VideoIt looks like 2005 could really be the year that regulators get tough on executive compensation.
In recent months, Securities and Exchange Commission officials have issued strong words on the subject. For example, Stephen Cutler, the SEC's head of enforcement, told a conference audience last year that the commission would bring cases against companies failing to properly disclose and value perks. SEC chairman William Donaldson has also called for greater clarity in reporting. "Total compensation is obfuscated and is very difficult to determine," he said in one interview with Dow Jones News Service. "While much of the information is included in public filings, it is difficult to dig out."
Now the SEC is walking the talk. Its recent enforcement action against General Electric Co. for failing to adequately disclose Jack Welch's retirement benefits, and its investigation into Tyson Foods Inc.'s accounting for perks grant to retired CEO Don Tyson, signal the commission's tough new stance on executive pay.
"This is by far the most intense and multifaceted approach to addressing executive compensation that I've ever seen," says David Johnson, a partner in the compensation practice at Ernst & Young. "There are a lot of interested parties weighing in: the SEC, the [Internal Revenue Service], Congress, institutional investors, you name it." The SEC is emphasizing its desire for full disclosure of all aspects of executive pay, he says.
For companies, the lesson is to "err on the side of caution," counsels Johnson. One example is corporate-aircraft use, a marquee issue for those critical of executive perks. "Don't just say there is personal use of corporate aircraft; describe the use in terms of its materiality and incremental cost," he says.
The SEC may soon make recommendations of its own. Anne G. Plimpton, of counsel with McDermott Will & Emery LLP, says she expects to see rule changes as early as this spring. "When the SEC says this is going to be an area of focus, it not only means they're going to be looking very hard at disclosure, it means they're thinking about amending the rules," she says.
While awaiting further guidance, CFOs should conduct a thorough inventory of all the types of compensation that officers and directors receive, making sure to capture informal perks like tickets, club memberships, and even occasional use of corporate assets like aircraft and cars. "The point," says Johnson, "is to avoid surprises." —Kate O'Sullivan
Mulligans
For corporations, it's akin to a group "do-over."
Last year, some 414 companies restated their financials, according to a study by Chicago-based Huron Consulting Group. That's an increase of 28 percent over 2003, when 323 companies restated due to accounting errors.
The main culprit cited was Sarbanes-Oxley, especially Section 404. Revenue-recognition issues prompted 16.4 percent of the restatements and equity accounting forced another 16 percent.
Some believe other factors were at work. "First, you're never going to be able to police a lot of the games being played in boardrooms," insists Paul Geller, a partner at law firm Lerach Coughlin Stoia Geller Rudman & Robbins LLP. "Second, auditors are taking their jobs more seriously."
Regardless of why they are done, financial restatements still have nasty consequences. In January, for example, Krispy Kreme restated its 2004 earnings and watched its stock price tumble more than 22 percent.
Restatements also trigger class-action suits. Not surprisingly, 212 shareholder lawsuits were filed in 2004, up from 181 in 2003, according to the Securities Class Action Clearinghouse at Stanford University. —Laura DeMars
Late Fees, Lost Profits
After being hammered for years by competitors' ads and late-night TV jokes, Blockbuster Video did away with its much-reviled late fees in December 2004. For the company, it was a welcome counterpunch against Netflix and video-on-demand providers. For CFO Larry Zine, it was a "double gulp" moment.
"Any decision to give up profitability in the short term is kind of a big gulp," explains Zine, who says the company had expected to make $250 million to $300 million in operating income from late fees in 2005.
Still, Zine says he was quick to support the "bold" move — and back it with a $50 million launch — after marketing executives told him fees were the top customer gripe. "When anything this big comes down, it clearly requires cooperation between finance and marketing."
"It is a market-share game," explains Southwest Securities analyst Arvind Bhatia of the flat market for video rentals. Subscription models such as Netflix, he says, are taking market share "because customers hate paying late fees." Blockbuster's "no late fee" move undercuts that threat to its stores, even as it looks to acquire competitor Hollywood Video. It is also rolling out its own subscription model.
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