A Complete Break?

The contradictory impulses of the federal government were on full display today. At one location on Capitol Hill, a group of so-called Senate moderates were meeting to strip some $80 billion out of the Obama Administration’s economic recovery plan. According to press accounts, they were mainly targeting proposed spending related to education, ranging from Head Start programs to Pell grants for college students. I guess they are telling us that in these hard times we shouldn’t be lavishing taxpayer funds on fat cat students.

Meanwhile, in another part of Capitol Hill, the Senate Banking Committee heard testimony from Elizabeth Warren (photo), Chair of the Congressional Oversight Panel that was created by the Troubled Asset Relief Program (TARP) legislation enacted last fall. Warren gave a preview of her panel’s new report that will contain estimates that, in its purchases of capital stakes in major banks, the Bush Treasury Department overpaid by some $78 billion.

Want to take bets on which group—students or banks—end up keeping their $80 billion?

Warren’s statement was based on a valuation study of a sample of the banks that got federal infusions. “Despite the assurances of then-Secretary Paulson, who said that the transactions were at par,” Warren said, “Treasury paid substantially more for the assets purchased under the TARP than their then-current market value.”

Being generous, Warren said that Treasury may have overpaid as part of a deliberate policy to increase the amount of assistance being given to the banks to enhance the stabilization effort. As I see it, the overpayment could just as easily be seen as incompetence or a corrupt conveyance of value by Treasury officials to their friends in the financial community.

Warren was joined at the hearing by Neil Barofsky, the TARP Special Inspector General, whose testimony echoed her concern about the failure of Treasury to explain the criteria it applied in making its TARP payouts last year. Barofsky also expressed frustration about the refusal of the TARP recipients to reveal what they are doing with the funds. Yet he made it clear that the era of non-accountability is over. Barofsky said his office is moving ahead with plans to ask all recipients for an accounting, and in some cases—such as Bank of America—he is launching an audit of where the TARP money went. Even more tantalizing was Barofsky’s statement that his office has “opened several criminal investigations.”

Warren and Barofsky’s aggressive approach meshes with the Obama Administration’s stance on executive pay, which was announced in the wake of revelations that bailed out Wall Street firms had distributed a total of some $18 billion in end-of-the-year bonuses. It’s unfortunate that the plan does not apply to the many companies and their executives who already took the money (from taxpayers) and ran (to the bank to deposit their bonus checks). Yet, given the likelihood that many more corporations will be receiving federal help in the months to come, some top executives may finally have to endure some sacrifices.

What worries me, however, is that the Administration’s assault on executive pay may be an effort to placate the public in advance of the big new bailout plan that Treasury Secretary Timothy Geithner is expected to announce next week—a plan that could include the creation of a “bad bank” to allow financial institutions to unload their toxic assets onto the taxpayers. Cracking down on the compensation of bank executives feels good, but it will not relieve the pain of another ill-conceived giant bailout.

Given the state of the economy, more federal intervention may be inevitable. Yet Geithner will have to make it perfectly clear next week that the Obama Treasury Department has made a complete break with the irresponsible and opaque policies of the former Paulson regime.

Note: Transparency is an issue not only for the TARP program, but also for the economic recovery plan. The stimulus legislation includes provisions for federal disclosure of money flows, but a new coalition is also calling for greater transparency in the way the states will use those funds.

Transparent Intentions

In some of its first official acts, the Obama Administration has set the hearts of disclosure advocates atwitter at the prospect of a new era of open government. “For a long time now there’s been too much secrecy in this city,” said the new President. “Transparency and rule of law will be the touchstones of this presidency.”

After issuing a memorandum on openness and an executive order repealing restrictive Bush Administration policies on the release of government records, including those relating to former presidents, Obama said: “Starting today, every agency and department should know that this administration stands on the side not of those who seek to withhold information, but those who seek to make it known.”

Transparency will be an issue in some of the administration’s largest initiatives, especially the $800 billion or so that will be spent for economy recovery. The signs there look promising as well. The 258-page text of the proposed American Recovery and Reinvestment Act of 2009 posted last week by the House Appropriations Committee includes some impressive provisions on disclosure. The bill calls for the creation of a special website called Recovery.gov “to foster greater accountability and transparency in the use of funds made available in this Act” (Section 1226).

Aside from general material on the stimulus program, the site is supposed to include detailed data on all contracts awarded and grants issued. However, the bill does state that “proprietary data that is required to be kept confidential under applicable Federal or State law or regulation shall be redacted before posting” (Section 201). Given the restrictive practices in some jurisdictions, this will require some watching.

Another provision of the legislation would create an Accountability and Transparency Board chaired by the President’s Chief Performance Officer (a new position created by Obama). The main aim of the board would be to “prevent waste, fraud and abuse,” but it would also be charged with overseeing practices regarding the reporting of contract and grant information. (Sections 1221-1225). Finally, the bill would require reporting on “the number of jobs created or sustained by the Federal funds…including information on job sectors and pay levels” (Section 12001).

If these provisions survive in the legislation that passes Congress, they will make the recovery act vastly more transparent than the bailout program carried out by former Treasury Secretary Henry Paulson in recent months. The need to bring some openness to the bailout was expressed by Timothy Geithner, Obama’s choice to succeed Paulson, during his confirmation hearing this week. Although most of the hearing was taken up with Geithner’s personal tax fiddles, the nominee declared that the Obama Administration intends to “fundamentally reform” the bailout program with “tough conditions to protect the taxpayer and the necessary transparency to allow the American people to see how and where their money is being spent and the results those investments are delivering.”

This is what watchdog groups have been demanding since the bailout first started. Last month, more than 75 organizations led by Open the Government.org and the National Taxpayers Union sent an open letter to Congress demanding bailout transparency. They are now planning to relaunch that effort.

So far, the Obama Administration is saying all the right things about transparency and accountability, but it has a monumental task before it to make truly open government a reality. We need to make sure it does not cut any corners.

Note: This piece has been crossposted on the Good Jobs First sister blog Clawback.

Will Xcel Settlement Lead to Meaningful Climate-Change Risk Disclosure?

Utility holding company Xcel Energy is getting lots of free publicity this week, since its name is on the arena in St. Paul, Minnesota where the Republican Party is holding its national convention. Last week, the company was being named in a different context.

While much of the attention of the country was focused on the Democratic National Convention, New York Attorney General Andrew Cuomo announced that Xcel had settled litigation brought against it by the state by agreeing to disclose the financial risks that climate change poses to the company and its investors. Minneapolis-based Xcel is itself a major contributor to global warming thanks to its ownership of more than a dozen coal-fired electric power plants in states such as Colorado, Minnesota and Texas.

Last year, Cuomo launched an investigation of Xcel and four other energy companies — AES, Dominion, Dynergy and Peabody — that were building new coal plants around the country. In Xcel’s case, the plant is Comanche 3 in Colorado (seen above in an Xcel photo simulation), which is expected to be completed next year. The probe was based on New York’s Martin Act, the same securities law that Cuomo’s predecessor Eliot Spitzer used in prosecuting Wall Street investment banks and major insurance companies.

The settlement with Xcel (the cases involving the other companies are ongoing) is a milestone in the effort to get publicly traded companies to reveal more about the potential financial consequences of climate change. Cuomo’s use of his prosecutorial powers is only one front in that effort. Institutional shareholders, working through the Investor Network on Climate Risk, have been pushing companies through shareholder resolutions while urging the Securities and Exchange Commission to mandate better disclosure. At the same time, the Carbon Disclosure Project is urging large companies to directly report their estimated CO2 emissions.

Under the settlement with Cuomo, Xcel will be required to include in its annual 10-K filing with the SEC a discussion of financial risks relating to:

  • present and probable future climate change regulation and legislation;
  • climate-change related litigation; and
  • physical impacts of climate change.

In addition, Xcel will have to provide various climate change disclosures on its operations, including:

  • current carbon emissions;
  • projected increases in carbon emissions from planned coal-fired power plants;
  • company strategies for reducing, offsetting, limiting, or otherwise managing its global warming pollution emissions and expected global warming emissions reductions from these actions;
  • and corporate governance actions related to climate change, including whether environmental performance is incorporated into officer compensation.

Although Cuomo’s agreement with Xcel applies only to that company, it could give a boost to other efforts to get large corporations to own up to the financial and other consequences of the growing climate crisis.

For this to happen, shareholder activists and others have to make sure that when companies accede to demands for climate-risk disclosure the result is meaningful. Xcel’s last 10-K filing, issued before the settlement, refers to climate change and emphasizes the need to reduce greenhouse gas emissions. When mentioning the New York State case, the company thus argues that it is already making the disclosures sought by Cuomo. Yet its main emphasis in the 10-K is on reassuring investors that the company is prepared for climate change, while there is no acknowledgment that building new plants such as Comanche 3 is exacerbating the problem. That’s not risk disclosure—it’s corporate spin.

If this same sort of rhetoric and evasion appear in the company’s next 10-K, let’s hope Cuomo prosecutes Xcel for violating the settlement agreement.

Trade Associations Squawk at New Pay Disclosure

Whether they are paid lavishly or barely above the minimum wage, Americans usually prefer not to tell others how much they earn. Some people cannot keep their pay entirely private, because their position is subject to public disclosure requirements, such as those that apply to non-profits. The Internal Revenue Service recently issued the first revisions of the compensation disclosure rules for non-profits in 30 years, and that is upsetting some people — especially in trade associations such as the National Football League — whose pay stubs will be exposed to the world for the first time.

The controversy surrounds the Form 990, an annual document through which non-profits — as a condition of remaining tax-exempt — have to disclose extensive information about their finances, including top-level compensation. After being submitted to the IRS, the 990s are made available on the web through sites such as Guidestar and the Foundation Center. The transparency is meant to discourage excessive spending on internal expenses rather than the group’s stated mission.

Currently, non-profits must disclose the compensation of officers, board members and “key employees” (such as an executive director) as well as the pay of the five highest-paid employees who do not fit those categories and who earn above $50,000. The IRS, which oversees non-profits, now wants non-profits to reveal the names and salaries of up to 20 key employees (more broadly defined) earning more than $150,000 as well as the five-highest paid other employees earning above $100,000.

Trade associations — previously not subject to the disclosure rule relating to highly compensated non-key employees — are doing most of the grousing about the new guidelines. The National Football League, which now reveals the salary of only one employee: its Commissioner, is leading the charge against the new IRS rules, saying the added disclosure is not appropriate for organizations that don’t take tax-deductible contributions from the public.

While you’d expect that a professional sports organization might be trying to conceal bloated pay levels, Joe Browne, the NFL’s executive vice president for communications and public affairs, recently strained to suggest to the New York Times that the problem was the opposite: “I finally get to the point where I’m making 150 grand, and they want to put my name and address on the form so the lawyer next door who makes a million dollars a year can laugh at me.”

Working with the American Society of Association Executives, the NFL has begun lobbying Congress for legislation that would allow trade associations to redact the additional salary information from the public version of the 990 (the way charities are allowed to remove information on their largest contributors).

While it is true that trade associations don’t receive donations from the public, they are still tax-exempt, which means that they should give up the financial privacy enjoyed by other private entities. Besides, even the new rules would require that trade associations disclose a lot less salary information than another non-charity type of non-profit: labor unions.

Under the Labor-Management Reporting and Disclosure Act of 1959, unions must file annual forms called LM-2s that, among other things, list the salaries not only of officers but all employees. The U.S. Department of Labor makes the forms available on the web and also provides a search engine that allows you to enter the name of any individual and easily find his or her compensation. How would trade associations feel about that level of mandatory transparency?

The SEC’s Risky New IDEA

When you go to the Securities and Exchange Commission website these days, the first thing you see is an animation that looks like something out of The Matrix films or the TV show Numb3rs. It seems the agency’s accountants and lawyers are trying to look cool as they move toward the creation of a new system for distributing public-company financial information on the web.

This week SEC Chairman Christopher Cox (photo) unveiled Interactive Data Electronic Applications (IDEA, for short), the successor to the EDGAR system that corporate researchers have relied on since the mid-1990s for easy access to 10-Ks, proxy statements and the like. The big selling point of IDEA is tagging. Companies (and mutual funds) will be required to prepare their filings so that key pieces of information are electronically labeled—using a system called XBRL—and thus can be easily retrieved and compared to corresponding data from other companies. The first interactive filings are expected to be available through IDEA late this year. EDGAR will stick around indefinitely as an archive for pre-interactive filings.

“With IDEA,” the SEC press release gushes, “investors will be able to instantly collate information from thousands of companies and forms, and create reports and analysis on the fly, in any way they choose.”

I just finished watching the webcast of Cox’s press conference earlier this week and came away with mixed feelings about IDEA. In one respect, it will be great to be able to readily extract specific nuggets of information. My concern is the emphasis being placed on disclosure as simply a collection of pieces of data. This may serve the needs of financial analysts and investors, but as a corporate researcher, I find that some of the most valuable portions of SEC filings are narratives rather than numbers—for example, the descriptions of a company’s operations, its competitive position and its legal problems that appear in 10-Ks.

As Cox finally mentioned about an hour into the press conference, tagging can be applied to text as well as numbers. Yet I can’t help worry that the direction the SEC is going in will tend to reduce narratives to bite-size portions that serve to diminish the full scope of disclosure. It was not comforting to hear William Lutz, the outside academic who is advising the SEC on a complete overhaul of its entire disclosure system, suggest during the press conference that the forms (10-K, 10-Q, etc.) companies are currently required to file will be phased out. Perhaps it was unintentional, but the impression Lutz and Cox gave is that future disclosure will be mainly quantitative.

This shift in focus from text to numbers would, I believe, increase the risk that company reporting on social and environmental matters, already inadequate, will be scaled back. That may not mean much for short-sighted investors, but it would be a major setback for corporate accountability.

Getting Companies to Come Clean About Risks

In 1982 building materials producer Johns-Manville filed for bankruptcy, overwhelmed by a rising tide of lawsuits brought by workers crippled from exposure to the company’s most infamous product: asbestos insulation. The Manville litigation and Chapter 11 filing caught many investors off guard because the company, despite knowing the risks of asbestos for decades, did not disclose the potential consequences to shareholders. The episode is one of the most egregious cases of corporate irresponsibility in U.S. history.

Unfortunately, Corporate America did not learn the lesson of the asbestos debacle. Many companies—from cigarette manufacturers to investment banks involved with subprime mortgages—have failed to fully inform investors of potential liabilities. They have been able to do so, in large part, because of lax accounting rules.

That could now change. The entity that sets the rules—the Financial Accounting Standards Board—is currently working on the first modifications since 1975 to its disclosure guidelines, known as FAS Statement No. 5, regarding “loss contingencies.” The problem is that FASB is considering revisions that some advocacy groups consider too weak.

The Investor Environmental Health Network (IEHN), “a collaborative project of investment managers that tracks product toxicity issues,” has just issued an appeal for interested parties to submit comments urging FASB to adopt stricter standards for Statement No.5. The comments are due by August 8.

Specifically, the IEHN is concerned that the revision of Statement No. 5, while requiring companies to report maximum possible loss, has three significant loopholes. These would allow companies to skirt the new rules if the company claims that the risks are only remotely likely and would not be resolved within the next year, or if it claims that the disclosure would be “prejudicial.” Also, the new rules would apply only to legal liabilities, not asset impairments (such as the risk that a company’s property might be destroyed by flooding related to climate change).

As Sanford Lewis, who serves as counsel for IEHN, puts it in an e-mail message to me: “For Enron, subprime lending and asbestos, the unifying theme is that management treated these severe-impact issues as only ‘remotely likely’ to hurt their companies. Now FASB wants to make some of these ‘remotely likely’ issues discloseable, but only if the issue is expected to be resolved within a year. Yet issues such as these typically take many years, if not decades, to be resolved. Investors need to know about them now, not right before the financial catastrophe hits.” (See his video on the issue here.)

Stricter accounting rules might not prevent risky behavior on the part of corporate executives, but they would increase the odds that investors would know about those risks before it was too late to bail out—or pressure management to clean up its act.

Is the SEC Putting Itself Out of Business?

Where are the rightwing crackpots denouncing “world government” when you need them? The New York Times reported over the holiday weekend that the Securities and Exchange Commission (SEC) is preparing a series of proposals that would weaken its own control over U.S. financial markets by, among other things, allowing American companies to opt for oversight by foreign regulatory bodies. The step would reportedly be presented as way to enhance the competitiveness of U.S. companies abroad and encourage more foreign investment here.

Critics worry, with some justification, that the move amounts to a transnational form of deregulation, given that securities oversight overseas is generally much less stringent than in the United States. The change could effectively abolish the Sarbanes-Oxley controls that were put in place by Congress after the collapse of Enron and other corporate scandals earlier this decade. The Times quotes Duke Law School securities expert James D. Cox as warning that the shift to international rules amounts to “outsourcing safety standards.” Picking up on the story today, the Washington Post suggested that a vote on the use of international standards could come in a few weeks.

Ceding control to foreign regulators is just one of the ways in which the SEC seems to be chipping away at its own authority. Yesterday, the agency announced it had reached agreement with the Federal Reserve to share information and cooperate more closely. That sounds reasonable, but it comes after the Fed shunted the commission aside and took control of the Bear Stearns crisis back in March. Since then there have been prominent articles, such as one on the front page of the Wall Street Journal, playing up the criticism of SEC Chairman Christopher Cox.

And then there’s the fact that in March Treasury Secretary Henry Paulson proposed an overhaul of the financial regulatory system that gave a diminished role to the SEC. Paulson’s plan has gone nowhere, but it added to the impression that the SEC’s star is waning.

The SEC is hardly a flawless agency, but the alternatives would probably be significantly worse in terms of investor protection and corporate accountability. As much as some of us harp on the limitations of SEC disclosure rules, for instance, there is a lot less transparency abroad. The only other country, to my knowledge, that requires companies to reveal a significant amount about their operations and their finances, and then makes those filings available at no cost on the web is Canada, with its SEDAR system. Allowing U.S. companies to follow foreign rules may or may not help their competitiveness, but it will in all likelihood allow them to operate with a lot less scrutiny.

Disclosure Issues Bedevil Climate-Change Debate

Big business is talking more these days about the need to reduce greenhouse gas (GHG) emissions. Even long-time global warming denier Exxon Mobil feels the need to publicize what it is doing in this regard. Claims of reductions in GHG are not, however, meaningful unless those emissions are being estimated consistently to begin with.

A study issued yesterday by the Ethical Corporation Institute raises questions about how much we really know about the volume of GHG being generated by large corporations. According to a press release about the report (which is available only to those willing to fork over more than 1,000 euros), there are “staggering inconsistencies in how companies calculate and verify their greenhouse gas emissions.” The report found, for instance, that companies responding to the fifth annual Carbon Disclosure Project questionnaire used more than 30 different protocols or guidelines in preparing their emissions estimates. The report, it appears, surveys this potpourri of measurement techniques but does not attempt to resolve the differences.

The absence of consistency has not prevented the Carbon Disclosure Project from trying to use current reporting to understand the larger framework of GHG trends. In May, the Project issued the first results of its Supply Chain Leadership Collaboration, an initiative in which large companies such as Nestlé, Procter & Gamble and Unilever urge their suppliers to report on their own carbon footprint. It is unclear how much effort is made to ensure these results are reported in a uniform manner.

Along with the need for improved GHG reporting, there are growing calls for companies to disclose the liability risks (and opportunities, if any) associated with those emissions. Recently, a broad coalition of institutional investors and major environmental groups once again urged the U.S. Securities and Exchange Commission to clarify the obligations of publicly traded companies to assess and fully disclose the legal and financial consequences of climate change. The statement was aimed at reinforcing a petition filed with the SEC last year on climate-change disclosure.

Climate-change liability risks no longer exist just in the realm of the theoretical. Lawsuits have been filed against the major oil companies for conspiring to deceive the public about climate change—including one brought in the name of Eskimo villagers in Alaska who are being forced to relocate their homes because of flooding said to be caused by global warming.  Famed climate scientist James Hansen recently declared at a Capitol Hill event that oil and coal company executives could be guilty of “crimes against humanity.” If that isn’t a risk worth reporting, what is?

SEC filings should be clearer and more detailed

Securities and Exchange Commission Chairman Christopher Cox yesterday announced the launch of an effort to “examine fundamental questions about the way the SEC acquires information from public companies, mutual funds, brokers, and other regulated entities, and the way it makes that information available to investors and the markets.”

Surprisingly, the grandly named 21st Century Disclosure Initiative is to be headed by William D. Lutz, an emeritus professor of English at Rutgers University-Camden. True, Lutz has a law degree and is said to be familiar with securities law, but he is known mainly as a critic of corporate and bureaucratic doublespeak.

There is plenty of gobbledygook in SEC filings that could be made more intelligible, but the bigger disclosure problem is the failure to require companies to divulge more on certain aspects of their operations. For years, initiatives such as Corporate Sunshine Working Group have been pressing for fuller reporting on a corporation’s social and environmental impact. The group’s website contains a six-page expanded disclosure schedule, including items such as:

* lists of major customers and suppliers (beyond the current limited requirements);

* detailed information on violations of labor laws, anti- discrimination laws, etc.; and

* more detailed reporting on actual environmental violations and potential environmental liabilities.

There’s more that could be added to the list. For example, it would be very helpful to analysts of state corporate tax compliance to know how much a company paid in taxes in each state. Although the information may be available (with some difficulty) from other sources, it would also be useful to know how much a company has received in tax abatements, tax credits and other subsidies from each state and from the federal government.

Another type of data that can be found elsewhere (usually for a price) but should be in filings such as 10-K annual reports or proxies is a list of a company’s largest institutional shareholders with information on whether they or their money managers vote their shares. The names of a company’s major creditors can sometimes be found by looking at revolving credit agreements included as exhibits, but they should be presented clearly in the debt section of the financial statements.

In short, there is a lot of vital information about publicly traded companies that should be made readily available to investors and other stakeholders. Presenting that data in plain English would be even better.

Sharing the Clean-Car Prize

John McCain’s suggestion yesterday that the federal government offer a $300 million prize for the development of a next-generation battery for plug-in hybrids or electric cars is being derided in some quarters as bringing a “game-show ethos to American politics.” It is also awkward that Daniel Yergin’s definitive account of the oil industry’s quest for domination was entitled The Prize.

The idea of offering a cash award for a technological innovation is hardly unprecedented. Such bounties, however, are usually offered by private entities such as the X Prize Foundation. What McCain is forgetting is that when a prize is offered by government—that is, when taxpayer money is the source of the reward—the public should get some direct benefit for its “investment.” A benefit, that is, beyond the fact that the new technology would be available for sale.

This is the principle behind the proposal put forth by people such as James Love of the Consumer Project on Technology to replace privately financed drug research with taxpayer-funded prizes. Pharmaceutical researchers would get substantial sums for the creation of new treatments that create demonstrable improvements in health conditions. This does not, however, create windfalls for the winners. Drugs that receive the prize—which was incorporated into a bill introduced last fall by Vermont Sen. Bernie Sanders—would not have patent protection and thus would be widely available at a cheap generic price.

There’s no indication that McCain has this trade-off in mind. He presumably would want the winners of the battery competition to be rewarded twice—with the prize as well as the patent.

Until prizes and other “carrot” approaches succeed in bringing about cleaner cars, some government “sticks” will remain necessary. One disclosure-based version of the latter is being introduced in California. The state’s Air Resources Board announced last week that, beginning next January, every new car put on sale in California will be required to carry a label informing potential buyers of the vehicle’s environmental impact. The label will rate the car based both on its emissions of greenhouse gases and its contribution to smog. The Board already has a website that provides data on the cleanest, most fuel efficient cars on the market.

Compared to his dismaying embrace of expanded offshore oil drilling last week, McCain’s clean-battery-prize idea is not completely foolhardy. But he shouldn’t forget that the role of government is to put a check on business shortcomings—if only through mandated disclosure—rather than fostering more winner-take-all “solutions.”