Academic

The waivers that weren't

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

So my idle curiosity has led to another summer project. Remember how the Enron board granted waivers from its ethics code to let Andy Fastow (the CFO) head the special purpose entities the company used to shift liabilities off of its balance sheet? That was bad. In response, Sarbanes-Oxley Section 406 required boards to disclose their ethics code and any waivers from that code on 8-Ks.

It seemed pretty straightforward. The idea: a company?s code of ethics should prohibit it from doing deals with insiders. If the board decides to allow this, investors should know, sooner rather than later. Commentators disagreed on the requirement?s effect: would it deter inside transactions? Or would it cause companies to ?wimp out? on their codes, so they wouldn?t have to disclose as many waivers? This question has been nagging at me for a while. So I, along with my awesome co-author, Mike Stegemoller and some hard-working RAs, took a look at 200 firms of varying sizes to see what kinds of waivers they were filing.

We found 2. That?s right, 2003-2007, 5 years, 200 companies, 2 waivers. Huh?

I asked the RAs to look at the disclosure of related-party transactions in proxy statements, which remain numerous. From what I can tell, companies are taking this approach: ?Our code does not allow certain kinds of transactions (say, buying supplies from a company owned by the CEO) unless they are approved by our board. Our board has been informed of and approved the transaction. Code of ethics complied with, no waiver necessary.?

The upshot is that these transactions are still going on, but they are reported only once a year, in the proxy, rather than within days of their occurrence via an 8-K.

It may be no harm, no foul. After all, the information is still being disclosed. At the very least, though, it seems like a circumvention of the intent of Section 406.

We haven?t started to write up the data yet, so thoughts/insights/suggestions would be welcome.

Full post as published by Conglomerate on July 12, 2008 (boomark / email).