SEC Chairman Christopher Cox came in with a reputation as a business advocate. But his job is a complicated one, and he seems to be taking a cautious approach that aims at finding a middle ground between the interests of business and investors.
Christopher Cox entered the small hearing room on the fourth floor of the
Cox sat down, opened a thick white binder and proceeded to scratch notes with a felt-tipped pen. Senator John Kerry (D-Mass.), chairman of the Small Business and Entrepreneurship Committee, and the other members had been delayed by a Senate floor vote. Cox rarely picked up his head, except when someone came over and interrupted his furious scribbling. He occasionally looked over and exchanged pleasantries with Mark Olson, the PCAOB chairman, who was sitting to his left, both of them facing the empty, horseshoe-shaped senators’ dais, draped in blood-red cloth.
Cox’s brown hair was slicked down like a newly paved road, and he was neatly barbered; in contrast, Olson’s hair was a little wild, with stray grey hairs curling up from his scalp. When the hearing started, Cox delivered a very thorough, almost intricate opening statement; but his voice could barely be heard three rows back, even with him speaking into a microphone. After Olson delivered his shorter statement, the questioning by Kerry and his colleagues began. Olson fielded the majority of the queries. When Cox weighed in, it was with staccato answers.
The performance was vintage Cox. The former
Reputation for Accomplishment
Nonetheless, Cox, 54, had a reputation in Congress for getting things done. He led efforts to pass the Private Securities Litigation Reform Act of 1995, and was a key mover behind the Internet Tax Freedom Act of 1998. He left Congress as chairman of the House Committee on Homeland Security, in addition to his position as chairman of the House Republican Policy Committee, the number five spot in the GOP House leadership.
Cox’s pre-congressional professional life, as well as his tenure on Capitol Hill, prepared him particularly well for the SEC chairmanship. From 1978 to 1986, he specialized in venture capital and corporate finance with the international law firm of Latham & Watkins, where he was the partner in charge of the corporate department in
Certainly, Cox’s corporate finance background more than qualified him for the SEC chairmanship. But in selecting him, the Bush White House was looking for something more than a subject expert. President Bush wanted someone who could assuage the jangled nerves of the GOP’s business and Wall Street constituencies, whom Cox’s predecessor, William Donaldson, had annoyed, mostly with his interest in shareholder access issues.
Tom Lehner, director of public policy for the Business Roundtable, the lobby for Fortune 100 CEOs, calls Donaldson’s shareholder access proposal “very convoluted.” He adds, “It collapsed of its own weight.” But Lehner says his group didn’t push for Donaldson’s removal and continued to meet with him, including two days prior to his announcement that he was departing the commission.
Aside from calming the corporate waters, Cox was seen as a politically adept consensus-seeker who could also dial down the heat from newly empowered investor and consumer groups, the once-98-pound weaklings, who were beginning to throw their weight around.
Joseph Borg, president of the North American Security Administrators Association (NASAA) and director of the Alabama Securities Commission, says the initial reaction to Cox’s nomination in the investor protection community — given his leading role in passage of the 1995 securities reform legislation — was “uh-oh.”
He explains, “We thought he was going to be someone who does what Wall Street wants. But we were wrong in the past on other people, and we were wrong this time on him.”
Borg says he has had more meetings with Cox than he had in the 12 years prior to Cox’s ascension with all of Cox’s predecessors. “I would describe him as ‘business charming,’” explains Borg. “He is a good listener.” Borg says Cox has supported the NASAA on a number of initiatives having to do with protecting the assets of senior citizens. “But we don’t agree with him on everything,” Borg adds.
Neither does the U.S. Chamber of Commerce, to say the least. While Cox hasn’t been the big bad wolf that investor and consumer groups expected, neither has he been the wing man business was hoping for. “He is a guy who is interested in balance,” explains David Chavern, chief operating officer and senior vice president, U.S. Chamber of Commerce. “There are some things we are happy about, some things we are not happy about.”
The Accent on Balance
Balanced. That is the adjective that comes up frequently when people describe Cox. He was appointed by a Republican president but faces a Democratic Congress. He rides herd over two commissioners who are Republicans and two who are Democrats. He faces pressure from businesses to reduce the costs of complying with SEC rules, such as Sarbanes-Oxley Section 404’s internal control provisions, even as investor protection groups are pressing him to keep those rules sacrosanct.
In part because he was appointed to be a conciliating caretaker, and in part because of the very narrow political space he has to maneuver in, Cox has proposed no major regulatory initiatives — and probably no minor ones, either, if truth be told. What he has seized upon is eXtensible Business Reporting Language (XBRL), a mechanism for “tagging” and reporting financial data, which Cox has described as “interactive data” that can easily be shared with investors.
More than anyone, Cox has driven the effort to popularize the use of XBRL, but the jury is still very much out; many CFOs and other financial executives have questioned its value to them, and the SEC’s voluntary program had attracted only about 40
Cox has more or less played out hands Donaldson dealt him, whether on executive compensation, Sarbanes-Oxley or other issues. His record as a finisher, though, has been seen as wanting in some quarters. That’s perhaps not unexpected, given the fact that he has hugged the median on many issues, tiptoeing unsteadily between political traffic coming fast and furious from different directions.
Cox’s attempt to satisfy everyone runs the risk, of course, of satisfying no one. That has certainly been the sense some observers have with regard to his efforts to write management guidance for companies complying with Section 404 of Sarbanes-Oxley, which explains how they are to assess their internal controls and how they are to report on that assessment. Not only do companies have to worry about how well they assess their controls, they also have to worry about paying outside auditors to peer over their shoulders and write an auditor’s report based on the PCAOB’s Auditing Standard 5 (AS5, outlined in May, updates AS2).
Companies, particularly smaller ones, have complained loudly since the Section 404 requirement went into effect about the costs charged by outside auditors, complaints that rang loudly long before Cox arrived at the SEC. In response, Cox established an Advisory Committee on Smaller Public Companies that issued recommendations in 2006. He and Olson followed up in December 2006 by announcing proposed changes to AS2 — the new AS5 — and the first draft of the SEC’s new management guidance.
When Cox appeared before Kerry’s Senate committee on April 18, he said the Advisory Committee report “has informed many of the solutions that we are now preparing to put into effect.” Yet, the management guidance the SEC issued on May 23 doesn’t remotely look like what the Advisory Committee proposed.
The key recommendation made by the Advisory Committee was that the SEC should adopt a “scaled” version of Section 404 for micro-cap and small-cap companies — the committee sets financial requirements for both categories — and exempt them from 404 in the meantime, while that system is being developed. The SEC recommended none of that. Nor did it accept the advice of the Committee on Capital Markets Regulation, which was appointed by Treasury Secretary Henry Paulson.
Hal S. Scott, a Harvard professor and director of the committee, says, “We did recommend that before applying ‘revised’ SOX 404 (both the SEC’s and PCAOB’s revisions) to small companies that a thorough cost-benefit analysis be done with respect to small companies. From what Cox has said, he plans to go ahead without this. We would disagree with that approach.”
Kerry has also piled on, saying, “I am concerned that the SEC has provided no assurances that the new internal controls rules will actually reduce costs for small public companies because they have not yet completed the required Regulatory Flexibility Act review of the rule.”
Concern over Materiality
And while Cox emphasized at a May 23 press conference that the final guidance and AS5 would help companies of all sizes, not just small companies, business groups sound skeptical. For example, the SEC’s and PCAOB’s definition of materiality in their December proposals caused some heartburn, which the final guidance did not ease.
Scott complains, “It does not appear that the SEC has defined ‘materiality’ with any precision — certainly the PCAOB has not, in its proposed revision of AS5. We believe that without a quantitative definition — we suggested 5 percent of pre-tax income — the costs of 404 will not go down enough.”
Michael J. Ryan Jr., executive director and senior vice president at the Center for Capital Markets Competitiveness, U.S. Chamber of Commerce, applauds the SEC and PCAOB for issuing more principles-based guidance. “However, the question remains: will it be enough?” he asks.
“The answer depends first on the clarity of the SEC’s guidance and how it is interpreted by the SEC, PCAOB, public companies and audit firms. In the end, the policy-makers in
While Olson did most of the talking at the April 18 hearing, he is clearly a junior partner, given the fact that the SEC must approve all PCAOB standards. Cox has made that clear, most recently at an SEC board meeting in early April where the commission voted 5-0 to authorize its staff to harmonize its management guidance with AS5 in four distinct areas.
Their harmonization efforts leading up to publication of their separate proposals last December hadn’t been a rousing success, and that may not change, given Olson’s handling at the April SEC board meeting where Olson talked about the PCAOB’s intentions.
Cox was polite that day. But one
Asked whether PCAOB staffers felt that he was mishandled at that SEC meeting, Olson answers, “I wouldn’t characterize it that way. I didn’t feel that way.”
While dousing the fires from 404 has been perhaps Cox’s biggest challenge, XBRL, as noted earlier, has been his biggest initiative. One month before he appeared before Kerry’s committee, Cox had journeyed to the other side of Capitol Hill to explain his fiscal 2008 budget request to a House Appropriations subcommittee.
The biggest chunk of his statement was devoted to XBRL, an initiative launched by Bill Donaldson, but one Cox has embraced with a bear hug. XBRL is seen as a way for corporations to reduce reporting costs and for shareholders to more easily obtain information on a company’s performance, and to benchmark it against others’.
To kick-start the process, the SEC in January 2006 established a voluntary program in which companies could submit tagged data in exchange for the SEC giving them an expedited review of the registration statements and annual reports. “The best way for filers to understand how interactive data works is to participate in the voluntary program,” Cox said in announcing the program.
Cox admitted to the House Appropriations subcommittee on financial services and general government in late March, however, that only 40 or so companies were participating in the voluntary program. Microsoft Corp. is one of them. Taylor Hawes, controller, finance operations at Microsoft, has been an outspoken advocate of XBRL. “Chairman Cox is doing a good job and will be remembered for his leadership on this,” says Hawes, “but he has to keep a close eye on some policy challenges.”
Cox has delegated to an organization called XBRL
However, Microsoft and General Electric Co. are the only two preparers participating in XBRL
A far larger and thornier issue for the corporate community is frustration over highly complex and arcane accounting standards. Cox has referred in the past to the “all-out war on accounting complexity” he is waging, and blamed the opacity of Financial Accounting Standard Board (FASB) standards for most of the accounting errors companies make.
For example, when he appeared before the House Financial Services Committee in May 2006, he said his first step would be to “re-address specific accounting standards that do not provide the most relevant and comparable financial information. Examples of standards in need of reworking for this reason include consolidations policy, certain off-balance sheet transactions, performance reporting and revenue recognition.”
A year later, FASB had done very little in any of those areas. One SEC staffer, who was not authorized to speak on the record, explains that what Cox meant, but did not say, was that he hoped FASB would get something done on those four standards “within five to 10 years.” Given the very deliberate pace of FASB standard-setting, and its current round of joint projects with the International Accounting Standards Board, that’s probably not an unrealistic time frame.
In contrast, the SEC published a proposed rule in four months on the Credit Rating Agency Reform Act (CRARA), which President Bush signed in September 2006. The purpose of that new law — which Cox in his testimony to the House Appropriations subcommittee said gave his agency a “significant new responsibility” — is to give corporate CFOs some choices beyond Moody’s and Standard & Poor’s when it comes time to get their corporate debt rated.
Set aside for the moment the fact that the SEC’s proposed rule managed to tick off both Moody’s and Fitch, one of the little guys the law was designed to help. But at least Cox used the whip on his own horse.
Better on Reporting Reforms
Turning back to accounting, it isn’t clear whether Cox himself thinks principles-based accounting is a good idea or whether he is marching to a tune fiddled by Treasury Secretary Paulson. Nor is it clear whether a Democratic Congress and possibly a Democratic administration would allow this notion to move forward.
Cox has had a better record on financial reporting reform than standards reform. About the new rules on executive compensation reporting the SEC published in the summer of 2006, FASB member Donald Young says, “He did a good job on that.”
Investor groups such as the Council of Institutional Investors agree. The new rules seemed, at least at first, to satisfy both users and preparers of financial statements. The rules require companies to report a “total” figure — one number — for all annual compensation, including perquisites. For the first time, all compensation for the past year to board members would be fully disclosed in a supposedly easy-to-read table.
In addition, companies must include a new Compensation Discussion and Analysis section, replacing the Compensation Committee Report, which was viewed by the SEC and others, according to the SEC press release announcing the changes, as so much “boilerplate.”
But as companies started to file proxies under the new executive compensation reporting rules, Cox has been lamenting the shortcomings of the rule he lauded last August. Cox told the 2007 Corporate Counsel Institute on March 8, “We’re seeing examples of over-lawyering that are leading to 30- and 40-page-long executive compensation sections in proxy statements. This kind of slavish adherence to boilerplate disclosure is what we’re trying to stamp out.”
“As Chairman Cox and other SEC staffers have already noted, more tweaks in the SEC’s rules may be required to elicit the types of disclosures [being] sought,” says Broc Romanek, editor of CompensationStandards.com. “One area of contention is that there is not sufficient analysis in the disclosures for shareholders to fully comprehend how boards devise CEO’s pay packages.”
Cox presumably has another year and a half to not only tweak the executive compensation rules, but to finalize other simmering issues that were already on the SEC’s front burner when he was appointed. No one questions his efforts, or underestimates the political challenges he faces. If he continues his balanced approach, his tenure is apt not to leave a bad taste in one’s mouth — or a particularly memorable one, either.
And, it will likely be his last meaningful role in
Stephen Barlas (sbarlas@verizon.net) is a freelance writer who has covered developments in
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