The head of the U.S. Senate Committee on Finance says he’s exploring the extent of abuse of executive compensation tax restrictions with an eye toward possible legislation.
The Finance Committee scheduled a hearing on executive compensation for Sept. 6, to focus on issues regarding executive compensation—including backdating of stock options and tax treatment of executive compensation, retirement and benefits.
The hearing isn’t the first to look into the controversy surrounding backdating; during a June hearing on compliance concerns in the corporate tax realm, committee Chairman Sen. Chuck Grassley (R-Iowa) had asked a Justice Department witness to explain the agency’s investigation of stock option backdating.
Panelists at this week’s hearing were to include a Justice Department deputy attorney general; Internal Revenue Service Commissioner Mark Everson; and a senior official from the Securities and Exchange Commission, according to a committee press release.
One panel will focus on the government’s response to stock option backdating and other issues regarding executive compensation, including Section 162(m) of the tax code—the million-dollar deduction rule—as well as transparency issues. A second panel of academics and interested groups will give additional perspective on backdating and Section 162(m) as well as provide an overview of executive compensation, retirement and benefits, and how they are treated under the tax code.
Grassley
“It’s frustrating to think that after the corporate scandals of recent years, some executives are still looking for ways to take unfair advantage for personal gain,” Grassley said in prepared remarks. “On top of that, it looks as though boards of directors are approving bad deals without shareholder approval.”
Grassley said the federal government “needs to take a hard look at that problem … I continue to ask federal officials to let me know whether the current tax laws are adequate to rein in and prosecute stock options backdating. If the tax laws are inadequate on stock options backdating, I want to beef them up.”
Grassley said he especially wants to hear panelists’ views on the adequacy and the appropriateness of the current tax treatment of executive compensation, including perks and retirement benefits. “I want to find out more about the effectiveness of the tax code, as well as how improved transparency for shareholders could address concerns about executive compensation abuse,” he said.
Expert: Sarbanes-Oxley Not Prompting Overseas IPO Boom
Critics of Sarbanes-Oxley who say the law is pushing initial public offerings overseas may have a valid point at the moment, but “it will prove to be a minor one” over time, according to at least one SOX compliance expert.
Twenty-four of the 25 largest IPOs last year listed on exchanges outside of the United States, a sharp departure from the historical norm of large companies going public here. SOX critics have pounced on that statistic, claiming it is market-based proof that the law is counterproductive and drives new issuers to list on other countries’ less-regulated stock exchanges.
But, according to Robert Kugel, senior vice president at Ventana Research, “People who are pointing to the large IPOs going abroad are missing the fact that a lot of them were nationalized local companies,” so their listing in local exchanges was logical. Proclaiming in a recent research note that the “era of regulatory dominance the United States has enjoyed since the end of the Cold War is over,” Kugel says such a shift was “inevitable.”
“To say companies aren’t doing deals in the U.S. because of Sarbanes-Oxley is a gross exaggeration of the reality,” Kugel says. “As we get into more advanced capital markets worldwide, plenty of companies are not going to list in the U.S. There’s no need.”
Still, Kugel notes that in terms of value, one-quarter of new issues were listed on U.S. exchanges, with the New York Stock Exchange leading the pack for IPOs worldwide. In addition, public companies have been making changes in their accounting systems and processes to ease the compliance burden, and in the process, reduce the cost of finance operations generally.
“I’m in the camp that believes when it comes to this sort of regulation, there’s a race to the top,” Kugel says. “People will pay extra for well-regulated markets, provided they’re not overly regulated markets.”
Kugel says the real issue is whether U.S. companies will start to list abroad in large numbers because they find reporting requirements here too onerous. Kugel says there’s “scant evidence this is occurring,” and says recent steps by the Securities and Exchange Commission and the Public Company Accounting Oversight Board to ease compliance for non-accelerated filers makes such an outcome even less likely.
More Backdating Repercussions: Inability To File Shorter S-3s
In addition to the litany of other issues facing companies that uncover problems with stock option timing and grant practices, companies could lose their eligibility to file a shorter registration form.
Companies that find backdating issues may have to restate their past financial statements, and consequently may delay filing their quarterly reports. Failure to file timely reports could then cause issuers to lose their eligibility to file S-3 registration statements, the short-form statements that companies typically use when doing shelf offerings or bond deals, notes Allison Garrett, an associate professor at Faulkner University School of Law and author of International Corporate Governance Blog.
Garrett
The registrant requirements in the general instructions state that the registrant must “have filed in a timely manner all reports required to be filed during the [prior] 12 calendar months.” Garrett says losing S-3 availability is significant because issuers will have to file a longer registration statement or obtain financing from sources other than the capital markets.
“A company that loses the ability to file an S-3 can still access the capital markets, but it’s a longer and more complicated process because have they have to file a Form S-1 registration instead, which is far more lengthy,” Garrett tells Compliance Week.
Garrett, a former vice president and general counsel at Wal-Mart, notes that issuers can file for an extension on 10-Ks and 10-Qs, “but it’s not much of an extension.” If a Form 12b-25 is timely filed, issuers get 15 more days to file the 10-K and five more days to file the 10-Q. If issuers then file within those time periods, they can still use the S-3. But, she notes, “If the issuer has significant backdating issues that will require restatements, this short extension period will probably not be very helpful.”
Details, Garrett's blog entry, and related coverage can be found in the box above, right.
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