SEC: More Disclosure About Boards, Please

New proposals would require filers to shed more light on proxy process, beef up board communication with shareholders. Plus: service sector picks up steam, Cablevision unearths more errors, and workers long for flex time.

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Yesterday, the Securities and Exchange Commission proposed to strengthen disclosure requirements relating to nomination of directors and shareholder communications with directors.

The proposals follow the recommendations made by the division of corporation finance in its July 15 staff report on the proxy process regarding the nomination and election of directors.

The new proposals would call for companies to reveal additional information about the nomination of board members, including:

  • Whether a company has a separate nominating committee and, if not, the reasons why it does not and who determines nominees for director.
  • Whether members of a nominating committee satisfy independence requirements.
  • A company’s process for identifying and evaluating candidates to be nominated as directors.
  • Whether a company pays any third party a fee to assist in the process or identifying and evaluating candidates.
  • Minimum qualifications and standards that a company seeks for director nominees.
  • Whether a company considers candidates for director nominees put forward by shareholders and, if so, its process for considering such candidates.
  • Whether a company has rejected candidates put forward by large long-term institutional shareholders or groups of shareholders.

The proposals also call for added disclosure regarding shareholder communications with directors, including:

  • Whether a company has a process for communications by shareholders to directors and, if not, the reasons why it does not.
  • The procedures for communications by shareholders with directors.
  • Whether such communications are screened and, if so, by what process.
  • Whether material actions have been taken as a result of shareholder communications in the last fiscal year.

“These rules are an important first step in improving the proxy process as it relates to the nomination and election of directors,” said Chairman William Donaldson, in a statement. “The commission believes that better information about the way board nominees are identified, evaluated and selected is critical for shareholder understanding of the proxy process regarding nomination and election of directors.”

Donaldson added: “We also believe that better information about the processes of shareholder communications with boards lies at the foundation of shareholder understanding of how they can interact with directors and director processes.”

The SEC noted that the proposals represent the first step in the implementation of the recommendations by the division of corporation finance, adding it expects to consider additional rules later this fall regarding enhanced shareholder access to companies’ proxy statements and forms of proxy for nomination of directors.

The commission is soliciting comment on the proposals for a 30-day period following their publication in the Federal Register.

Boom Times for the Service Sector?

Let the good times roll — at least for the service sector.

Business activity in the non-manufacturing sector increased in July 2003 to its highest level in nearly six years, according to The Institute for Supply Management Business Survey.

Altogether, 14 of 17 industry groups in the non-manufacturing sector reported business growth last month, led by construction, agriculture, finance and banking, retail, and communications.

Just one group saw its business actually contract: health services. The other two sectors reported no change from June.

The Non-Manufacturing ISM Report on Business is based on data compiled from monthly replies to questions asked of more than 370 purchasing and supply executives in more than 62 different industries.

Altogether, 38 percent of the members reported increased business activity in July, compared with June’s 41 percent. On the other hand, reduced activity was reported by 12 percent of members, compared with 14 percent in June. In July, the remaining 50 percent of members indicated no change in business activity. In June, that figure was 45 percent.

The Backlog of Orders Index rose for the third consecutive month and for the eighth time since August 2002. The July New Orders Index increased from 57.5 percent in June to 66.9 percent in July.

There was also good news about deflation.

Members reported that the prices they pay increased in July — the second consecutive month respondents said price went up. What’s more, eight industry groups reported paying higher prices compared with June, four reported paying the same, and five industry groups reported paying lower prices in July.

Not all of the economic news on Tuesday was positive. According to placement specialist Challenger, Gray & Christmas Inc., U.S. employers in July announced plans to cut 85,117 jobs.

Cablevision Finds More Accounting Problems

On Tuesday, management at Cablevision Systems said it had discovered additional accounting irregularities. The irregularities cover about $3.4 million. The company indicated that no further restatements are necessary because of the irregularities.

On June 18, Cablevision management said $6.2 million of expenses recorded in 2003 at the national services division of its Rainbow Media Group were accelerated, and therefore had improperly accrued or expensed in 2002, rather than 2003. All but $1.7 million of that amount was identified and reversed prior to the release of the company’s 2002 results, the company’s management added.

Management at Cablevision also said it believed that improper expenses recorded in 2000 and 2001 were similar in size to those in 2002.

In explaining the discrepencies, Cablevision indicated that that its audit committee had retained William McLucas of law firm Wilmer Cutler & Pickering to conduct an investigation. Wilmer Cutler subsequently retained PricewaterhouseCoopers as forensic accountants.

The upshot: Wilmer Cutler identified additional improperly recognized expenses at production units within the AMC and WE: Women’s Entertainment business units, which are under the Rainbow Media Group roof. The company’s management said the improperly recognized expenses resulted from inappropriately accelerating the recognition of certain production costs.

The company added the net effect in each of the years 2000 through 2002 of original production costs expensed in earlier years was less than $1 million. In addition, the amounts that should have been expensed in 2003 that were expensed in earlier years amounted to about $3.4 million.

Cablevision also claimed its independent auditor KPMG agreed that the improper expense accruals are “insignificant.”

KPMG also advised the company that is unable to complete its review of the company’s consolidated financial statements for the second quarter.

Standard & Poor’s, however, said Cablevision’s rating would not be affected by the announcement that KPMG is unable to complete its review of the second-quarter financial statements. The ratings specialist did add, however, that “the absence of this review may hamper the company’s near-term ability to opportunistically refinance higher coupon debt and preferred stock as favorable market conditions emerge.”

Reversal of Fortune

Upon further review: two former Dynegy finance executives on Tuesday decided to plead guilty to criminal charges stemming from a 2001 fraud scandal, according to wire service reports.

Gene Shannon Foster, Dynegy’s former tax vice president, and Helen Christine Sharkey, the company’s former accounting manager, each pleaded guilty to one count of conspiracy to commit securities fraud, according to the reports.

They face up to five years in prison and $250,000 in fines for their part in the scheme, whereby they tried to disguise a $300 million loan as a natural gas trade.

On July 1, both pled not guilty to the securities fraud charges.

As part of Tuesday’s plea bargain, the two former executives agreed to cooperate with investigations into Dynegy, while prosecutors agreed to drop additional charges. Those additional charges could have both in jail for up to 35 years and cost them $2 million a piece in fines.

Jamie Olis, Dynegy’s former finance vice president and the third dependant, has pleaded not guilty to a related charge — and did not change his plea.

According to press reports, government prosecutors claim the three defendants illegally disguised a risk-free loan from several banks as a five-year natural gas contract with a dummy company created to make the deal work. Dynegy has already paid a $3 million fine to settle a complaint by the SEC regarding the scandal.

In a brief statement, Dynegy management said: “While it is the company’s policy not to discuss former employees or comment on the facts of this case, we respect the judicial process and the efforts of the U.S. Attorney’s Office to resolve this matter in a thorough and deliberate manner. Dynegy has been and will continue to be committed to complete cooperation with all government agencies and to restoring the confidence of its stakeholders.”

Short Takes

  • An American civilian contractor who worked for engineering and construction company Kellogg Brown & Root, was killed in Iraq on Tuesday when his truck accidentally detonated an anti-tank mine near Tikrit, according to Reuters. The company is a subsidiary of Halliburton Co.
  • General Mills Inc. management said its pension plans were under-funded by $224 million at the end of its recent fiscal year. The plan had been over-funded by $571 million the prior year. The Minneapolis-based cereal maker expects required cash contributions of less than $10 million in fiscal 2004, and it made contributions of $9 million in 2003 and $7 million in 2002.
  • One-third of workers said greater schedule flexibility would result in increased job satisfaction, according to a survey conducted by OfficeTeam, a staffing service. When asked, “Which one of the following would give you greater satisfaction in your current job?” 17 percent cited each of the following: more autonomy in making decisions, more variety in work projects, and more collaboration with others.
  • Cap Gemini Ernst & Young appointed Tim Crichfield to the post of Americas CFO. Crichfield has worked more than 20 years in the consulting industry, most recently as COO of the Americas Products business unit.

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