|
Important notice: You may use this material for your own personal reference only. The material may not be used, copied or redistributed in any form or by any means without a LAWLEX enterprise wide subscription. Corporate Law Bulletin Bulletin No. 85, September 2004 Editor: Professor Ian Ramsay, Director, Centre for Corporate Law and Securities Regulation Published by LAWLEX on behalf of Centre for Corporate Law and Securities Regulation, Faculty of Law, the University of Melbourne with the support of the Australian Securities and Investments Commission, the Australian Stock Exchange and the leading law firms: Blake Dawson Waldron, Clayton Utz, Corrs Chambers Westgarth, Freehills, Mallesons Stephen Jaques, Phillips Fox. Use the arrows to navigate easily across the bulletin | |
|
Detailed Contents | |
|
1. Recent Corporate Law and Corporate Governance Developments 1.1
Report of the Special Commission
of Inquiry into James Hardie 2.1 ASIC provides relief for financial services guides given in time
critical situations 3.1 ASIC releases report card on ASX 4. Recent Takeovers Panel Developments 4.1 Australian Leisure and Hospitality Group Limited: Panel declines to commence proceedings 5. Recent Corporate Law Decisions 5.1
ASIC’s examination and production powers continue after commencement of
proceedings
| |
|
1.1 Report of the Special Commission of Inquiry into James Hardie On 21 September 2004, Commissioner Mr DF Jackson QC, delivered to the New South Wales Governor the Report of the Special Commission of Inquiry into the Medical Research and Compensation Foundation established by the James Hardie Group. (a) The Inquiry’s terms of reference On 27 February 2004, Mr Jackson was commissioned to inquire into and report upon:
(b) Background to the Inquiry The following four paragraphs are extracted from an August 2004 research note on James Hardie prepared by the Commonwealth Parliamentary Library: “The Hardie Group manufactured asbestos products (cement, piping, insulation and brake linings) for over 70 years in NSW, Queensland and Western Australia. Estimates of Australia's total liability for future asbestos claims start around $6 billion. Other companies and federal and state governments also have substantial asbestos liabilities. Claims are not limited to those who worked in asbestos mines and factories. Former power station, shipyard and dock workers, railway labourers and members of the defence force, especially the Navy, are at significant risk from asbestos-related diseases. These diseases can take decades to develop—a major difficulty for compensation planning. Mesothelioma (cancer of the chest cavity) can emerge 40 years after exposure. Since 1945 about 7000 Australians have died from this disease, estimated to rise to 18 000 by 2020. Other asbestos related cancers may be around 30—40 000 by the same time. “A major problem for the Hardie Group is the range of products it made with asbestos. It faces growing claims from users of these products. Over half the claims made to the NSW Dust Diseases Tribunal in 2002 were against the Hardie Group. “Between 1937 and 1986 asbestos products were manufactured by two subsidiaries of James Hardie Industries Limited (JHIL): now known as Amaca (building and construction products) and Amaba (brake linings). Between 1996 and 2001 the assets of Amaca and Amaba were transferred to JHIL (now 'ABN 60'), then to a Netherlands based company - James Hardie Industries NV (JHI NV). In February 2001 ownership of Amaca and Amaba was transferred to a new body, the Medical Research and Compensation Foundation ('the Foundation'), which was given $293 million to fund asbestos injury claims. “In October 2001 the Hardie Group assured the NSW Supreme Court that ABN 60 could call on $1.9 billion owed by JHI NV for partly paid shares to meet future asbestos claims. This assurance was 'pivotal to the court giving approval for the transfer of ABN 60's assets' to JHI NV in the Netherlands. But in March 2003 ABN 60 cancelled the partly paid shares 'without informing the court or the stock exchange'” In August 2004, James Hardie indicated that the company would provide additional funds to compensate victims of asbestos related diseases provided a statutory scheme is established and certain prerequisite are met. (c) Key findings of the Special Commission of Inquiry Several of the key findings of the Commission are:
(d) Response of James Hardie On 21 September 2004, James Hardie issued a media release that stated in part: “The Company acknowledges the seriousness of the findings and comments of the Commissioner and advises that the Board Special Committee and the Board itself will review the report accordingly. The Board will issue a response after a full analysis of the Report has been undertaken by the Special Committee and considered by the Board. James Hardie notes remarks by Commissioner Jackson in the report in support of a Scheme as the best long-term solution for satisfying asbestos liabilities. In this regard, the company reconfirms its funding proposal and its willingness to work with all relevant stakeholders in developing a satisfactory compensation solution for asbestos claimants against its former subsidiaries which it could put to shareholders for approval.” On 28 September 2004, James Hardie issued another media release in which it stated that Peter Macdonald would stand aside as CEO and Peter Shafron would stand aside as CFO until matters surrounding the Commissioner’s report and the ASIC investigation become clearer. However, it is also stated in the media release that Mr Macdonald will continue to be responsible for the business operations of James Hardie and Mr Shafron will undertake projects for the company outside the CFO’s function. (e) Response of ASIC On 22 September, Mr Jeffrey Lucy, Chairman of the Australian Securities and Investments Commission (ASIC), announced that ASIC has commenced investigations into the circumstances surrounding James Hardies' creation of a fund to compensate victims of asbestos-related illnesses. “ASIC is deeply concerned about the serious corporate governance issues that have been raised by Mr Jackson, QC, and the community can be assured that we will vigorously pursue breaches of the law. Our investigation will include the conduct of certain directors and officers of the James Hardie group of companies and associated parties, and market disclosures made by the companies and individuals. While we have closely followed the Special Commission of Inquiry, our investigation is not constrained by the findings of the Special Commission.” (f) Accessing the report The Report of the
Special Commission of Inquiry into the Medical Research and Compensation
Foundation is available on the website of The Cabinet Office of the NSW
Government at http://www.cabinet.nsw.gov.au/publications.html.
1.2 Disclosure by New Zealand finance companies On 24 September 2004,
the New Zealand Securities Commission released a discussion paper titled
“Disclosure by Finance Companies”. The increase in the number and profile of finance companies has seen a corresponding increase in the number of complaints that the Commission receives and deals with. These trends have prompted the Commission to undertake the review. The discussion paper outlines the Commission’s preliminary views on the information that should be disclosed by finance companies to assist investors to make informed investment decisions. The Commission seeks comments from finance companies and other interested parties on these preliminary views. Once it has received and considered comments, the Commission will publish a report to provide guidance on its expectations for disclosure by finance companies. The discussion paper does not include detailed issues concerning disclosure of financial information by finance companies. The Commission is undertaking a separate project on financial disclosure by finance companies. The Commission has identified the following broad issue areas relating to disclosure and compliance by finance companies for inclusion in the discussion paper. Many of these issues are interrelated:
The discussion paper is available at: http://www.sec-com.govt.nz/publications/documents/disclosure/index.shtml
1.3 European Commission consults on shareholders’ rights The European Commission on 16 September 2004 launched a public consultation on facilitating the exercise of basic shareholders’ rights in company general meetings and solving problems in the cross-border exercise of such rights, particularly voting rights. Responses will be taken into account in a forthcoming proposal for a Directive which is part of the Commission Action Plan on Corporate Governance. The deadline for responses is 16 December 2004. The Commission’s consultation paper gives first indications as to the possible future EU regime on shareholders’ rights in listed companies. The Commission considers that this should be based on a Directive, since the effective exercise of such rights requires solving a number of legal difficulties. The main issues on which the Commission is seeking responses are:
The consultation paper is available at: http://europa.eu.int/comm/internal_market//company/shareholders/index_en.htm Responses should be sent by 16 December 2004 to DG Internal Market - Unit G4, European Commission, B-1049 Brussels, or to: Markt-OMPLAW@cec.eu.int
1.4 UK Government consultation on new European standards for statutory audit On 10 September 2004, the UK Government announced that it is seeking views on new proposals for pan-European standards on auditor independence and audit quality. The draft Directive under consideration is the European response to the scandals of Enron, Worldcom and Parmalat and in particular the questions these have raised about the role of the auditor. The key proposals outlined in the consultation document include:
On 16 March 2004, the European Commission presented a proposal for a Directive of the European Parliament and of the Council on Statutory Audit of Annual and Consolidated Accounts, and amending Council Directives 78/660/EEC and 83/349/EEC. The proposed Directive will replace the existing EC 8th Company Law Directive of 1984, and make a number of changes of substance to the present rules on statutory audits. The UK Department of Trade and Industry (DTI) is currently negotiating the terms of the Directive and is seeking views from a range of stakeholders as to which parts of the Directive should be supported and which require amendment. For example, how it might impact certain of the UK's current controls, such as auditor rotation and the establishment of audit committees as a legal requirement. The DTI is also seeking evidence that it hopes will assist in a cost/benefit analysis on the Directive's impact. The deadline for replies to the consultation is 30 November 2004. The full Consultation Document is available at: http://www.dti.gov.uk/consultations/ Hard copies of the consultation are available on request from: Ray Taylor, Corporate Law and Governance, DTI, Elizabeth House, 39 York Road, London. SE1 7LJ. Tel. 0207 215 0239; fax. 0207 215 0235.
1.5 US report on voting and transparency in connection with pension plans On 9 September 2004 the United States Government Accountability Office (GAO) released a report titled “Pension Plans: Additional Transparency and other Actions Needed in Connection with Proxy Voting”. According to the report, the retirement security of plan participants can be affected by how certain issues are voted on during company stockholders meetings. Fiduciaries, having responsibility for voting on such issues on behalf of some plan participants (proxy voting), are to act solely in the interest of participants. Recent corporate scandals reveal that fiduciaries can be faced with conflicts of interest that could lead them to breach this duty. Because of the potential adverse effects such a breach may have on retirement plan assets, the GAO undertook the study which describes (1) conflicts of interest in the proxy voting system, (2) actions taken to manage them, and (3) the US Department of Labor’s enforcement of proxy voting requirements. The GAO recommends that Congress consider amending the Employee Retirement Income Security Act of 1974 (ERISA) to require fiduciaries to (1) develop proxy-voting guidelines, (2) disclose guidelines and votes annually, and (3) appoint an independent fiduciary to vote the company’s own stock in its pension plan in certain instances. The GAO recommends that the Department of Labor conduct another proxy enforcement study, and enhance coordination of enforcement strategies with the US Securities and Exchange Commission. The report is available at: http://www.gao.gov/cgi-bin/getrpt?GAO-04-749
1.6 World Bank report-Doing Business and Obstacles to Growth On 8 September 2004, the World Bank Group published a report titled “Doing Business in 2005: Removing Obstacles to Growth”. The report, co-sponsored by the World Bank and International Finance Corporation, the private sector lending arm of the World Bank Group, benchmarks regulatory performance and reforms in 145 nations. The top 10 economies in terms of ease of doing business are New Zealand, United States, Singapore, Hong Kong/China, Australia, Norway, United Kingdom, Canada, Sweden and Japan. The report finds that poor nations, through administrative procedures, still make it two times harder than rich nations for entrepreneurs to start, operate, or close a business, and businesses in poor nations have less than half the property rights protections available to businesses in rich countries. Overall, rich countries undertook three times as many investment climate reforms as poor countries last year. European nations were especially active in enacting reforms. The top 10 reformers for the most recent survey year were Slovakia, Colombia, Belgium, Finland, India, Lithuania, Norway, Poland, Portugal, and Spain. Of the 58 countries that reformed business regulation or strengthened the protection of property rights in the last year, fewer than a third were poor or lower-middle-income economies. "Poor countries that desperately need new enterprises and jobs risk falling even further behind rich ones who are simplifying regulation and making their investment climates more business friendly," said Michael Klein, World Bank/IFC Vice President for Private Sector Development and IFC Chief Economist. On average, it takes a business in a rich nation six procedures, 8 percent of income per capita, and 27 days to get started; in a poor or lower-middle-income economy, the same process takes 11 procedures, 122 percent of income per capita, and 59 days. In more than a dozen poor countries, registering a new business takes more than 100 days. Potential investors in many rich nations enjoy full access to the ownership and financial information of publicly listed companies while investors in most developing countries have hardly any access. Doing Business in 2005 updates the work of last year's report in five sets of business environment indicators: starting a business, hiring and firing workers, enforcing contracts, getting credit, and closing a business; it expands the research to 145 countries and adds two new indicators, registering property and protecting investors. Since last year, 13 governments have asked for their countries to be included in the Doing Business analysis. This year's report catalogs wide variances in hiring and severance costs across countries and shows that high severance costs can discourage job creation. The report also shows that poor regulation of bankruptcy can cause business loans to dry up: in 50 countries, creditors can expect to recover less than 20 cents on the dollar when a business goes bankrupt. The main research findings of Doing Business in 2005 are:
Doing Business in 2005 finds that reform took place last year mainly in countries that faced competition and had incentives to measure regulatory burdens. In the enlarged European Union, accession countries reformed in anticipation of the new competitive pressures on their businesses; existing members reformed to maintain their advantage against the lower-wage producers from accession countries. In developing countries, performance targets set by the International Development Association and donor country aid programs spurred poor countries to examine regulatory obstacles and propose reforms. Most reforms focused on simplifying business entry and improving credit information systems. African countries reformed the least of all regions and had the most regulatory obstacles to doing business, followed by Latin American countries. The Doing Business project is the product of more than 3,000 local experts - business consultants, lawyers, accountants, and government officials - and leading academics, who provided methodological support and review. The data, methodology, and the names of contributors are publicly available online. Investment climate indicators and analysis, along with information on ordering the report, are available on the Doing Business website at: http://rru.worldbank.org/doingbusiness
1.7 Global governance ratings for 2,600 companies On 7 September 2004, Governance Metrics International (GMI), the corporate governance research and ratings agency, announced new ratings on 2,588 global companies. (a) Key findings Twenty-six companies – twenty American, five Canadian, and one Australian - received scores of 10.0, GMI’s highest rating. As a group, these companies outperformed the S&P 500 Index as measured by total returns for each of the last one, three and five year periods by 4.9%, 8.3% and 10%, respectively, as of 31 August 2004. Similar out-performance results were achieved when measured against the MSCI World Index. US companies overall had improved ratings over the past two years, with their global average rating rising from 6.5 to 7.2. According to GMI, the Sarbanes-Oxley Act has had clear effects on the levels of behaviour and disclosure when comparing GMI’s newest ratings release to the first release in December 2002. Among the more positive changes in the US are:
In addition to changes from legislative initiatives, there have been several other improvements in governance in US boardrooms over the past two years. For example:
According to GMI, in the matter of independent board leadership, advances are being made, but US companies still have a long way to go. The difference between the US and UK in this area is noteworthy. Presently, 95% of rated companies in the UK have separated the Chairman and CEO roles, but only one-third of rated companies in the US have done so. In December 2002, 22% of US companies had separated the Chairman and CEO roles. Other companies are attempting to address this issue by naming a “lead non-executive director.” The percentage of US companies naming a lead director increased from approximately 13% to 42% in the period from December 2002 to August 2004. However, nearly a quarter of these non-executive chairman and lead directors cannot be classified as independent under GMI standards. Approximately 35% of US companies examined by GMI report a related-party transaction involving the Chairman, CEO, President, COO or CFO or a relative thereof. In contrast, 11% of European companies engaged in such related party transactions. For US companies with dual class voting mechanisms where insiders control shares with superior voting rights, this number is notably higher (46%). Among the more conspicuous transactions in the past year are:
(b) Country ratings On a national level, US companies had the highest overall average rating of 7.23, followed by Canada (7.19), United Kingdom (7.12) and Australia (6.73). At the other end of the scale, Greek companies had the lowest overall average rating at 2.93 followed by Japan at 3.57. In Europe, companies from Belgium (4.52), Portugal (4.55) and Denmark (4.60) had the lowest overall average ratings. Twenty-five companies received GMI’s lowest overall global rating of 1.0. Thirteen of the 25 are located in Japan, 4 in Greece, 3 in Belgium, 2 in France, and 1 each in Denmark, New Zealand and Hong Kong. Further information about the study is available at: http://www.gmiratings.com
1.8 UK government decides not to cap auditor liability On 7 September 2004 the UK government announced that it would not cap the liability of auditors. It also announced changes to director liability. (a) Auditors The government announced that in light of consultations it had undertaken and the report of the Office of Fair Trading that concluded that introducing a cap would not significantly enhance competition, it has decided not to change the law to introduce a cap on the liability of auditors. In its announcement, the government stated that the Companies (Audit, Investigations and Community Enterprise) Bill (which is currently before Parliament) contains a number of initiatives to improve the quality of the audit and other information provided to shareholders. For example:
(b) Directors The government announced that it will introduce two important relaxations of the current prohibition on companies exempting their directors from, or indemnifying them against, liability:
The Government amendments will also remove an arguable loophole under which a company in the same group may currently provide an indemnity to a director that would be unlawful if it was provided directly by the company of which the individual was a director. The amendments will also require disclosure in the directors’ report by companies that indemnify directors. Shareholders will also have the right to inspect any indemnification agreement. Companies that do not indemnify directors will not have to make any disclosure.
1.9 Horwath 2004 corporate governance report On 7 September 2004, the 2004 Horwath Corporate Governance Report was published. Almost two-thirds of Australia’s top listed companies fail to meet the minimum standard of director independence, concludes the report. The research for the report was conducted by the University of Newcastle. (a) Key findings The report finds that
62 per cent of the top 250 companies do not have a majority of independent
directors. Of these companies, eight per cent had a board of directors that did
not contain a single independent member.
Findings of the 2004 Horwath Report also include:
According to the report, the vast majority of companies have made an effort to improve their corporate governance in the last twelve months. This is reflected in the decrease in non-audit fees paid to external auditors, an increase in the number of remuneration committees, and improved disclosures relating to code of conduct, risk management, and share trading policies. The corporate governance structures of 51.6% of companies (54% in the Horwath 2003 Report) could be described as good (or better). Conversely, the corporate governance structures of 33.2% of companies (30% in the Horwath 2003 Report) were lacking in key areas. At face value the results appear slightly worse in the current year. In reality, the slightly reduced result is as a result of Horwath’s increased expectations of corporate governance and hence a tightening of the criteria to achieve a good (or better) rank. As was the case in the 2002 and 2003 Horwath Reports, the corporate governance gap between the top companies and the lesser ranked companies remains huge. At the other extreme, 16 companies achieved only a one star ranking. The corporate governance structures of these companies were sub-standard. Corporate governance structures were lacking in most key areas. Almost without exception the board of directors and the associated committees (where they existed) contained no independent members. Overall there was an absolute scarcity of corporate governance structures for these companies. To test the question of whether good corporate governance makes a difference to the share price of a company, the data from the 2002 and 2003 Horwath Reports were reviewed. The annual percentage change in share price of all companies was calculated after adjusting for dividend payments. For both 2003 data, and the average of 2002 and 2003 data, the 1 star and 2 star companies provided the worst return to shareholders. These companies were either lacking in some or most areas of their corporate governance. These findings are consistent with the view that the market places significant value on the existence of good corporate governance structures within companies. (b) Research design The research contained in the report is derived from the 2003 Annual Report disclosures of Australia’s top 250 Australian companies based on market capitalisation. The report contains an overall assessment of each company’s corporate governance structures and comprises a star rating out of 5, and a relative ranking. The corporate governance assessment model developed in the research is based upon a combination of factors identified in national and international best practice guidelines and research studies. These include the USA Blue Ribbon Committee Report (1999), the UK Hempel Report (1999), the OECD Report (2001), the UK Higgs Report (2003), the Australian Ramsay Report (2001), Investment and Financial Services Association of Australia Corporate Governance Guide (2003), the ASX Corporate Governance Council Report (2003), and CLERP 9. As was the case in previous Horwath Reports, central to the model is the need for companies to have appropriate levels of independence on the board of directors, their associated committees and from their external auditor. The model considers objective factors based on publicly disclosed information pertaining to the existence and structure of a company’s board of directors and associated committees, the level of perceived independence of the company from the external auditors, and disclosures relating to the existence of a code of conduct, risk management and share trading policy. The report is available at http://www.horwath.com.au
1.10 APEC corporate governance report
1.11 US director pay increases - stock option use declines as restricted stock increases On 1 September 2004, a study of remuneration for board members of major US companies was published. The study was undertaken by Hewitt Associates, a human resources outsourcing and consulting firm. (a) Director fees Hewitt surveyed more than 170 major US companies (median revenue of $3.7 billion) and found that the median retainer for board members grew to $40,000 in 2004 from $35,000 last year. Board member meeting fees also increased to a median of $1,500 per meeting, up from $1,250 in 2003. (These findings are consistent with Hewitt’s analysis of Fortune 250 companies, which shows that total board compensation for this group increased by 17 percent in 2004.) Meanwhile, 23 percent of companies increased retainers for committee chairs, with the Audit Committee Chair receiving the highest fees of $10,000 this year, compared to $5,000 in 2003. The figures in this paragraph are US dollars. (b) Equity remuneration Hewitt’s study shows that companies are also changing their approach to equity remuneration. Stock options are less popular, with 59 percent of companies providing them to board members in 2004, compared to 68 percent in 2003. At the same time, companies are increasing restricted stock/unit awards (from 27 percent in 2003 to 34 percent in 2004). Heightened attention on stock ownership has also led some companies to institute ownership guidelines for board members. Specifically, 44 percent of companies currently have such guidelines, compared to 33 percent last year. (c) Benefits and perks In addition to the traditional cash and equity forms of remuneration, 43 percent of organizations provide benefits to the board and 58 percent offer perks. The most common benefit is travel/accident insurance (79 percent), while the most popular perk is a matching charitable gift program (65 percent). (d) Additional data highlights Following are additional highlights from Hewitt’s study:
1.12 European investor relations websites rated best On 31 August 2004, IR Web Report published a study of 507 investor relations websites of large-cap companies titled “IR Website Global Rankings”. The study covered the period February – July 2004. The study is available at http://www.irwebreport.com/index.htm Spearheaded by German, Swedish, British and Swiss companies, European investor relations professionals are making better use of the Internet in their IR programs than their counterparts in other parts of the world. Companies' investor relations pages were evaluated for 100 best practice attributes organized into four themes or dimensions, namely completeness, transparency, responsiveness and usability. The findings indicate that European companies generally take an investor-centric approach to their IR websites and are more prone to best practice, while companies in other countries appear to be oriented more to meeting minimum mandatory requirements. Geographic differences are clearly evident in the rankings. A wide spread exists in the scores between the top and worst ranking countries. Germany had the best IR websites while Japan had the weakest. One of the most improved performances was among Italian companies, which may be responding to the sharp focus on their practices in the wake of the Parmalat debacle. Meanwhile, score ranges were tighter on a sector basis with little difference between the standards of companies in different sectors. Based on median scores, Telecommunications firms ranked the highest and Health Care companies the lowest for the overall effectiveness of their IR websites. (a) Median total scores by country - Country rank median score 1.
Germany 46.58; 2. Sweden 42.73; 3. Britain 42.70; 4. Switzerland
40.07; (b) Median total scores by sector - Sector rank median score 1.
Telecommunications 38.05; 2. Materials 37.39; 3. Financials
37.06; (c) Best IR websites European companies dominated the Top 50, taking 33 of the top places. North American companies took just 13 or 26% of the top positions, despite accounting for just over half of all companies in the rankings. (d) 20 highest scores – Company 1. Stora Enso; 2. BCE
Inc.; 3. Bayer AG; 4. ThyssenKrupp AG; 5. Danske Bank
1.13 Hollinger International special committee report released – finds massive fraud On 30 August 2004, the Special Committee of the Board of Directors of Hollinger International Inc. submitted its Report to the US Securities and Exchange Commission. The Report covers the results of the Special Committee’s investigation since it was formed in June 2003 in response to allegations of fiduciary duty violations and other misconduct at Hollinger. The following is an extract from the executive summary: “The Report chronicles events at Hollinger over the decade since it first became a US public company in 1994. Hollinger is a publishing company, but the story of the last decade at Hollinger, which is the subject of this Report, is not about Hollinger’s valuable publishing assets or the quality of the staff at its many publications. Rather, this story is about how Hollinger was systematically manipulated and used by its controlling shareholders for their sole benefit, and in a manner that violated every concept of fiduciary duty. Not once or twice, but on dozens of occasions Hollinger was victimized by its controlling shareholders as they transferred to themselves and their affiliates more than $400 million in the last seven years. The aggregate cash taken by Hollinger’s former CEO Conrad M. Black and its former COO F. David Radler and their associates represented 95.2% of Hollinger’s entire adjusted net income during 1997-2003. “At the outset, the energies of many people went into building Hollinger into a major publishing enterprise. Over time, however, Hollinger went from being an expanding business to becoming a company whose sole preoccupation was generating current cash for the controlling shareholders, with no concern for building future enterprise value or wealth for all shareholders. Behind a constant stream of bombast regarding their accomplishments as self-described “proprietors,” Black and Radler made it their business to line their pockets at the expense of Hollinger almost every day, in almost every way they could devise. The Special Committee knows of few parallels to Black and Radler’s brand of self-righteous, and aggressive looting of Hollinger to the exclusion of all other concerns or interests, and irrespective of whether their actions were remotely fair to shareholders. “The Special Committee believes that the events at Hollinger were driven in large part by insatiable pressure from Black for fee income from Hollinger to prop up the highly levered corporate structure of Ravelston and HLG, and to satisfy the liquidity needs he had arising from the personal lifestyle Black and his wife had chosen to lead. The intensity of the pressure for tens of millions in cash payments to Black, irrespective of corporate performance or the fairness of transactions to shareholders, led to a series of abusive transactions in which Hollinger was a victim of Black and Radler’s ravenous appetite for cash. “The cash that the insiders pursued so ravenously did not come from taking an aggressive share of the growth of an expanding firm, or from gains generated through the value of outsized equity grants. The bulk of what Black and Radler were taking from Hollinger was cash, and that cash did not come from earnings or the creation of value for all shareholders. Rather, one scheme after another was devised to siphon away Hollinger’s opportunities, its cash flow and a share of its balance sheet. For years Black and Radler found excuses for transferring existing cash or assets to themselves, even if it required dismantling Hollinger for their own benefit. “Black and Radler (together with Ravelston and HLG, the corporate vehicles that they controlled and utilized in their improper acts) were the principal actors with the greatest responsibility for conceiving and directing most of the events described in this Report. Others facilitated or assisted efforts to skim cash from Hollinger improperly, or failed to detect and prevent the looting of the Company. The Report describes the actions of those individuals as well. “The Committee has already commenced the Illinois Action against Black, Radler, Amiel Black (Mrs. Black), Colson and Boultbee as individuals, and against Ravelston and HLG as corporate vehicles, seeking $1.25 billion in damages suffered by Hollinger from the individual acts and events described in the Report, and from a long course of fraudulent activities in violation of federal racketeering statutes. “The problems traced in this Report are not new. Indeed, Hollinger does not appear ever to have been run in accordance with accepted governance principles in the world of public corporations. While individual issues and transactions can and will be the subject of dispute and interpretation, the evidence reviewed by the Committee establishes an overwhelming record of abuse, overreaching, and violations of fiduciary duties by Black and Radler, the two controlling shareholders. “Hollinger wasn’t a company where isolated improper and abusive acts took place. Rather, Hollinger was a Company where abusive practices were inextricably linked to every major development or action. For most companies, operating in compliance with law and following ethical practices are key objectives, and specific concerns of the CEO. At Hollinger, Black as both CEO and controlling shareholder, together with his associates, created an entity in which ethical corruption was a defining characteristic of the leadership team. Indeed, at Hollinger during the years covered by this Report transactions or strategies were particularly attractive if they offered opportunities for extraordinary payments to the control group.” The full report is available on the SEC website.
1.14 Inaugural corporate responsibility index results published On 28 August 2004, the results of the inaugural Corporate Responsibility were published. Westpac has achieved first place in the Corporate Responsibility Index, followed closely by BP, Rio Tinto, BHP Billiton and Toyota. Australian companies perform well in this inaugural international benchmarking of corporate social responsibility. The Index results show local businesses are equal to their counterparts in the UK, although weaker in the area of assurance. A voluntary, self-assessment survey, the Index sets up a process that compares the systems and performances of different companies in and across specific sectors. It was established two years ago by 80 leading businesses working with UK charity Business in the Community (BITC). The first round of Australian results are consistent with other international surveys indicating that while many companies are at an advanced stage in policy development, only a few are really successful in actually driving corporate responsibility throughout the business. Responding to the need for a credible Index that allows companies to accurately benchmark corporate responsibility practices with those of their peers, St James Ethics Centre joined forces with The Sydney Morning Herald, The Age and Ernst & Young to introduce the Corporate Responsibility Index to Australia. St James Ethics Centre has played no role in rating the performance of participating companies. Rather, the Centre acts as Trustee for the process – ensuring its overall integrity, free from conflicts of interest. The primary focus areas examined in the Index are strategy, integration, management practice, performance and impact, and assurance. It acts as a business tool by providing a practical framework for improving and communicating performance. 26 companies participated in the inaugural Australian Corporate Responsibility Index, ranging from the finance sector to manufacturing to extractive industries. Companies at the top of the Index display the following characteristics: they have incorporated the rhetoric of their corporate values and principles into the way the organisation is managed; they can measure and report how this works in practice; and they are taking action to reduce any negative impacts of their products or services and maximise their positive qualities in the marketplace. To accommodate differences between participants and industry sectors, the Index allowed participants to tailor certain sections of the survey to their particular business challenges. For example, in relation to social impacts, participants had to answer two of five questions concerning 'product safety', 'occupational health and safety', 'human rights in the supply chain', 'diversity in the workplace', and 'community investment', but were able to choose the ones that were most relevant to them. The complete results of the Corporate Responsibility Index are available at: http://www.corporate-responsibility.com.au/
1.15 US Public Company Accounting Oversight Board releases reports on inspections of big four accounting firms The Public Company Accounting Oversight Board issued on 26 August 2004 reports on the Board’s 2003 limited inspections of the four largest public accounting firms in the United States. The inspections examined compliance, quality control and selected public-company audits in the national and regional practice offices of Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP. In the inspections, the Board identified significant audit and accounting issues that were missed by the firms and identified concerns about significant aspects of each firm's quality controls systems. The Board's inspection reports describe those issues. “As our reports state, their emphasis on criticisms do not reflect any broad negative assessment of the firms' audit practices,” said PCAOB Chairman William J. McDonough. “The Board's inspections are unprecedented, and in this first year, our findings say more about the benefits of the robust, independent inspection process envisioned in the Sarbanes-Oxley Act of 2002 than they do about any infirmities in these firms' audit practices.” The Sarbanes-Oxley Act of 2002 requires the PCAOB to conduct annual inspections of registered accounting firms that audit more than 100 public companies. The four firms that consented to the limited inspections in 2003 and four other U.S. firms are subject to full inspections in 2004. The limited inspections of the four largest U.S. firms were conducted between June and December 2003 to provide the Board with a foundation for the full-scale inspections and to obtain a baseline understanding of the firms' internal systems of quality control over auditing. The inspections involved both an examination of each firm's policies, practices, and procedures related to public company auditing and a review of aspects of selected recent audits performed by each firm. Final inspection reports are provided to the Securities and Exchange Commission and certain state authorities and made available to the firms, as provided in the Board’s rules. With the reports, the Board issued a statement concerning the issuance of inspection reports, describing in detail the nature of the inspections, statutory limitations on public disclosure of parts of the reports and other matters related to the reports. The statement and the reports are available under Inspections at http://www.pcaobus.org/Inspections/
1.16 New members of the Companies
Auditors and Liquidators Disciplinary Board
1.17 Remuneration for directors of largest US companies Board compensation grew 13% to nearly $176,000 in 2003. The increases follows two straight years in which Board pay at the Top 200 US industrial and service companies was nearly flat, according to a new study released on 12 August 2003 by compensation consultants Pearl Meyer & Partners. The figures in the study are in US dollars. Compensation for committee service saw the biggest jump, swelling on average by approximately 35% to over $23,000, including a 47% rise in Audit Chair fees and retainers and a 24% pay increase for Compensation Committee heads. In a significant shift, the use of full value shares surpassed stock options for the first time since equity became an integral part of Director compensation programs a decade ago. (a) Shift in pay
patterns Following a similar shift in the use of equity incentives for top executives, fewer companies granted stock options to Directors - 59% of the Top 200 companies compared to 70% one year earlier. The change in equity use reflects a consensus among governance activists that full value incentives better promote a long-term perspective on corporate performance. Stock option values were down over 5% to about $49,000, due in part to the market slump in the first half of 2003, while full value awards rose 23% to more than $50,000. Close to half of the Top 200 Boards in 2003 provided premiums for service on specific committees - most commonly Audit and Compensation - based on the additional time and responsibility involved. As an example, Audit Committees met an average of nine times in 2003 - twice as often as five years earlier - due largely to new requirements. (b) Financial and Healthcare Firms remain pay leaders The Securities industry ranked first in Board pay at nearly $307,000 - roughly 75% more than the average Top 200 Director - and also reported the largest stock awards at over $234,000 and second highest committee fees at over $28,000. Diversified Financial companies ranked second in total pay, averaging $258,000, followed by Healthcare at $255,000. While those three industries also led in use of Board equity, Healthcare's cash retainer was the lowest among the 24 industries studied at $35,000, and the Securities sector provided the second lowest Board meeting fees at $2,500 annually. The Energy/Utilities, Food/Drug Store Chains and Transportation/Delivery sectors reported the lowest levels of Board compensation, averaging $124,000, $127,000 and $136,000 respectively and ranked at the bottom in equity use.
|
