Businesses expose conduct rules to light
By Sean Hao
Advertiser Staff Writer
Last September, board members at Hawaiian Electric Industries attended a retreat to discuss ways to reassure investors as accounting scandals erupted at several other major companies.
Jeff Widener • The Honolulu Advertiser
The product of those meetings was a package of revised business conduct and ethics codes meant to foster a culture of honesty and accountability for employees and shareholders.
Alton Wong, a trouble dispatcher at Hawaiian Electric, finishes a call in the load dispatch control room. Hawaiian Electric Industries is one of several Hawai'i businesses trying to make their governance policies more transparent.
"Investors are very skittish about any company that has a taint of any corporate governance problems," said Robert Clarke, chairman, president and chief executive of Hawaiian Electric Industries. "To the extent that you can be a leader in that area, you don't have that issue."
In the past, companies have cited competitive reasons, liability concerns and a lack of interest among investors for not disclosing such policies. Soon they'll have no choice in the matter. The New York Stock Exchange, Nasdaq and other exchanges are drafting rules requiring increased transparency of corporate governance procedures. They're also expected to require companies to adopt and disclose policies addressing conflicts of interest and confidentiality issues, and encouraging the reporting of unethical behavior.
Corporate governance deals with a broad range of issues, including how executives and directors are chosen and compensated as well as how well they perform.
The focus on such issues by market regulators is meant to restore the confidence of investors, which has been shaken in recent years because of numerous accounting scandals.
While instances of opaque accounting appear to have slowed, they haven't stopped. The latest company to generate concern: rehabilitation hospital company HealthSouth Corp., which recently said its financial statements dating back to 1986 may be unreliable.
While there's no guarantee that transparency of corporate governance policies will prevent fraud, one study released last week indicates it may lead to greater shareholder value.
Experts say investors should look for the following when assessing a company's corporate governance policies: • Is there a corporate governance committee? What is its charter? • Are director qualifications described? Does the company seek specific skills and experience for certain committees? • Does the company describe practices to assess the board's effectiveness and to further develop the skills of board members? Source: Sibson Consulting
The study, released by human resources consultant Sibson Consulting, analyzed the 2001 annual reports of 385 companies and found that those that disclose more information about their governance practices posted higher shareholder returns over a five-year period than companies with less-transparent policies.
Guidelines for investors
The presence of such policies better positions companies for growth, said Donald Gallo, head of the corporate governance practice at New York-based Sibson. "It's yet another indication of how well-run a company is," he said.
Other local companies reviewing their governance policies include Alexander & Baldwin Inc. and CPB Inc., holding company for Central Pacific Bank. Property developer Alexander & Baldwin now reviews public disclosure processes quarterly, has increased the frequency of its audit committee meetings and is preparing a code of ethics.
Glenn Ching, corporate counsel for CPB, said the bank already is in compliance with many of the new governance rules heading its way. That's partly because as a bank, Central Pacific already faces greater scrutiny from regulators than other types of businesses
"That's not to say that we're not looking at it," Ching said. "We're not just sitting back on our hands."
In addition to updating its governance policies, Clarke said, Hawaiian Electric has improved the transparency of its financial reports by accounting for the cost of stock options against earnings and banning the use of so called "off balance sheet" transactions, which can obscure information about a company's liabilities and costs.
Indeed, Hawaiian Electric was named by Sibson among the top 10 most transparent companies it studied for corporate governance.
There are costs associated with the crackdown on Wall Street, including a more risk-averse nature among some executives, said David Parker, senior utility analyst for broker Robert W. Baird & Co. in Tampa, Fla.
Companies responding to these new realities are being rewarded, Parker said. Although Hawaiian Electric's stock dipped 8 percent between April 1, 2002, and April 1 of this year, its stock outperformed the Standard & Poor's 500 index, which fell 25 percent in that period.
However, if history is any indication, investors are fickle about the importance of issues such as corporate governance. "In a bear market businesses get screened more thoroughly," Parker said. "In a bull market the world is great and the glass is half full and some of these issues don't matter" to investors.
Still, companies increasingly are having little choice but to be up-front, in part because of the Sarbanes-Oxley Act of 2002. In addition to requiring executives to personally vouch for their company's financial filings, the act bans loans to executives, requires that audit committee members be independent, and makes the audit committee responsible for hiring, overseeing and firing outside accountants.
Other rules being drafted by the major stock exchanges would require:
- The adoption of corporate governance guidelines.
- The creation of corporate governance committees.
- Strict definitions of "independent" directors.
- Regular meetings of outside directors without management present.
Addressing accounting concerns creates other costs, including increased liability insurance for directors and higher audit costs. It also makes it harder to find qualified directors. Hawaiian Electric recently increased salaries for members of its audit committee by $5,000 a year. Similar talks are taking place at CPB, Ching said.
Parker said he's already seeing these higher costs hit the bottom lines of some companies. This potential drag on profits doesn't guarantee companies won't commit fraud, he said. "If you're determined, you'll find a way around it," he said. "It all comes down to the moral fabric of the board and management. It's all about people."
Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.
