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SARBANES OXLEY AFTER THREE YEARS MARKKULA CENTER Mark Bertelsen November 4, 2005
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-2- 2881566.1 Today’s Environment Sarbanes Oxley is here to stay “Stop complaining and get on with it” Management Accountability and Shareholder Empowerment/Activism: Recent news articles HP and Pfizer require majority vote for directors Role of ISS “Don’t propose anything to shareholders that ISS doesn’t support” GovernanceMetrics International (GMI) Governance is an international issue Privileged and Confidential
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-3- 2881566.1 Continuing Themes Transparency Management Accountability Shareholder Improvement/Activism Board Independence Role Board Committees Time Commitment and more informed decision- making Wall Street Journal Test compliance with the letter and spirit of the law Privileged and Confidential
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-4- 2881566.1 Observations From 12/04 SEC/PCAOB Conference Financial reporting is management’s tool for communicating with investors Minimum compliance is not enough Disclosure rules are the floor, not the ceiling Audit Committees need to be strong, active and independent Effective monitoring by other gatekeepers’ such as independent accountants, lawyers, and bankers Overtime, the benefits of SOX reforms will outweigh the costs Importance of strong internal controls Senior management must promote and reward ethical conduct Executive Compensation: Transparent disclosure Reasonableness standard Privileged and Confidential
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-5- 2881566.1 Cost/Impact of Compliance SEC estimate of $1.24 billon vs. AEA estimate of $35 billion for 404 compliance Audit fees for Fortune 1000 increased, on average, 103% Companies below $100 million in revenues spent 2.55% of revenues on compliance vs. 0.06% for companies with over $5 billion in revenues Role of PCAOB PCAOB budget for 2006 is $137 million Powerful with Minimal legislative oversight; senate has no say on Chair Companies below $200 million in revenues had highest 404 failure rate in calendar 2004 (43% of adverse opinions) Privileged and Confidential
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-6- 2881566.1 Small Company Relief 404 compliance extended for small issuers first fiscal year ending on or after July 15, 2007 More time to file SEC reports COSO proposal SEC subcommittee proposal Privileged and Confidential
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-7- 2881566.1 Institutional Shareholders Impact of ISS “Recommendation” Current and evolving positions: Majority vote for Directors Annual election of Directors Poison Pills Options Executive compensation/performance compensation Board-Shareholder communications Privileged and Confidential
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-8- 2881566.1 Securities Act Reform Manner and speed of communication, e.g., use of internet, web casts, etc 1934 Act reporting more timely and robust More frequent SEC review of 1934 Act filings More frequent use of registered offerings Communications in registered offerings Categories of issuers: seasoned issuer vs. unseasoned issuer Privileged and Confidential
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-9- 2881566.1 Other Developments Impact on Capital Markets Going private transactions and being acquired rather than IPO Risk Management Disney Siebel Privileged and Confidential
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-10- 2881566.1 Impact on Boards and Management Is there enough clarity about what is expected? Going beyond director independence Risks to entrepreneurialism and creativity Developing a new recipe with respect to corporate trust and integrity, and the principal elements are: Transparency Responsibility Accountability Privileged and Confidential
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