As all eyes monitored the new president's economic stimulus plan, a group of individuals -- some new, some old, many familiar -- operated behind the scenes, preparing to wield their influence on regulatory matters that will affect corporate finance executives long after the credit-and-confidence crisis abates.
These regulatory matters and the individuals currently shaping them bear close monitoring by finance leaders and other GRC executives in the months ahead.
Some of these sources of GRC influence may surprise. For example, consider the future of the U.S. Securities and Exchange Commission (SEC), whose abolishment (floated in some news articles) remains a long shot. The SEC's fate more likely includes a merger with the Commodity Futures Trading Commission (CFTC); however, this marriage would hinge less on how well the commissions' leaders get along and more on whether members of the four Congressional committees that oversee both agencies see eye to eye.
The health of this relationship largely boils down to money. Membership on the committees that oversee the SEC and CFTC confers a valuable campaign fund-raising opportunity. A merger could eliminate this fund-raising opportunity for as many as half of the members on these committees.
What follows is a rundown of important regulatory issues to be addressed in the weeks and months ahead. The collection of questions and influences below is not exhaustive. Rather, it is intended to guide corporate finance executives' attention to the shifting, and often surprising, sources of influence in the wake of an historical presidential election and a turning point in the country's economic history.
Issue: International Financial Reporting Standards (IFRS) adoption
Key Question: How much IFRS-GAAP convergence will take place in the coming 2 years -- regardless of any changes to implementation timelines?
Major Influences: The FASB and IASB leadership
The current SEC exposure draft on the transition to IFRS implementation contains a staggered implementation date, between 2014 and 2016. However, newly appointed SEC chair Mary Schapiro expressed caution in both the oral and written testimonies she provided to Congress following her nomination. The new SEC chair said that she would take a "deep breath" before reviewing the proposed IFRS transition timeline. She also signaled that she will not feel "bound" by the timeline draft that currently exists.
While this stance opposes new Economic Recovery Advisory Board head Paul Volcker's support for a quicker transition to IFRS, the contrast may not matter. This is because the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have been working together to converge IFRS and GAAP for years.
The collaboration continues: The "gap" between IFRS and GAAP continues to shrink. If the SEC delays the official start of IFRS implementation to 2016, for example, this gives U.S. companies two more years of gradual adjustments, which should help to ease the amount of work required during the transition. Even in a highly unlikely situation where the move from GAAP to IFRS is scrapped or postponed indefinitely, the slow but steady convergence of the two sets of guidelines may result in a de facto transition anyway.
Issue: The future of the SEC
Key Questions: Can the Congressional committees that oversee the commissions agree on merger terms? Who will be the SEC's next chief accountant?
Major Influences: The chairs and members of the Senate Committee on Banking, Housing, and Urban Affairs; House Committee on Financial Services; Senate Committee on Agriculture, Nutrition, and Forestry; and House Committee on Agriculture ... and SEC chair Mary Schapiro
House Committee on Financial Services chair Barney Frank (D-Mass.) has been talkative in 2009. His comments have fueled articles in The Washington Post and The Wall Street Journal about the possible introduction of a "super-regulator" (e.g., the chairman of the U.S. Federal Reserve) who would oversee systemic risk throughout the country's financial system. These articles raised questions about the future of the SEC, including concerns not just about how it might fit into a revamped regulatory structure, but even whether it would at all. However, regulatory insiders say that the replacement of the SEC and the CFTC by a super-empowered fed is unlikely for a number of reasons, including opposition from investors and many well-entrenched Congressional interests.
The prospect of an SEC merger with the CFTC appears more likely, although this could quickly change. The idea was previously floated by former U.S. Treasury Secretary Henry Paulson, and the notion still seems to have legs within the Obama administration.
The fate of this possible merger largely depends on whether Frank, Sen. Chris Dodd (D-Conn.), Rep. Collin Peterson (D-Minn.), Sen. Tom Harkin (D-Iowa), and their colleagues on the finance and agricultural committees (which provide Congressional oversight to the CFTC) want it to happen. If the committees resist the idea of a merger, then the consolidation effort would need to be driven by the Obama administration. Whether the administration steps in would depend upon how much political and human capital -- elements in short supply given the number and severity of the challenges on the president's plate -- can be spared.
In the short term, corporate finance executives should scour Schapiro's previous public statements for clues about her intentions and also pay close attention to the individual she appoints as chief accountant and head of the commission's corporate finance division. The chief accountant may be the most influential accounting official in the country -- even more important than FASB chair Robert Herz and Public Company Accounting Oversight Board (PCAOB) chair Mark Olson.
Issue: The Sarbanes-Oxley Act's impact on smaller public companies
Key Questions: What will Mary Schapiro do, and when will she do it?
Major Influence: Schapiro
The SEC has delayed Sarbanes-Oxley's Section 404 auditor attestation requirement for several years. This may soon change, based on SEC chair Mary Schapiro's January testimony before Congress. Unlike larger public companies, "non-accelerated" filers (generally, companies with market capitalizations of less than $75 million) are not required to have their external auditors issue a separate certification and report on the effectiveness of financial controls over financial reporting; only the management teams of these companies are required to issue the reports. Schapiro's written testimony suggests that she is in favor of halting the string of delays that have postponed the implementation of this part of the law for smaller companies.
Issue: Other corporate governance regulations (in addition to a potential overhaul of the U.S. regulatory system)
Key Question: Will "say on pay" and competitive board elections become requirements?
Major Influences: President Obama's political capital, the U.S. Chamber of Commerce's voice
Three governance-related items appeared likely bets to become new regulation after the November presidential elections. President Obama's words and actions since taking the oath of office have only improved their odds. By capping his staffers' pay, describing certain financial executives' year-end bonuses as "shameful," and then limiting executive compensation at bailout banks, President Obama has sent a clear signal about his willingness to wade into executive pay issues.
This means that CFOs who also serve as corporate directors should closely monitor any say-on-pay legislation. The corporate governance community also may be inspired to intensify efforts to get new rules on competitive board elections enacted by the SEC. Additionally, governance experts expect to see new securities regulations directed at previously unregulated entities such as hedge funds and private equity firms.
The U.S. Chamber of Commerce and, to a less dramatic degree, the Business Roundtable have opposed many business regulations in the past, and their leadership -- particularly, Chamber president and CEO Thomas Donahue -- have made it clear that they will continue to oppose regulatory changes that may hamper the competitiveness of U.S. companies.
Issue: Other regulatory changes
Key Question: When will the Employee Free Choice Act become law?
Major Influences: President Obama's political capital, Blue Dog Democrats
In addition to new rules related to corporate governance, other regulatory changes could greatly impact corporate GRC programs.
President Obama has said that he would sign the Employee Free Choice Act -- also know as "card check" -- if and when it is passed by Congress. When he was in the Senate, the president co-sponsored the legislation, which would amend the National Labor Relations Act to make it easier to form a union by replacing secret balloting with the signing of cards. Most labor relations experts believe that "card check" will become law fairly quickly once the new Congress and presidential administration address economic issues.
Even if "card check" fails to pass Congress, several other factors appear poised to boost union activity, including the recent economic crisis and an increasingly global and diverse workplace. United States union membership, which has declined annually for almost 50 years, posted its first increase in a generation in 2007. Although the country's 15.7 million union members account for only 12.1 percent of the country's wage and salaried workers, strenuous economic conditions tend to increase union membership, sometimes significantly.
The U.S. Chamber opposes the "card check" bill on the grounds that it would effectively eliminate private-ballot union elections, even if employees want open elections; place federal regulators in charge of private business decisions (because the business and a newly certified union would be forced into binding arbitration by a government panel if they do not reach agreement within 4 months of certification); and unfairly punish companies for violations committed during the union recognition process.
Beyond "card check," new environmental laws (regulating carbon emissions), healthcare rules, and changes to international trade agreements (generally, opposing existing treaties and discouraging additional ones) may come down the pike. Whether these ideas emerge as bills in Congress, and what happens to them if they do, depends on an old-fashioned-sounding -- but newly empowered -- contingency: Blue Dog Democrats.
If enough of these 45-plus Democratic representatives (who typically come from conservative voting districts) side with a unified Republican minority on any of the above-mentioned legislative issues, they could create a majority.
Blue Dogs are not the only wild card; red ink, frozen credit markets, unemployment, and geopolitical surprise can quickly move pending regulatory changes to the back burner. In the meantime, it makes sense to keep these potentially dramatic GRC shifts front-of-mind.