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More employees should be willing to share corporate responsibility — no matter what their positions (“Turning the Screws,” From the Editor, January). There is not a single person working in a U.S. public company today who should not be able to read and understand a financial statement. All employees should also understand the basics of Sarbanes-Oxley and what its implications are for the CEO and CFO, and be in a position to help improve financial controls and performance. It may take time, but more and more employees will have to get educated on the basics of Sarbanes-Oxley and of finance.
Who’s the Fiduciary?
Randy Myers did a great job in the December 2005 article “Games They Play,” but he did not go far enough in terms of presenting solutions to the issue of pension consultants and conflicts of interest.
Sending SEC-model questionnaires now to consultants to disclose and ascertain possible conflicts of interest may be useful for information purposes, but the horse left that barn a very long time ago. Damage to pension and 401(k) plans from conflicted advice may have already been done, and some observers estimate the losses run in the billions of dollars. Could the situation have been prevented? With trillions of ERISA plan dollars in play, will it happen again only in another form? Can CFOs better defend themselves, the board, the retirement plan, and the employees?
CFOs should recognize that they are always at some risk when working with consultants, vendors, and service providers that disclaim fiduciary status to the company’s retirement plan. The CFO should ask every plan vendor or consultant, “Are you a fiduciary to our plan?” The answer will reveal who assumes the highest level of responsibility and shares the CFO’s level of fiduciary liability. A nonfiduciary vendor retains the legal right to represent its own self-interest in the business relationship ahead of the best interests of the plan, the CFO, other executives, the board, and the employees.
CFOs cannot be effective leaders in pension- and 401(k)-plan management and defend against consultant and vendor self-interest without substantive fiduciary training. The SEC and consultant issues raised now are a direct result of executives being charged with management and oversight of large amounts of retirement-plan assets but with no training for the task. However, the CFO should not be expected to be the only trained and vigilant executive. Every Treasury, HR, and support staff member that touches the corporate retirement plan should be trained in best plan management practices, their duties, and responsibilities. The result is less risk exposure to CFOs, executives, and board members, and better retirement plans for employees.
Senior Vice President
Denali Fiduciary Management Corp.
Conflicts of interest may be more subtle than you think. Everyone has a conflict of interest in his or her work with ERISA retirement plans. Independence is not just a matter of how one gets paid. Remember, there is no PCAOB equivalent in the benefits- or pension-consulting world. Thus, one brand-name consulting firm that proposed to provide independent advice already had a $500,000 health-and-welfare consulting assignment on the books. Is that advice independent? Who would risk a $500,000 assignment by telling the plan sponsor something it doesn’t want to hear? In this case, the firm is about as independent as Arthur Andersen was of Enron.
Another major consulting firm that provided recordkeeping and actuarial services to a Fortune 500 company also proposed that it be retained to provide a fiduciary audit of the plan sponsor’s conduct. How independent could that audit be?
Investment consultants may or may not be independent of the investment funds they recommend. For example, some studies show that you have about a 10 percent chance of identifying the active investment manager that will outperform a passive benchmark over the next five years. Given that statistic, what is the prudent basis for choosing to spend plan assets pursuing the “rewards” of active investment management on a defined-contribution plan?
Conflicts abound in the ERISA world. To act as if all conflicts are tied to direct payments is to miss where the conflict influences behavior and generates a blind spot in the thought process of the individual or organization providing services.
All conflicts of interest on the table and under a bright light — that should be the mantra.
Realtors to Rely On
Don Durfee’s article on potential conflicts of interest in commercial leasing (“Divided Loyalties,” December 2005) is excellent, and any experienced leasing expert should acknowledge that problems are legion.
At the same time, one organization — the Society of Industrial and Office Realtors (SIOR) — has made excellent progress in supporting high professional standards in tenant and buyer representation brokerage services. The SIOR designation is the highest professional recognition that a commercial broker can earn, and is based on an audited track record of high productivity over several years, completion of a national exam on core competencies, and, perhaps most important, a reputation for and commitment to a rigorous code of ethics.
While conflicts of interest are a problem, I believe space users are particularly well served by brokers who have earned the SIOR designation, which requires that there be prompt disclosure of such possible conflicts and that the interests of the broker align with the interests of the space user.
For example, many brokers with the SIOR designation seek fee structures that are constant for all properties in order to eliminate one problem: significant fee differentials between owners that are desperate to lure a desirable tenant and owners that couldn’t care less. A variation includes structuring fees “per square foot” versus fees based on gross lease value. Prompt fee disclosure by brokers is also mandatory when a broker is representing the best interests of the space user, but is being paid by the “opposition.”
Your article “Mum Is Not the Word” (Topline, December 2005) did a fine job flagging the cash buyback liability issue. However, the conclusion reassured readers that 10b5-1 type programs (corporate repurchases under a written plan) “can alleviate” SEC concerns. That seems to be a mistake. CFO’s article was based on a 2005 study by Colorado University law professor Mark Loewenstein and his colleague W.K.S. Wang. The study suggests that, because a corporation is always privy to significant information, and because even 10b5-1 programs must be halted whenever the selling party has material inside information, it is questionable if a corporate repurchase could ever qualify for a 10b5-1 safe harbor.
Isn’t the corporation inherently an insider? Right now, corporate treasuries routinely execute cash buybacks without legal consequence, but things change — sometimes slowly (like the expensing of options), sometimes quickly. No one seems to think of corporations as insider traders but, if they aren’t, then who is? Certainly, with annual cash buybacks by S&P 500 companies up over 50 percent in 2005 to in excess of $300 billion, attorneys have good reason to take a serious look.
Because of the impact on corporate treasury, an ill-priced cash buyback can easily send a stock price down instead of up. At first glance, the Loewenstein/Wang report seems to address only liability that corporations face if their stock price rises after the buyback. In fact, it may be that the most egregious (and, hopefully, rare) problems will arise from instances in which a corporation’s stock price falls subsequent to a buyback. One thing is for sure: lawyers will look for victims and remedies. Wherever the victims are found, the corporation’s deep pockets most likely will be looked to for the remedy.
Michael A. Gumport
The Role of IT
Your December 2005 By the Numbers page (“Still Waiting“), which dealt with IT trends, was correct in noting that “it wasn’t supposed to be this way,” regarding the long wait for valid ROI approaches to IT. I’d like to offer a follow-up thought: It doesn’t have to continue this way.
One of the reasons that 60 percent of the survey respondents indicated “no” or “not sure” when asked if their IT investments have produced the expected returns may be that many CFOs either don’t know the right questions to ask regarding IT’s role in creating shareholder value or don’t know how to go about answering them.
CFOs should ask three fundamental questions: (1) How can IT investment be optimized to create (or increase) shareholder value? (2) What is the process to prioritize and evaluate IT investment? (3) How do you measure the shareholder-value impact of the IT organization?
The relative importance of each question will vary by company, and will also be influenced by acknowledging that IT’s role differs depending on whether it is being evaluated in the context of maintaining operations, driving value, or enabling value. It took us a while to figure this out, so CFOs must be willing to work at it. We believe, though, that the results are worth the effort.
Roy E. Johnson