More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
With the recent market turmoil in the financial sector and global stock markets, corporate-governance issues are front, right and center. This includes greater scrutiny of compensation, boards, financial reporting and related issues as investors look for improved performance in these areas as a means to spur long-term success.
"Today, corporate governance is more high profile than ever before. The Enron-WorldCom period raised consciousness, and then we had Sarbanes-Oxley, which changed listing requirements. Now, we are primed to see another round of legislative/regulatory reform as a result of the credit-market meltdown," explains Pat McGurn, special counsel for RiskMetrics Group's ISS Governance Services unit in Rockville, Md.
Research's Corporate Governance Leaders
Corporate Governance Quotients (CGQs) measure the quality of a company's corporate-governance practices and board of directors, as provided by RiskMetrics Group.
Campbell Soup Co., 91.7
W.P. Carey & Co., 94.6
Southwest Gas Corp., 90.0
Source: RiskMetrics Group, 12/10/08
"During the Presidential primary campaign, every candidate discussed executive compensation; the two nominees went on in the general election to talk about boards and corporate governance in general," McGurn says. "And Barack Obama even made executive pay and the issue of 'say on pay' part of the Democratic Party platform."
That means the new president is expected -- in first 100 days after the administration is installed - to move to broaden government-related provisions in the Troubled Asset Relief Program for banks and other financial institutions and apply them to a broader community. "We expect other longstanding proxy voting issues, like say on pay, to be required yearly and new rules for putting nominees on the proxy ballot could become mandates for all companies," explains McGurn.
Of course, these are major changes on the legislative/regulatory front. "We also expect a broader national discussion to definitely provide a great deal of momentum for shareholder resolutions this season, and investor anger will fuel 'just vote no' campaigns against directors," he adds. "We should see a bumper crop of this type of activity in 2009."
Some companies with a strong track record in corporate governance are prepared.
"We have been focusing on this issue since before corporate governance became an official issue for public companies," explains Ken Kenny, vice president and treasurer of Southwest Gas Corporation in Las Vegas. "As a company, we were definitely focused on it so that our shareholders were confident in our management team. And when the [Corporate Governance Quotient] ratings came out, we were rated extremely high given our history."
"Some companies are now catching up with us in corporate governance as it's been mandated in areas where we took action before," Kenny says.
"We've always paid attention to corporate governance, from the way we elect our board members to how we do our Sarbanes-Oxley requirements, and we've always maintained good records, etc.," he shares. "As more mandates came in, all we had to do was formalize certain processes. We started operations in 1931 and began trading on the New York Stock Exchange in 1979. We have a history of being concerned with earnings as well as with proper checks and balances."
"We will continue to improve as needed," Kenny concludes. "For our corporate governance score, we reelect our board members every year, in addition to meeting other criteria, and that is positive."
In addition, companies that have controls in place give investors more comfort in today's environment, experts say, in terms of understanding a company and its data.
According to RiskMetrics McGurn, "Recent problems point to some areas that were not fixed, like compensation, which was -- in some cases -- encouraging excessive risk taking and too short a focus."
RiskMetric's Corporate Governance Quotient looks at multiple factors and is thus a good barometer for measuring boardroom accountability. Strong scores should give shareholders some confidence, but they don't fully replace good old-fashioned fundamental analysis. "CGQs can help find trouble spots that merit further inquiry," McGurn shares.