Corporate Governance & Disclosure

Issue

To encourage the adoption of good corporate governance practices and appropriate and accurate disclosure of financial information and to scale the federal securities laws, as appropriate, for smaller publicly-traded banks and savings associations

Position Statement

ABA supports the adoption of good corporate governance practices by both public and private banking institutions of all sizes. Any new standards, legislation, or "best practices" in corporate governance that are developed should, however, take into account the different organizational, capital, and ownership structures of financial institutions. Additionally, any efforts to make legislative or regulatory changes must be accompanied by a reduction in the existing excessive compliance burdens. ABA will continue to oppose unreasonable requirements that do not lead to better corporate governance practices or that unduly impede the ability of companies to access the public markets to obtain capital. ABA recognizes that laws and regulations, on their own, cannot substitute for the voluntary adherence to ethical principles of corporate conduct and the establishment of a "tone at the top" corporate culture that promotes moral behavior throughout the organization.

To promote financial transparency, ABA supports the disclosure of accurate and appropriate information about financial performance and business operations in a timely manner. Rules, regulations, and private initiatives that create burdensome and duplicative reporting requirements and accelerated reporting deadlines should be reconsidered, taking into account the resources, interests, and needs of companies of all sizes, with particular consideration of the limitations of smaller companies.

For publicly-traded banks, savings associations, or holding companies, ABA specifically supports, as best practices, the following corporate governance and disclosure principles:

• A strong board of directors committed to acting in the best interests of shareholders;
• A strong and independent-minded audit committee, knowledgeable about banking and financial matters;
• A strong and independent-minded nominating and compensation committee;
• Initial and continuing director education and training;
• Adoption of a code of conduct and ethics covering directors, officers and employees;
• Promotion and enforcement of a corporate culture that expects honest and ethical conduct;
• Periodic reporting that promotes a better understanding of the financial position for users of financial statements;
• Reporting of financial information within reasonable time frames; and
• Accurate disclosure of critical accounting policies.

Explanation

The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), arguably the most significant overhaul of the Securities Exchange Act since its enactment in 1934, established federal government involvement in areas such as accounting firm oversight and corporate governance that traditionally have been left to peer oversight and the states, respectively.

The Securities and Exchange Commission (SEC) issued final rules to implement many of the Sarbanes-Oxley provisions. These rules addressed a broad spectrum of corporate governance structure and operations, including CEO/CFO certification of financial reports, auditor independence, audit committee duties and responsibilities, code of ethics disclosure, and internal control evaluation and disclosure. ABA provided comments on the SEC proposals, and the final rules were responsive to many of ABA's comments and concerns.

The stock exchanges, with the encouragement of the SEC, also addressed corporate governance at listed companies. The New York Stock Exchange, the NASDAQ Stock Market, and the American Stock Exchange adopted additional corporate governance-related listing requirements that go beyond the requirements of Sarbanes-Oxley. These exchange standards address, among other things, director independence by requiring that a company have a majority of independent directors. The exchanges adopted stringent criteria for establishing "independence."

Over the past few years, more attention has been placed on assessing the effect of the implementation of the internal control over financial reporting requirements of Section 404 of Sarbanes-Oxley. From the roundtables held by the SEC and the Public Company Accounting Oversight Board (PCAOB) and comment letters from industry it became clear that the costs of implementing Section 404 outweigh the benefits for companies of all sizes. In addition, Section 404 may have had the effect of reducing access to the U.S. capital markets by driving companies to de-register or to raise capital privately or in markets overseas.

The costs of Section 404 are significant for all companies, and particularly onerous for smaller public companies and banks. Earlier this year, the SEC issued interpretive guidance to help public companies comply with Section 404 by focusing company management on their internal controls over financial reporting, and the PCAOB issued Auditing Standard No. 5 (AS5), replacing the earlier standard (AS2) and addressing auditing of internal controls under Section 404.  Both actions were most welcomed by the ABA. The test will now be whether these changes result in their stated purpose of reducing costs to public companies.  ABA will be monitoring that closely.

Most recently, the SEC in November 2007 adopted smaller reporting company regulatory relief and simplification regulations that will implement some of the recommendations made in 2006 by the SEC's Advisory Committee on Smaller Public Companies.

Contact for further information: Mike Gullette (202-663-4986) and Cecelia Calaby (202-663-5325) for all other corporate governance issues.