Academic

But enough about me, let's talk about my article*

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

Yesterday I posted about the article we just sent out, posing the problem of how we we can ever know if companies are complying with our securities laws by disclosing what they're supposed to (we also received an offer of publication, so the game is on!).  My co-author, Mike, and I exploit an overlap in securities laws to explore this question.

Here's the deal: Section 406 is a relatively obscure provision of Sarbanes-Oxley.  It required companies to disclose the code of ethics that applies to their top 3 executives, the CEO, CAO, and CFO, or to explain why they don't have one.  Unsurprisingly, everyone discloses a code.  Next, it requires companies to file 8-Ks with the SEC reporting any waivers from the code granted to the 3 executives, within 4 days after the waiver is granted, OR disclose them on their company website.

I know, you're thinking, "Huh, I haven't heard of this provision."  You're not alone: we found only 36 waivers from 2002-2007 filed with the SEC for ALL public companies.  36.  Of course, the website disclosure possibility means we can't really know how many ethics waivers are being disclosed unless we look at all the websites.

Mike devised a random sample of 200 companies, and we looked at their ethics waivers, whether disclosed via 8-K or website.  Only 1, disclosed via 8-K.  So we're dealing with really ethical companies here, right?  Unless they're not disclosing the waivers like they should be.  But how would you know?

It turns out that companies have to disclose their related-party transactions in their 10-Ks or proxies at the end of the year.  Item 404 of Regulation S-K requires all transactions with insiders over $120,000 be disclosed.  The fit is not perfect--there are lots of related-party transactions disclosed that don't involve the CEO, CAO, and CFO.  But if you look through each company's related party transactions, you can sift out those involving the CEO, CAO, and CFO, and see if they were disclosed as ethics waivers, as they were supposed to be. 

Tune in tomorrow to see what we found...or take a peek here.

*My associate dean, Paul Kurtz, swears that he was once on the receiving end of this line, delivered at a cocktail party by a law professor.

Full post as published by Conglomerate on March 20, 2009 (boomark / email).