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Oil companies pressured to disclose payments to developing nations; IPO market limps back; Congress may ask CEOs to sign tax returns; investor relations visits Madison Avenue; a candid look inside the WorldCom fraud; and more.
David Campbell, CFO Magazine
August 1, 2003
Anticorruption activists are urging oil companies and other extractive industries to come clean on their payments to governments in developing nations.
Groups like Global Witness and Catholic Relief Services are calling for international accounting and stock exchange rulesto require oil, gas, and mining companies to disclose, on a country-by-country basis, net payments to governments for access to natural resources. Transparency of such payments, say advocates, will ensure the public funds are used by these nations to alleviate poverty and foster development, instead of lining the pockets of corrupt officials. (As much as $1.4 billion in revenues and loans in Angola's oil sector — about a third of state revenues — went missing in 2001, says Global Witness, a London-based advocacy group.)
ExxonMobil and ChevronTexaco, the two largest U.S. oil companies, have opposed new regulation. They argue that disclosure should be voluntary on the part of their host nations. "Disclosure of payments made to a host country government can be made only with the agreement of that government," says ExxonMobil spokesman Tom Cirigliano.
Yet those who favor change say the voluntary approach doesn't work. Ian Gary, co-author of a report calling on the World Bank and the International Monetary Fund to help create transparency in African oil revenues, says that if disclosure isn't universal, an unlevel playing field results. "When one company speaks out and others don't follow, they can suffer negative competitive pressures," he says.
Gavin Hayman of Global Witness says oil companies often face extortion by these governments. In 2001, for example, British Petroleum was threatened with expulsion when it tried to disclose tax payments to the Angolan government. "Big oil just wants a quiet life," he says.
The Bush Administration has opposed the disclosure over concerns about maintaining energy security. With elections on the horizon, Republicans could also be leery of alienating the oil lobby. The position is a departure from that of the Clinton Administration, which pressured Europe to crack down on bribes.
Oil-industry finance expert James L. Smith of Southern Methodist University says U.S. companies would do well to push for stronger disclosure rules in Europe and the United States. "Just as disclosure protects in-vestors against corrupt ex-ecutives who would offer bribes," he says, "it also protects honest executives from those officials who would make such demands." —David Campbell
As of June 30, all insider transactions were required to be filed electronically with the Securities and Exchange Commission and posted on company Websites. Yet on July 1, dozens of companies had failed to comply.
According to a survey of 300 small and mid-cap companies by Toronto investor-relations consulting firm Blunn & Co., 11 percent missed the deadline. "For the most part, this is an oversight, not a conscious effort to avoid compliance," says Dominic Jones, head of Blunn's online IR research practice. Jones says that that while the SEC is slowly starting to recognize the role Websites can play in disclosure, many companies are careless about keeping them up-to-date. "In many cases, their sites are in a state of neglect. That so many companies failed to meet the requirement is really quite shocking."
In addition, the SEC received more than 600 paper copies of insider-trading reports after the deadline. The commission says the copies will be returned to senders, which could put them in violation of another provision of the Sarbanes-Oxley Act of 2002: insiders must now disclose most transactions in company stock within 2 business days. The former deadline? A snail-mail-friendly 41 days. —Joseph McCafferty
"It is the sense of the Senate," reads a little-noticed section of the Sarbanes-Oxley Act of 2002, "that the Federal income tax return of a corporation should be signed by the chief executive officer." Tax experts, who breathed a collective sigh of relief when no immediate action was taken on this oblique statement, would likely disagree with the logic of such a requirement. In fact, 96 percent of tax directors recently surveyed by Deloitte & Touche said "their CEO was not very knowledgeable about [tax] issues reflected in the corporate return." But if a subsequent provision wedged into the Senate-approved CARE Act of 2003 makes it through the House of Representatives, tax departments everywhere may be saddled with teaching Tax Accounting 101 to CEOs.
Unlike the controls certification now required for financial statements by Sarbanes-Oxley, the tax-certification rule would implicitly ask the CEO to vouch for the accuracy of tax documents, says San Francisco-based Pillsbury Winthrop attorney Keith Gercken. Mistakes in the thousand-plus-page returns could lead to fines (and possibly even jail time) unless the CEO has a good-faith belief that the information provided was correct and complete. "It would be an incredible burden to get CEOs sufficiently educated that they would be willing to sign the return," says Gercken. And for CFOs, "the issue is how many more people will you have to hire in your tax department?"
Executive-advocacy groups have been fighting hard. The Tax Executives Institute sent a letter to the Senate Finance Committee urging it to abandon the proposal. "Such a requirement would place undue burdens on fully compliant companies and distract senior management from pressing duties of managing the business," the letter said. Financial Executives International, meanwhile, is looking for ways to soften the impact of the potential legislation. "If Congress absolutely insists on having a CEO signature, it should be limited to saying the CEO has taken steps to promote [the tax return's] accuracy, rather than saying the CEO has examined all of the documents," says Mark Prysock, director of tax policy for the FEI. —Alix Nyberg
Back in the Public Eye
Don't call it a comeback, but the market for initial public offerings is perking up. In the first six months of 2003, there were just 8 lonely IPOs, compared with 238 during that period in 2000. But signs that the drought is over are evident. In June alone, 17 companies filed to go public.
While that may not signal a return to the parade of IPOs that occurred during the dot-com boom, the market could at least be returning to normal. "The process has returned to what it was like pre-bubble," says Joe Hammer, managing director of the capital-markets group at Boston-based investment bank Adams, Harkness & Hill. "The size of the IPOs is larger, which means the companies are more mature."
Those that have braved the IPO waters this year have been successful, says John Fitzgibbon, editor of the newsletter IPO Outlook. Most companies that made their initial offerings between January and June have gained about 45 percent; only one has fallen below its offering price. "People are going to market at fire-sale prices, and it's working," he says.
Companies will need to demonstrate revenues, earnings, and sound business models to succeed in a wary market, adds Mark Liebner, CFO of Scottsdale, Ariz.-based VistaCare Inc., a provider of hospice services that made its Nasdaq debut in December 2002. Its stock has nearly doubled since its IPO. VistaCare had little competition for investment bankers' and analysts' time. "Given the dearth of offerings, we really had more choice than we would have had under normal circumstances," says Liebner.
Which is not to say VistaCare found the road to Nasdaq an easy one, given the shaky equity markets and the tense world political situation. But as the political scene stabilizes and the market edges higher, a new crop of IPOs seems likely to follow. Fitzgibbon watches the ticker tape for signs of life. "About 75 percent of IPOs are traded on Nasdaq," he explains. "And Nasdaq has had a great run since its low in October." —Kate O'Sullivan
Recent IPO filings.
Source: IPO Monitor
Branding Your Stock
As more and more investors begin to wade back into the equity markets, some investor-relations pros are trying to get their attention using techniques from the advertising world, ranging from intensive focus-group research to direct-mail pieces.
"The role of IR people traditionally has been to maintain a relationship with Wall Street," says Rob Swadosh, principal and co-founder of S2 Communications. "They haven't really been part of the creative-development channel."
The New York-based consultancy is among those that are trying to change that. S2 has created a system called Brandimension, which borrows techniques from ad-industry "account-planning" methodology to drill deeper than existing IR techniques into underlying investor motivations and behaviors. For example, S2 will explore the attributes of a client's "investment brand" compared with other companies not only in its business peer group but also matched against the brands of other companies in the client's "investment peer" group.
Not everybody thinks the approach is sound. "They're wasting money," charges Gary Miles, head of strategy and marketing in the New York office of PA Consulting, a management-advisory firm. "At the end of the day, [a stock's] brand really doesn't mean anything. You can only value cash flows that come out of activities and products. Then investors will understand exactly what it is you're trying to do as a company. Everything else is spin doctoring," he argues.
Still, plenty of companies are finding value in using advertising techniques for IR. For example, The Allied Defense Group Inc., a Vienna, Va.-based defense-technology firm, recently commissioned qualitative investor research to help the company assess its name identity and develop the most cost-effective IR strategy. Among other perceptions Allied executives want to correct is confusion about the company's business model, says a spokesperson. And Basking Ridge, N.J.-based telecom firm Avaya Inc. direct markets software to investors that automatically brings financial data to their desktops.
Efforts that borrow from advertising might prove particularly effective with individual investors, especially with consumers and other constituencies that already may have a relationship with a company. "These people also are investors who are putting their money back to work, and companies want some of that capital allocated to them," says Moira Conlon, executive vice president of FRB/Weber Shandwick, an investor-and public-relations firm. —Dale Buss
Truth and Consequences
On the heels of two critical reports on the nature of the $11 billion accounting fraud perpetrated at WorldCom Inc., the company, which now calls itself MCI, reached a settlement with the Securities and Exchange Commission to pay $750 million in penalties. The fine is the largest ever levied against one company by the SEC.
The agreement includes $250 million in common stock to be paid out after the telecom emerges from bankruptcy. The additional contribution "will allow shareholders and bondholders to participate in the future success of the company," said CFO Robert Blakely in a statement.
But while current executives looked forward, two new reports pulled back the covers on WorldCom's gory past. One investigation, commissioned by the company's independent directors, including former FASB chairman Dennis Beresford, concluded that WorldCom's fraud was shockingly simple. "As enormous as the fraud was, it was accomplished in a relatively mundane way," the report said.
The investigation revealed an appalling pattern of lax controls that allowed former CEO Bernard Ebbers and former CFO Scott Sullivan to run the company unchecked. "The most shocking thing was the 40 to 45 people in the finance department who were suspicious, but looked the other way," says Beresford. "The control structure was pretty abysmal."
During the investigation, it was alleged that former director of general accounting Buford Yates once threatened to throw an employee out the window if the individual showed information to auditors.
Another report, by former U.S. attorney general Richard Thornburgh acting as an independent examiner appointed by the bankruptcy court, also condemned WorldCom's controls. "Every level of 'gatekeeper' was derelict in his duties to some degree," it states. —J.McC.
Renewed Interest in Checking
The notion of banks paying interest on corporate checking accounts hardly seems revolutionary. Yet since the 1930s, when Congress passed the Glass-Steagall Act and other rules designed to separate the banking and securities industries, banks have been banned from doing so under Regulation Q. Now that a bill to repeal the arcane rule has passed the House, though, treasury experts are again hopeful that businesses may find more advantages to leaving cash in the bank.
"It's been passed by the House four times since 1999, and we're very optimistic that it will pass the Senate," says Al Rodack, chairman of the Association for Finance Professionals's government-relations committee, an advocate of the bill.
If Reg Q disappears, cash managers could eliminate the cumbersome "sweep" process of moving money from checking accounts to interest-bearing accounts over-night, reducing fees and possibly earning more interest.
The greater challenge for banks may be in marketing the products, since treasurers now leave money in banks at the risk of being considered inept. Indeed, so far most are skeptical that the ability to earn interest on checking would change their strategies. "It would streamline processes," says Keith Love, cash manager for Knowledge Learning Enterprises Inc., a Denver-based child-care facilities operator. But it "won't have a huge impact on the bottom line."
Banks are hoping to change that mindset. "Particularly in this low-rate environment [where balances are scarce], banks are going to come out with attractive instruments to allow corporate treasurers to leave their cash in banks," says David Robertson, principal at Treasury Strategies Inc., a Chicago-based consulting firm. In fact, many of his client banks expect to roll out products that would allow companies to reap returns on their checking-account balances regardless of the rule. "Increasingly, we're seeing banks use new technology to bypass the need for a Reg Q repeal," he says. —A.N.
Insurers Vow to Fight Securities Suits
After years of soaring prices for directors' and officers' (D&O) insurance, insurers are hoping to provide cheaper coverage by pursuing what they see as the main culprit of higher costs: shareholder litigation.
Earlier this year, Chubb, one of the largest providers of D&O coverage, announced a more-aggressive stance against what it sees as frivolous lawsuits. The company has committed $1 million to create a new association that will urge holders of D&O policies to join insurers in fighting the plaintiffs in court — a rarity today — rather than settling automatically. "There are some instances where we think it would be worth trying to take some of these cases to trial," says Robert Cox, COO of Chubb Specialty Insurance.
There is certainly a problem. The cost of D&O policies jumped 103 percent in 2002 and 83 percent in just the first quarter of 2003, according to the Risk and Insurance Management Society. While a number of factors lie behind these increases, the rising number and severity of lawsuits may be the biggest. "The price of D&O policies has gone way up as a result of claims being settled for astronomical amounts," says Joseph G. Finnerty III, a partner at Piper Rudnick, a law firm in New York that defends insurers and corporations in shareholder suits.
To be fair, insurers bear some of the blame. In the mid-1990s, D&O providers began offering "entity" coverage as part of their policies, largely eliminating the insureds' exposure. (Traditionally, D&O policies covered only the directors and officers themselves.) As a result, companies had an incentive to settle lawsuits. When a plaintiff learned that a company had a $100 million policy, says Finnerty, "it would make a settlement offer for $99 million, and it would be very difficult for the insurance companies to refuse to pay."
Whether or not companies will have the stomach to take their chances in court remains to be seen. But insurers are hoping to nudge their customers in that direction. Like other D&O providers, Chubb is reintroducing risk-sharing provisions such as co-insurance, which requires the insured to pay a certain percentage of any settlement costs. —Don Durfee
|Reason to fight?|
Average securities-suit settlements are going up.
|* Excl. Cendant's Record $3.2 billion settlement|
Source: Cornerstone Research