In our front page interview, Norm Veasey states that anticipating future developments is one of the important attributes of general counsel in their capacity as persuasive counselors of CEOs and Boards.
One future development of concern to all corporate counsel is so important that we devoted substantial resources to it in our May, June and current issue - see the "Special Section on Global Competitiveness." That issue? How can the good ship "America" best navigate through the uncharted waters of capital raising transaction globalization? Particularly with CEO's, CFO's and Boards of Directors, this is not just a spectator sport. It won't work for you and your company to say "stop the world I want to get off." Companies must find the capital necessary - to fund operations and to expand - in the most cost efficient markets. Failing to recognize the increasingly global and highly competitive environment for these transactions will lead companies to disastrous financial consequences. The only way to get off is for your company, whatever the industry it may be in, to court the disaster of losing the battle to survive in an increasingly competitive world.
We all owe a debt of gratitude for the leadership of Treasury Secretary Hank Paulson, Undersecretary Bob Steele and others in the U.S. Treasury Department and to private sector organizations who prepared the three reports we have highlighted in our coverage of global competition. Although many of the reforms suggested in the reports promote the continued viability of our capital markets, other reforms address the broader regulatory environment for public companies and their ability to raise capital. Those broader reforms include: addressing the civil litigation environment, advocating prudential regulation to replace the "school of hard knocks" role of regulation through enforcement proceedings, and expanded privilege protections for company self-assessment work product. If enacted, these reforms would broadly enhance the global competitiveness of all U.S. companies.
Reforms That Demand Immediate Implementation
Securities Class Actions. Foreign companies are deterred from listing here by the immense financial threats posed by securities class actions that in many cases materially benefit only plaintiffs' counsel and may simply reallocate cost burdens among shareholders. The proposed reforms would make all U.S. companies more competitive by addressing the perceived risks in the U.S. that are not present in overseas markets. Recent U.S. Supreme Court decisions are helpful, but many issues remain unaddressed.
The Death Sentence Exposure of Companies and Personal Liability of Officers and Directors. Because companies are subject to vicarious criminal liability for the alleged misdeeds of directors and officers, a death sentence can be imposed on a wide range of companies as a result of mere indictment. The Arthur Andersen case is a classic example. The reports suggest either the elimination of vicarious liability or limiting the application of the criminal sanctions to companies that are rotten to the core.
The reports also recommend that officers and directors be relieved of personal liability where they rely in good faith on auditors' reports or on senior officers and that they be entitled to indemnification in connection with Section 11 violations.
Quarterly Earnings Guidance. Companies that provide earnings guidance are under pressure to meet earnings targets to the penny and therefore have temptations to engage in imaginative accounting to meet that guidance. They also tend to sacrifice long term goals in order to meet their quarterly targets. Convincing companies to abandon quarterly earnings guidance is a private sector effort which has already been launched by the U.S. Chamber and the Business Roundtable.
The Threat To Audit Firms. With the number of audit firms capable of certifying to large global public company financials having been reduced to four as a result of the death of Arthur Andersen, the choice of an auditor has been significantly narrowed. To preserve choice, it is vital that the number of firms not be further reduced. Recommendations in the reports include capping auditor liability and issuing federal charters to the largest audit firms. U.S. companies also benefit by preserving choice among auditors. The U.S. Treasury is setting up a broad-based committee to look into the recommendations.
Regulatory Reform. The reports recommend that the SEC adopt principles-based rulemaking coupled with prudential administration like that used by bank regulators here or the FSA in London. This approach, used by the regulators in London and other foreign capital markets, protects investors while reducing costly red tape and encourages companies to correct unintentional violations rather than adopting the enforcement-oriented approach of the SEC. In his interview on page 7, Steve Burdumy points out that his U.S. clients will, in many cases, use London capital markets rather than New York after considering cost and other advantages. Should your company have to endure the inconvenience of using foreign capital markets simply because issuers using our capital markets sometimes confront senseless red tape and ill-considered enforcement actions? Here too, the SEC and PCAOB are moving forward with the most pressing reforms.
Sarbanes-Oxley Burdens. Compliance with Section 404 places disproportionate burdens on smaller companies and foreign companies. Why should U.S. companies have to go to London because the cost and other burdens of Section 404 are so great? The PCAOB has sent to the SEC for approval reforms which go a long way toward relieving these burdens.
Building For The Future - Longer Range Reforms
Encouraging Saving For Retirement. U.S. employees are not saving enough to provide for their retirement. This not only results in depriving our capital markets of funds which would otherwise be invested, it also creates a social burden on the economy when the increasing number of workers who do not have generous employer-financed defined benefits plans retire. The U.S. Chamber Report proposals would create retirement vehicles that would make retirement savings plans more attractive while encouraging more employers to offer such plans. These proposals deserve support by all U.S. businesses and employees.
Immigration Reform. The Bloomberg/ Schumer Report maintains that our inability to attract foreign talent puts us at a competitive disadvantage. We are educating doctoral candidates in the sciences and mathematics who are not permitted to practice in the U.S. the skills they learned at our finest universities. The immigration proposals pending in Congress only partially address a problem that unless fixed will make it impossible for U.S. businesses to maintain their current leadership in businesses requiring these skills unless they outsource the work abroad.
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The above summary touches on only a few of the recommendations made in the reports. However, it should be clear from the above that your company will benefit immensely from one or more of the individual recommendations and the prosperity that adoption of the recommendations will bring to the U.S. In order to make our readers aware of the positive effects of such recommendations, we are asking our law firm and legal service provider supporters to discuss the individual recommendations in a regular monthly Special Feature which will be published beginning with our September issue.
Published July 1, 2007.