CEBC IN THE NEWS

Most Company Execs Think Reforms
Have Gone Too Far

Published Monday, April 5, 2004 in the Star Tribune.

By John J. Oslund And Patrick Kennedy

After grappling for two years with Congress' scandal-inspired corporate reforms, Minnesota's biggest public companies are finding that familiarity indeed breeds contempt.

"Total knee-jerk reaction by grandstanding politicians," commented one Top 25 company.

We asked executives of Minnesota's largest public companies several questions about the reforms required by the Sarbanes-Oxley Act, among other issues, as part of our 13th annual Star Tribune 100 special report, published Sunday. Among the highlights:

• 67 percent of the 80 companies responding believe corporate reforms "have gone too far." That's up from 57 percent last year.

• A majority (58 percent) believes the Sarbanes-Oxley Act has made "no difference in shareholder confidence." A year ago, 44 percent felt that way.

• 95 percent of respondents say the reforms have made compliance with legal and auditing rules "significantly more costly." Last year the figure was 73 percent.

"It's not surprising," said Michael Fox, president of Minneapolis-based Matrix Associates Inc., a consulting firm that helps public companies comply with Sarbanes-Oxley. "It's very expensive. Last year, they were anticipating the costs. This year, they are incurring the costs."

Considered the most sweeping securities legislation since the 1930s, Sarbanes-Oxley was passed in the wake of scandals at Enron, Tyco, Adelphia, and Arthur Andersen. Among other things, the act requires more independence among board members and audit firms, beefed-up criminal penalties and significantly tighter auditing controls inside corporations. Additionally, there are multiple requirements to document processes and procedures.

The initial costs of compliance (called "Section 404"), include estimated additional accounting and consulting fees of $650,000 for small companies and up to $2.5 million for large companies, said Patrick Delaney, a recently retired Minneapolis-based corporate attorney who still serves on company boards.

For ongoing Sarbanes compliance work, added annual accounting and legal fees will run about $500,000 for small companies to several times that figure for large companies, he said.

To put those costs into context, the No. 100 company in our ST100 survey had annual sales of $44 million. As a percentage of revenue, initial compliance could run 1.5 percent of sales, while yearly Sarbanes-related costs could run about 1.1 percent of sales. (Delaney added, however, that the fees can vary depending on the type of business and industry.)

Here's a sampling of comments on the reforms:

Apogee Enterprises Inc.: "Jail the scoundrels and it will stop!"

Patterson Dental Co.: "Significantly more costly with no shareholder value created. Just compliance waste."

Sportsman's Guide Inc.: "It is really too early to tell what the shareholders believe. Time will tell."

Hutchinson Technology: "It probably increased confidence, but it is falsely placed. The responsibility to assess the integrity of management still rests on the shoulders of the investor."

Ron James, president and CEO of the Minneapolis-based Center for Ethical Business Practices, said the corporate reaction is similar to what his group is hearing. The center consults with companies on ways to build ethical corporate cultures. Companies that already had successful and rigorous internal controls to prevent fraud nonetheless must install the Sarbanes-mandated procedures because they are the law of the land, James said, and many find that "least common denominator" approach frustrating.

"Obviously, they have to comply with the law. But our view is that you cannot legislate integrity. That has to come from the individuals in the organization who set the tone at the top -- particularly the board and senior leaders."

That tone defines the corporate culture, James said, and, for better or worse, provides the company's moral compass.

"It is the culture that points you in the right direction when you are in the gray areas," James said.

Fox said companies in the throes of complying with reforms are understandably anxious and skeptical of the benefits. "I think in the long term, there will be a payback," he said.

Hiring and spending

While they have soured on the corporate reforms, the firms responding to our survey were significantly more positive about their business prospects than they were a year ago.

For example, nearly half (49 percent) of the companies said they plan to hire additional workers this year while 46 percent will hold headcount steady.

Only 5 percent said they planned to cut staff in the next six to 12 months.

A year ago, just 39 percent of respondents planned additional hiring while 12 percent anticipated layoffs.

Meanwhile, a majority of the responding firms (53 percent) plan to spend more on capital investments this year. Just 9 percent said they plan to cut capital spending.

A year ago, 33 percent said they planned more spending in 2003 while one in four (24 percent) planned to cut capital spending.

Survey highlights

Minnesota companies rank hiring and retaining workers as their most pressing business issue, as they have in each ST100 survey we've conducted.

Companies gave hiring and retaining workers an average 2.8 points on our 0-to-3 scale, with 3 being "very important."

This year, concerns about wage rates ranked second at 2.5 points, followed by education (2.3) and state taxes (2.1).

Our survey was in the mail when Metro Transit bus drivers went on strike March 4. Transportation issues ranked 1.5 on the importance scale this year compared with 1.8 a year ago.

As in 2003, affordable housing ranked lowest with a score of 1.2, compared with 1.6 a year ago.

James said he's surprised by the relatively lower scores assigned to transportation and affordable housing. In recent years, both have received a higher priority from business leaders, he said. For example, the United Way -- which is widely supported by business leaders -- has launched major initiatives in both transportation and housing.

"Business people are participating in those areas," he said. "I am surprised that they didn't come up with a higher score."

Economy over geopolitics

While war with Iraq and terrorism against the United States are important concerns for our companies, the condition of the nation's economy clearly takes priority, ranking 2.6 on the 0-to-3 scale.

Increased regulatory enforcement comes next, with a score of 2.3, followed by international competition (2.0), interest rates (1.9), energy costs (1.8), terrorism (1.7) and privacy regulations (1.5).

In a curious tie, the responding firms weighted Minnesota's budget deficit and the war in Iraq equally at 1.4.

Our questions regarding trade policy appear to have spawned more questions than answers. For example, at 1.3 on the 0-to-3 scale, the nation's record trade deficit ranks lowest among the major issues.

Nearly four out of five respondents said trade policy "does not affect" my company.

On the question of outsourcing, one in four companies said they have increased outsourcing since 2000. About one in every five said they plan to do more outsourcing in the next 12 to 24 months.

© Copyright 2004 Star Tribune. All rights reserved.

Center for Ethical Business Cultures

1000 LaSalle Avenue, TMH 331 ▪ Minneapolis, MN 55403-2005 ▪ USA

Phone: 651 962 4120 or 800 328 6819 Ext. 2-4120 ▪ Facsimile: 651 962 4042

Email: mail@cebcglobal.org

© 1978-2008 Center for Ethical Business Cultures. All Rights Reserved.

Business Partnering with the University of St. Thomas - Minnesota