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Panelists See Cultural Divide on Corporate Governance, Audit Committee Issues

The biggest problem facing the audit committees of foreign issuers is a cultural misunderstanding of the committee's role, according to Holly Gregory of Weil, Gotshal & Manges. She joined other panelists at the Practising Law Institute's recent conference on foreign issuers to discuss corporate governance issues relating to foreign companies.

Gregory believes there is also a failure in the U.S., where companies are getting very checklist driven, to understand the audit committee's function. Most companies seem to know the committee's job of ensuring that a process is in place to get to fair and complete disclosure, she said. However, the committee also needs to think about how things fit together, and why a company and its management are moving in a certain direction. "This kind of drilling down is difficult, but essential," she said.

Program co-chair Michael Mann of Richards, Spears, Kibbe & Orbe believes that one weakness of the Sarbanes-Oxley Act is the emphasis it places on the audit committee. He said that foreign companies' audit committees still have a long way to go before they are doing what Sarbanes-Oxley envisions they are doing.

Mann believes the greatest weakness with foreign audit committees is that audit committee members are not adequately compensated. "If you don't treat it like a job and staff it like a job, then the chances of success are much lower," he said. In his opinion, foreign audit committees are not staffed effectively enough to really be overseers of corporate governance.

Janet Fisher of Cleary Gottlieb Steen & Hamilton agrees that there is a general misconception among foreign issuers about the role of the audit committee. However, she believes there are initiatives underway that could help in this area. She cited the proposed amendments in the European Union to Directives 4, 7 and 8. Among the changes, which should be coming next year, are rules requiring companies to form independent audit committees, she noted.

Fisher is also encouraged by the AICPA's recent exposure draft that would replace SAS No. 61. The draft, entitled "The Auditor's Communication With Those Charged With Governance," was released in March.

The exposure draft establishes standards and provides guidance to an auditor on matters to be communicated with those charged with governance. It creates a requirement for auditors to communicate, increases the number of items to be communicated and offers guidance on the communication process.

Fisher said that the document should increase the focus on two-way communications between auditors and those responsible for corporate governance. "If communication is not adequate, the committee must consider whether it implicates tone-at-the-top issues," she said. She believes the new statement will enhance corporate governance at both domestic and foreign companies.

The panelists also discussed the different approaches to corporate governance inside and outside the U.S. and what that means for foreign issuers trying to go public in the U.S. "Clearly the corporate governance standards are different," said Mann. "The idea of shareholder activism did not exist outside the U.S. until very recently."

Foreign companies are not accustomed to U.S. corporate governance systems, Fisher said, so she begins to advise her clients well before the IPO about what will happen next. She said she discusses the disclosures that will be required and the potential liabilities to which the company will become exposed.

Gregory noted that unlike U.S. companies, foreign issuers often have one controlling shareholder. She said she makes sure that the controlling shareholder knows that after the IPO it will no longer be their company.

She advises her clients that if they want access to international capital, then they will have to put certain corporate governance systems in place. Gregory said that she also tries to explain to foreign issuers how good corporate governance practices will actually make the company perform better.

"I now see foreign companies putting corporate governance structures in place earlier," she said. "They think the market will react better to their offering if it sees these systems are up and running.

John Filar Atwood