Cox On 404 Guidance; Say On Pay; No. Dakota

Securities and Exchange Commission Christopher Cox says his agency is working “pedal to the metal” on final guidance to help companies comply with Section 404 of Sarbanes-Oxley, which should be ready before Memorial Day.

Cox

Testifying last week before the Senate Committee on Small Business and Entrepreneurship, Cox also promised that non-accelerated filers—the vast majority of publicly traded companies in the United States—will not be required to comply with Section 404 until that guidance, as well as new guidance from the Public Company Accounting Oversight Board on auditing internal controls, is available to companies “with plenty of time to prepare.”

And yes, Cox says, that means the SEC will delay compliance deadlines yet again if it and the PCAOB cannot get their guidance published soon—although, he stresses, another postponement “isn’t Plan A.”

Under rules adopted in December 2006, smaller companies are slated to file management reports on their internal controls with their annual report for their first fiscal year ending after Dec. 14, 2007. For calendar-year-end companies, that would mean March 2008. Those filers would conduct their first 404 audit during their first fiscal year ending after Dec. 14, 2008.

Olson

In recent weeks, both Cox and PCAOB Chairman Mark Olson have said their staffs are aiming to complete their respective reform efforts in time for companies and their auditors to use them in connection with annual reports to be filed in 2008. Cox specifically has said he wants guidance out by the end of May; the PCAOB has been more cagey about exactly when it will complete its work, although most observers expect it will finish either at the same time or within a few weeks after.

When the SEC and PCAOB proposed guidance was open for public comment earlier this year, several commenters urged the SEC to extend the compliance deadline another year. That would mean non-accelerated filers wouldn’t file their first 404 audit reports until at least March 2010.

Cox, however, told the Senate committee, “We’re working diligently to provide both guidance for management and a new auditing standard in time for companies and their auditors to use them in connection with annual reports to be filed in 2008.”

At a special open meeting earlier this month, the SEC directed its staff to work with the PCAOB to bring its new audit standard—tentatively dubbed Auditing Standard No. 5, to replace the current Auditing Standard No. 2—more in line with the proposed management guidance, which is viewed as less prescriptive and more principles-based. The SEC staff said it plans to work with the PCAOB on four major areas: alignment, scalability, judgment, and using the work of others.

House Approves Say-On-Pay Measure

The House of Representatives solidly approved a bill last week that would require companies to give shareholders an advisory vote on executive compensation deals, a huge step forward for the “say on pay” movement sweeping Corporate America.

Despite opposition from the White House, the House approved the bill by a vote of 269-134. The measure now heads to the Senate, although no companion bill has been introduced in that chamber yet and a timetable for Senate action is unclear.

Frank

The bill, introduced by House Financial Services Committee Chairman Barney Frank, D-Mass., would require companies to include in their annual proxies a nonbinding advisory shareholder vote on their executive-pay plans. It also includes a separate advisory vote if a company gives a new, not-yet-disclosed “golden parachute” while negotiating to buy or sell a company.

The legislation comes amid a flurry of shareholder proposals calling for say-on-pay votes; institutional investors have filed more than 60 of them this year alone. Last year’s first-time shareholder proposals on the issue received an average of more than 40 percent support, the highest ever for a first-time proposal.

So far this season, pay vote proposals have averaged about 41.5 percent support at five meetings, according to Institutional Shareholder Services. Investors at nine companies will vote on the issue this week alone.

In February, insurance giant Aflac became the first U.S. company to adopt an advisory vote voluntarily in response to a proposal from Boston Common Asset Management. Last month, the Securities and Exchange Commission issued a no-action letter telling AT&T that shareholders should be able to vote on a similar measure at the company’s annual meeting, slated for this week.

Say-on-pay votes are common in Britain, Australia, and elsewhere, but are controversial in the United States. Supporters of the bill, including Democrats, unions and shareholder advocates, have said the legislation is necessary to give shareholders a way to respond to the information they will have under the expanded executive compensation disclosure rules adopted by the SEC.

Opponents of the measure, including many Republicans and business groups, say the decision on whether to have an advisory vote should be left to companies, not legislators, and that Congress should give the new SEC rules a chance to work.

North Dakota Enacts Tough Corporate Governance Standards

The state of North Dakota has enacted the toughest corporate governance standards in the nation—for all two publicly traded companies chartered there, except that both are grandfathered out of mandatory compliance with the new law.

After July 1, 2007, corporations incorporated under North Dakota law can elect to be subject to the optional new law by including a clause to that effect in their articles of incorporation. Provisions of the new law include majority voting in election of directors; one-year terms for directors; advisory shareholder votes on compensation reports; shareholder access to the proxy statement; reimbursement for successful proxy contests; and separation of roles of chairman and CEO.

Nell Minow, editor and cofounder of The Corporate Library praises the move.

Minow

“We have had a long-term ‘race to the bottom’ with state control of corporate governance laws,” Minow says. “With the passage of this law, North Dakota begins for the first time a race to the top. Shareholders should begin pressing portfolio companies to re-incorporate in North Dakota, and they should press Delaware and other states to follow this example.”

Delaware and its corporation-friendly legal system is home to more corporations than any other state.