative in order to ensure that the proper focus was given in each instance. Too, one must keep in mind that CEO and CFO certifications are also required at these six subsidiaries.

Southern Company’s remaining disclosure committees are drawn from certain significant non-reporting subsidiaries within Southern Company. Examples include Southern Nuclear, which maintains and operates the nuclear facilities for Southern Company, and SouthernLINC Wireless, our telecommunications subsidiary.

A Workable Process?

Yes, we think so. However, there were significant challenges in the beginning.

Obviously, one of the first matters of business was to create procedures and guidelines for all of the committees to follow. Once established, a consistent framework for the gathering of information for possible disclosure was created using a basic questionnaire as the primary collection tool. This basic questionnaire currently has some 40 questions that must be answered by all senior level management. Also, subsidiary committees have the flexibility to add questions as circumstances dictate, and the questionnaire is reviewed quarterly for any changes or updates. As an example, we recently added several new questions in order to ensure that pertinent information related to Sarbanes-Oxley Section 404 activities is being gathered.

After the questionnaire is completed and the information is screened by the subsidiary disclosure committees, it is then sent to the Southern Company disclosure committee for consideration.

Admittedly, we, like most registrants, continue to struggle with materiality and how it should be defined. The manner in which we have resolved this dilemma, at least as it relates to the information gathering process, is to request that the respondents interpret “material” to mean anything that they believe needs to be brought to the attention of the disclosure committee for its consideration in preparing SEC filings, without regard to dollar value. While this definition certainly is very open ended and tends to lead toward an over accumulation of information, it has proven to be effective in bringing forward the pertinent data needed in order to make informed judgments.

A simple matrix reporting format is used by all the committees to report matters to the Southern Company disclosure committee. Development of the matrix approach to reporting matters upward has proven to be a significant time saver as compared to the first couple of efforts where the committee was reviewing everything from detailed minutes of meetings to bullet point summaries. As a point of reference, our most recent consolidated matrix was 41 pages and contained approximately 140 items for consideration. On the surface this appears to be an unmanageable amount of information; however, we have found that providing the document to the committee members a couple of days prior to the formal meeting enables a thorough review of the data. And, after all, very few new issues are raised at this level that would not have already been aired though other forums.

At the Southern Company disclosure committee meeting, the items are discussed and determinations are made as to the disclosures that should be included in the preliminary periodic report drafts. Prior to finalizing these reports, normally a day or so before filing, communications take place with each subsidiary disclosure committee in order to make sure that there is agreement on the disposition of each item. This final process provides these committees with one last opportunity to review the information or raise additional issues prior to the actual filing of the Form 10-K or 10-Q.

This basic framework has remained essentially unchanged since it has been in existence. Obviously, we continue to tweak and enhance certain aspects as necessary. However, all in all, the process is working very effectively. And both senior management and the Southern Company audit committee seem to be pleased with the efforts to date.

Real Time Reporting And The Disclosure Committee Framework

As most Compliance Week readers are aware, real time reporting became a fact of life when the new Form 8-K rules were finalized in March 2004 with an effective date of Aug. 23, 2004.

In order to address these new requirements, we chose to enhance the already existing disclosure committee framework by requiring that each committee have particular persons assigned to monitor Form 8-K reportable events. Through meetings, email communications, conference calls, use of our intranet, and other educational opportunities, our committees became keenly aware of these new requirements. In addition, beginning the month before the rules went into effect, a weekly report was required to be sent to the Southern Company disclosure committee verifying that the new items had been reviewed. The requirement for these reports continued for several months after the rules went into effect in order to solidify this knowledge base.

Finally, the process would not be complete unless we had persons at the Southern Company level available and able to react quickly to possible reportable items. This was accomplished through the creation of a five-person subcommittee consisting of individuals most closely related to SEC reporting matters. This subcommittee approach has proven to be very effective in analyzing the matters brought forth from other entities within the system companies. Certainly, this process wouldn’t operate effectively unless each subsidiary disclosure committee member has access to these subcommittee members at all times. They do ... even on weekends.

Three Lessons Learned

Obviously, after living with this process for nearly three years, there are a number of lessons we have learned. In the interest of space, let’s focus on the following three:

Senior management’s commitment to the process must be sincere. I know that this sounds obvious. But there's a big difference between "written" commitment and "actual" commitment. Because we operate in a capital-intensive industry and, as such, are accustomed to a significant amount of due diligence scrutiny in connection with sales of securities, senior level management at Southern Company has been accustomed to reviewing its periodic filings for many years. However, Sarbanes-Oxley has certainly required that we formalize these review processes. Commenting specifically on this commitment, I vividly recall during one of our earlier Southern Company certification sessions observing our CEO, pencil in hand, putting the finishing touches on a particular Form 10-Q footnote with our audit committee chairman on the other end of the phone. I’ve got a feeling that the SEC would have liked this picture.

You must find ways to keep the fire hot. With any periodic, routine requirement, there is often the tendency for the process to become complacent and lose its effectiveness. At Southern Company, we try to approach each new quarter with the same enthusiasm. As stated earlier, the questionnaire is reviewed each quarter in order to determine if any changes should be considered and the new questionnaire is shared with each of the other committees. And, realizing the importance of frequent communication with our subsidiary committees, we make use of emails and other opportunities to keep this process on the front burner as much as possible. Also, Southern Company’s internal auditing department has a policy of performing random audits on each of the disclosure committees within our system for the purpose of testing their effectiveness. Finally, and perhaps most importantly, it doesn’t hurt to have the support of senior management. Remember Lesson No. 1!

Follow your procedures. For most companies, I suspect there is an overwhelming desire to develop a detailed set of procedures for the disclosure committee process. This tendency is perhaps even more popular at the present time given the recent emphasis to documentation requirements in connection with Section 404 activities. This advice is offered—if you have procedures in place, make sure they are followed. One sure sign of an ineffective structure is the failure to follow established guidelines. Lest we leave the impression that we are preaching and oblivious to our own advice, we continue to look at our procedures and make improvements where appropriate. After all, the not-so-subtle message contained in the Section 302 phraseology relating to “evaluation of the effectiveness of the disclosure controls and procedures” requires no less.

In closing, please forgive me if I harp back to the opening theme of this column for a moment. Having multiple disclosure committees may not be the answer for all large companies; however, at Southern Company we’ve found this to be a very effective way to collect and process information.

And yes, Mr. McEnroe, we are serious!

This column solely reflects the views of its authors, and should not be regarded as legal advice. It is for general information and discussion only, and is not a full analysis of the matters presented.

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