Federal Securities Lawyer & Attorney : Porter Wright Law Firm : Securities Exchange Law : Serving Ohio, Washington DC, Florida

In a recent national survey of CFOs and senior comptrollers conducted by Grant Thornton, over 75% of respondents said the SEC should revise Form 8-K rules to require reasons for all company dismissals of auditors, for all auditor resignations, and for all instances in which the auditor chooses not to stand for reappointment. The results suggest that CFOs feel auditors resign or are terminated for reasons that investors should know about but for which no disclosure is required. The crux of the current 8-K rules if an auditor resigns or is dismissed require that all disagreements between the auditor and the company be disclosed.

The complete survey follows. Note the split response to the last question.

Do you believe the roles of CEO and chairman of the board should be independent of each other?

Yes 78.73 %
No 20.81 %

Should the SEC revise 8-K rules to require reasons for all company dismissals of auditors, for all auditor resignations and for all instances in which the auditor chooses not to stand for reappointment?

Yes 75.57 %
No 21.72 %

Do you believe shareholders in public companies should have greater access to the proxy?

Yes 66.06 %
No 29.86 %

Do you believe that small cap companies who test internal controls (according to Sarbanes-Oxley) will be looked upon more favorably by investors than those who do not test internal controls?

Yes 68.78 %
No 29.41 %

Do you consider the newly issued guidance (AS 5) from the SEC on internal controls and the new audit standard for auditing internal controls to be a significant improvement over previous rules?

Yes 43.89 %
No 47.96 %

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The SEC is investigating misuse of a 10b5-1 trading plan by Countrywide Financial Corp CEO, Angelo Mozilo, and securities experts continue to predict that such misuse will be the next big securities scandal.

10b5-1 trading plans allow executives to trade stock without worrying about trading on material, nonpublic information, also known as insider trading. The plans are filed with the SEC and specify in advance when stock in an executive’s company will be bought and sold and at what price. The plans cannot be entered at a time when an executive has material, nonpublic information, the idea being that executives should not be able to influence when plans make purchases or sales if the executive has inside information.

Much like option backdating was exposed by an academic study that found option grants tend to occur at optimum times (which suggests insider trading), misuse of 10b5-1 plans has been suggested by a Stanford study that found such plans beat other trades by as much as 6 percent.

Examples of plan manipulation include:

• Starting a plan while aware of insider information;
• Disclosing insider information before a planned trade to maximize profits; and
• Rewriting a plan before upcoming changes in company performance.

These types of manipulation are already illegal, which could mean any impending scandal may need to be solved with better detection of wrongdoing, as opposed to new rules.

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Yesterday, ISS blogged about Booz Allen Hamilton’s annual CEO succession study, which reported several interesting findings that I also think are worth sharing. The study, which is based on the world’s 2,500 largest public companies concludes that the imperial CEO has been replaced by the inclusive CEO, as reported in the press release on the study – “The Era of The Inclusive Leader.” 

As noted in the press release, the study shows that CEOs are becoming acutely aware that in order to succeed, they must listen to the concerns of their directors, shareholders and employees, and respond timely and appropriately. Thus, the days of CEOs answering only to themselves appear to be closer to a distant memory than today’s reality. 

The study shows that boards are becoming less tolerant of current poor performance and indications of future underperformance than in the past. It used to be that boards would primarily only remove CEOs for proven underperformance, however, boards are becoming more focused on future performance and more inclined to remove CEOs based on indications of future underperformance.

The study also indicates that splitting the roles of chairman and CEO can be very beneficial to companies. Notably, in 2006, all of the underperforming CEOs of North American companies were also chairmen of their companies, or served under chairmen who were the companies’ former CEOs. The conclusion that investors benefit more when the positions of chairman and CEO are held by different individuals is a consistent conclusion on a global scale.

The press release is a quick read and I recommend checking it out.

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