Options timing is clearly the cause du jour of federal regulators — and the terror of executives. After announcing investigations into dozens of companies this past summer, the Securities and Exchange Commission and the Department of Justice filed charges against former executives at Brocade Communications Systems and Comverse Technology, sparking what most expect to be an ongoing volley (see On the Record).

While investigators continue to focus on backdated options, companies may well be nervous about regulators’ interest in related practices known as spring-loading (timing grants to come ahead of good news) and bullet-dodging (offering them after bad news), both of which aim to capture presumed lows in stock prices for the options’ strike prices. Last November, Analog Devices spent $3 million to settle spring-loading charges with the SEC. Cyberonics is still under investigation for issuing options to top officers following Food and Drug Administration approval of a new product but before the market opened. Many others, including Home Depot and Merrill Lynch, have been tainted by The Wall Street Journal’s recent revelations that abnormally large numbers of options were issued soon after the tragedies of September 11.

Such practices, which some say were widely used at volatile technology companies, are not technically illegal, provided the company’s compensation committee was not deceived in any way. “It’s a pure governance issue rather than the violation of any law,” says Michael Sirkin, a partner at Proskauer Rose and co-chair of the law firm’s new stock-option task force. (In most cases, investigations related to spring-loading center on whether companies ran afoul of disclosure rules.)

In fact, SEC commissioner Paul Atkins even promoted such tactics as a way for cash-poor companies to get more bang for their buck with options. “It’s only a paper gain and it still has to be earned,” Atkins told CFO.

Yet, few others are advocating options timing these days. “It’s a cloudy ethical issue — a very gray area — so we don’t do it,” says J.D. Sherman, CFO of Akamai Technologies Inc.

Governance experts agree. Building in quick paper gains “seems to cut against the very notion of incentive compensation,” says Pat McGurn, executive vice president of Institutional Investor Services. Not to mention that, strictly speaking, options given under such conditions would be nearly impossible to fairly value for reporting purposes. “Having additional information causes the Black-Scholes model, along with most others, to break down,” says Stacy Powell, national practice leader for CCA Strategies’s equity compensation consulting practice. The models work on the presumption that all sides have equal information, she explains.

In August, the SEC issued new rules on executive-compensation reporting that require the disclosure of the rationale behind options grants. Many companies are also moving to make grants at specific times each year, to avoid the appearance of opportunistic timing. — Alix Nyberg Stuart

Checkups on Providers Miss the Mark

SAS-70 audits assess the internal controls, in particular the data-security controls, of outsourcing providers. These checks have become a regular part of Section 404 compliance. The problem is, they cost a lot, and “it isn’t clear that they are all that effective,” says Jonathan G. Gossels, president of information security firm SystemExperts.

Part of the issue is that SAS-70 audits are not standardized; each accounting firm performs them differently. “If I were a CFO, I would want to know that my outsourcers have been measured against an objective standard, not one the auditor made up,” says Gossels. Some audits, he says, look only at existing policies, not best practices. For example, if a company does not have a policy to prevent new data servers from being deployed with their default passwords, there is no guarantee that the audit will uncover it. Another problem is that the audits don’t necessarily test every one of the outsourcing provider’s facilities.

Larry Runge, CFO of dbaDirect, a data-infrastructure management firm, says the concerns are misguided. While he agrees that client firms need to ask about audit criteria, he is comfortable with the level of assurance the audit provides. More to the point, he says, “I don’t see another alternative.”

But Gossels has another suggestion: abandon the SAS-70 audit in favor of a “more comprehensive” international standard, such as ISO 27002. Rather than allow negotiation on procedures, ISO 27002 sets specific standards that must be met to earn what Gossels considers a meaningful seal of approval. — Rob Garver

States Go Their Own Way

With a minimum-wage hike dead in Congress, individual states are likely to continue raising the pay floor on their own, creating a patchwork of laws and inconsistencies for those who run businesses in multiple states.

Maryland, Rhode Island, Michigan, Arkansas, Maine, Delaware, Pennsylvania, and North Carolina have all enacted new wage minimums this year. On July 31, Massachusetts passed a bill raising its minimum to $7.50 in 2007 and $8 in 2008. California is expected to raise its wage later this year. Ballot initiatives to raise the minimum will go before voters in November in Arizona, Missouri, Montana, and Nevada. In most states, the minimum-wage laws go into effect only if the state’s minimum wage is higher than the federal minimum.

In June, the U.S. Senate failed to enact a bill that would have raised the current federal rate of $5.15 an hour to $7.25 an hour over the next three years. (The federal hourly minimum wage has stood at $5.15 since 1997.)

“For those companies that pay minimum wages, working with a patchwork of different statutes and regulations creates headaches,” says Paul Kelly, senior vice president for government affairs at the Retail Industry Leaders Association. Companies must also contend with different rates for tipped versus nontipped workers and different thresholds for who gets paid the minimum wage, says Tom Foulkes of the National Restaurant Association.

“The uniform federal system is much easier,” says Foulkes, whose association’s members hire many entry-level workers. Foulkes predicts that a federal minimum-wage hike could prompt a slowdown in state action on the issue.

For businesses that hire minimum-wage workers, the big question is whether federal inaction is pushing some states to set a higher wage than they would otherwise. “Is the lack of a federal increase creating pressure in certain states? I think the answer is yes,” says Rob Green, vice president for government and political affairs at the National Retail Federation. “But would a federal increase take the pressure off in some states? I’m not convinced that it would.” — Allan Richter

Bulldog Accounting?

Corporate accounting scandals may be fading from the front pages, but the nonprofit sector is coming under more scrutiny.

In July, Yale University announced that the Department of Health and Human Services, the Department of Defense, and the National Science Foundation subpoenaed documents relating to how the school allocated research expenses and how it reported faculty work devoted to grants. The subpoenaed documents relate to 47 grants and contracts totaling about $45 million and spanning a decade, says Tom Conroy, a Yale spokesperson.

Part of the motivation behind the Yale inquiry may be the federal government flexing its muscle, says David Crawford, a former auditor with the University of Texas who now runs his own risk-management firm and closely tracks university-compliance issues. “When they [investigate] Yale, everybody sits up and takes notice,” he says.

Debra Zumwalt, vice president and general counsel at Stanford University, says that because accounting at universities and other nonprofits can be more complex than at for-profit companies, irregularities are more likely to arise from honest mistakes. Nonprofits must not only track expenditures from a multitude of received funds, she explains, but they must also ensure that all spending is earmarked according to a fund’s criteria.

Like for-profit companies, many nonprofit organizations are currently examining accounting controls, and many are adopting Sarbanes-Oxley. — A.R.

What’s Your Financial Style?

There are almost as many initiatives to make executives better leaders as there are executives. Some theories focus on personality, others on skill. A recent entry into the mix proposes a connection between how executives inherently view money and the way they make management decisions.

E. Ted Prince, a former CEO with 20 years’ experience and author of The 3 Financial Styles of Very Successful Leaders (McGraw-Hill, 2005), has been studying the relationship between executive behavior and corporate performance since 2002. He contends that managers possess innate financial traits that make up their “financial signature.” Some people, like Wal-Mart’s Sam Walton, are natural discounters — they’re thrifty and focus on low-value, low-margin opportunities. Others, like Apple’s Steve Jobs, have venture-capitalist tendencies — they look for high-risk, high-reward opportunities requiring lots of capital.

Identifying your fundamental financial style is the secret to achieving success, claims Prince. Understanding your financial signature tells you what your natural response will be when confronted with situations involving risk/reward and cost/benefit, he says.

The classification is innate and fixed, says Prince, so putting a natural risk-taker into a corporate environment that calls for conservative management can be a recipe for disaster. “All the MBAs from the best business schools in the world cannot offset the impact of unconscious financial drivers,” argues Rob Kaiser, a partner at management consulting firm Kaplan DeVries, in a recent article for Personnel Psychology. Instead, explains Prince, executives need to pick companies with a mission and a culture that fit their financial style. (For another view of decision-making, see Insight.)

There is some hope for those whose style clashes with their company’s needs. According to the author, once executives are conscious of their intrinsic financial style, they can resist those tendencies and make decisions that benefit the company. In other words, while executives’ views are inherent, with some work, behavior can change. — Joseph McCafferty

Don’t Even Mention It

Trying to boost your stock price with a spin-off, stock buyback, or debt-financed acquisition, or by entertaining a leveraged-buyout offer? You may have to contend with lower credit ratings sooner than you thought.

With corporate-bond issues by investment-grade companies up 72 percent in the first half of 2006, credit-ratings agencies say they may lower ratings upon the announcement of such an event.

“Often the final rating isn’t [issued] until the transaction closes. But in some cases, where the motivation is clearly pressure from shareholders,” the rating will drop immediately, says John Olert, managing director at Fitch Ratings. He says there is no need to wait when it’s pretty clear that the goal is to reward shareholders. A recent Fitch survey found that such moves were the top concern of 78 large bond investors.

In July, the major agencies immediately put HCA on review for potential downgrade after it accepted a $33 billion buyout offer from major LBO firms. Kinder Morgan received the same treatment back in May upon mere receipt of an LBO bid, even though by August no decision had been made to accept the bid. The Tribune Co. was slashed to junk status when it announced in May that it would use $2 billion in debt to repurchase shares, even though such buybacks can take months or even years to complete.

Pamela Stumpp, Moody’s Investor Services managing director, says that slightly more than 75 percent of this year’s so-called fallen angels, or companies that have been downgraded from investment to junk, are associated with M&A transactions or stock buybacks, creating the need for earlier warning signs for bondholders.

In late July, Moody’s put out a request for comment on specific guidelines for circumstances under which it would downgrade a company upon announcement of a credit-eroding event, instead of just putting it on watch. Stumpp says the move is timely because “stock prices are fairly flat, and many companies are considering what they can do to change capital structures.” — A.N.S.

IRS Seeks Truth in Veritas Deal

Symantec Corp. develops software that battles computer viruses. But these days, the company spends time battling what it considers to be another pest: the Internal Revenue Service.

In June, Symantec filed a petition with the U.S. Tax Court to dispute more than $1 billion in back taxes and penalties that the IRS believes the company owes. The petition labeled the IRS’s claim “arbitrary, capricious, and unreasonable.”

The eye-popping tax bill stems from the transfer-pricing agreements in place between Veritas U.S., which Symantec acquired in 2005, and its Irish subsidiary, Veritas Software International Ltd. The IRS says the amount of income attributed to Veritas U.S. as a result of a technology-licensing agreement with the Irish subsidiary was too low for tax years 2000 and 2001. At the same time, the IRS says Veritas allocated more of the costs of developing software than it should have, boosting expenses at Veritas while lowering its income. (In June, Symantec settled a similar case for fiscal years 2003 and 2004 for $36 million; the IRS wanted $100 million.) The outstanding case is one of the largest transfer-pricing tax disputes ever.

The software company argues that Veritas worked with its outside accountants, Ernst & Young, to develop its licensing and cost-sharing arrangements. In 2004, Symantec approached the IRS in hopes of reaching what’s known as an advance pricing agreement (APA), which would have allowed that the transfer prices the taxpayer was using were comparable to what two unrelated parties would have negotiated. In 2005, the IRS rejected the request. (The IRS and Symantec declined further comment on the dispute.)

Normally, APAs are done prospectively, says Carolyn Fanaroff, counsel with Greenberg Traurig in Washington, D.C. However, taxpayers requesting an APA can also ask for a rollback, which would cover prior years’ transfer-pricing issues.

At this point, it’s impossible to predict how the battle between Symantec and the IRS will be resolved. What is clear is that more tax disputes will arise over transfer pricing. As more U.S. companies have established operations outside the United States, the IRS has taken a closer look at transfer-pricing agreements and is currently revising the rules stating how cross-border services transactions are taxed. — Karen M. Kroll

Continuing Gains for Domestic Partners

More than half of Fortune 500 companies now provide benefits that cover domestic partners of employees. According to a survey by the Human Rights Campaign, as of June 1 of this year, 253 of those companies provide such benefits, up from 246 in 2005. 3M, ADP, and Clear Channel added the benefit in the past year. The survey also found that 85 percent of the Fortune 500 now include sexual orientation in their nondiscrimination policies.

Booking Trips the Old-fashioned Way

Not long ago, Randy Royer, the treasurer of Mesirow Financial Holdings, got caught in an ice storm in Portland, Ore. Because he had booked his trip online, he spent hours on the phone with airlines, trying to get back home to Chicago. In the end, he drove to Seattle (a two-hour trip that took six hours in the storm), where he hopped a red-eye to Washington D.C., and then another flight to Chicago. “When you’re in a situation like that, calling someone who can look at options and work around the problem is really helpful,” he says.

More business travelers are finding that out. Despite the popularity of online booking sites like Expedia, Orbitz, and Travelocity, travel agents are making a comeback. Glen Stewart, president of Gray’s Travel Management in Northbrook, Ill., says more business travelers are skipping the mouse and picking up the phone to book their next trip. “In the past year and a half, we have noticed that more people want to talk to real people about their trips,” he says. Gray’s handles about 4,000 calls a month from booking customers.

For simple trips, online travel arrangements may still be the faster and cheaper way to go, but for more-complex trips, speaking to a person may be more cost effective. Agents can make sure customers pay the cheapest fares available, which sometimes means calling up an airline to get the best deal. They can also help travelers receive first-class upgrades if they are eligible, change itineraries without the extra fees that most online sites charge (especially during times of heightened security), and pinpoint the closest hotels. In addition, says Suzanne Fletcher, president of the National Business Travel Association, agents also quickly handle international faring. “It’s a science,” she says, “and they’re pros at it.”

Usually, travel agents are part of a larger travel-management program that gives employees access to an online site for booking simple trips and live travel agents if needed. Accessing agents can sometimes require an added fee of around $10, which most in-house travel managers are happy to approve if they think the agent can help save the traveler money by finding the cheapest way to go. — Laura DeMars

Deep Pockets, Getting Deeper

U.S. companies continue to hoard record levels of cash. And over the next 12 months, most don’t plan on changing that practice, according to a survey released in July by the Association for Financial Professionals (AFP) and Credit Suisse Asset Management. Nearly half (49 percent) of the treasurers and other executives surveyed say they expect their companies to maintain current cash balances over the next 12 months. Another 27 percent say they will increase their cash reserves. Jeff Glenzer, director of treasury services at the AFP, says cash stockpiling suggests a lack of investment opportunities. “It can be seen as a barometer of how corporations view the economic climate,” he says. The survey also finds that many companies are lax about creating an investment policy for cash and that they don’t diversify their cash holdings.


“I hadn’t known anyone who tried to manage his own death in such a conscious fashion…. What can I say? I was an accountant…. The same traits that made me someone who might flourish in the world of finance and accounting also made me someone who did not know how to do anything unplanned — dying included.”

— Eugene O’Kelly, former chairman and CEO of KPMG, from his book, Chasing Daylight: How My Forthcoming Death Transformed My Life. O’Kelly died of cancer on September 10, 2005.

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