Global CEO Turnover At Record Highs
As companies set higher standards of performance for CEOs than ever before, CEOs are falling short in record numbers, according to "CEO Succession 2002: Deliver or Depart," the second annual survey of CEO turnover at the world's 2,500 largest publicly traded corporations by management and technology consulting firm Booz Allen Hamilton. And, despite the well-publicized U.S. cases, CEO turnover is accelerating faster in Asia and Europe than in North America, the study found.

Results from the study underscore the growing influence of shareholders and their representatives, corporate directors, the study concludes. "This phenomenon is now fully global, even in regions not burdened by governance scandals," said Charles Lucier, senior vice president emeritus of Booz Allen. "There is no longer any safe haven for chief executives who can't deliver superior results."

Among the findings:

• Involuntary successions in 2002 increased by more than 70 percent over 2001, even thought the total number of CEO changes only rose by 10 percent.
• Of all CEO departures globally in 2002, 39 percent were forced, performance-based changes, compared to 35 percent in 2001.
• CEO turnover in Europe and the Asia/Pacific region continues to rise. CEO succession is up 192 percent in Europe and 140 percent in Asia/Pacific since 1995, the study's benchmark year; in North America, succession events increased on 2 percent during the same period.
• Regionally, the biggest change occurred in the Asia/Pacific region, accounting for nearly one of every five (19 percent) global succession events, compared with 8 percent in 2001 and 6 percent in 2000. Forced turnover in Asia accounted for 45 percent of all transitions there, up from only 6 percent in 2001.
• North America accounted for 48 percent of all successions worldwide in 2002. That was significantly lower than the 64 percent the region accounted for in 2001.
• Boards are less forgiving, and are judging CEO underperformance more strictly. CEOs who were dismissed in 2002 generated median regionally adjusted shareholder returns 6.2 percentage points lower than those of CEOs who retired voluntarily. It took an 11.9 percent shortfall to prompt a firing in 2001; in 2000, fired CEOs underperformed retiring chiefs by 13.5 percent.
  

Roles Central to Directors' Pay

The rewards and costs of directorship -- what Sibson Consulting calls "the director value proposition" -- are in flux, driven by the ongoing upheaval in corporate governance. The demands and risks of board membership are rising, while non-financial rewards of directorship are declining.

"Differentiation in director compensation, previously driven by company size and industry, is increasingly affected by the specific roles that individual directors have to play," says Donald Gallo, senior vice president at Sibson Consulting. "One size no longer fits all."

A recent analysis by Sibson of data from 385 proxy statements filed in 2002 and compiled by Khojna Technologies found that:

Lead independent directors at most companies that have such directorships are paid 116 percent of what regular board members receive in total compensation, including stock.
Fully independent board chairs earn 136 percent of what regular board members get in total compensation, including stock.

Board chairs who were previously CEOs earn a whopping 302 percent of what regular board members are paid in total compensation, including stock.

In a recent survey of 69 companies, Sibson found considerable changes in board pay.

Are Companies Unwittingly Supporting Terrorism?

Being a good corporate citizen is difficult these days. There was a time when companies encouraged employees to give to worthy nonprofits, matched their contributions, received a nice tax break and trusted that they were helping make the world a better place. No longer.

Today, a controversial piece of legislation called the USA PATRIOT Act of 2001 is causing a big dilemma for corporations. It raises the possibility that if they unwittingly give to a charity that supports terrorism, they could be charged with criminal activity.

USA PATRIOT stands for "Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism." Its official goal is "to deter and punish terrorist acts in the United States and around the world, to enhance law enforcement investigatory tools, and for other purposes." Good intentions aside, the ramifications of this bill - specifically as it affects people and organizations who never intended to support terrorism - have many businesses worried.

"Suppose one of your employees makes a donation through your corporate matching program, and unbeknownst to you, that charity then funneled money to a terrorist group or an individual that's been designated a terrorist by the U.S. government," says Craig Wichner, CEO of KindMark, a provider of integrated online corporate giving solutions. "It's possible that your company could be held liable. It may not matter that neither you nor your employees knew they were supporting terrorism."

Wichner advises companies not to stop giving, but to do "due diligence" on every charity the companies supports, and to establish a screening process that ferrets out terrorist financing, fraud and corruption.

He offers the following tips:

• Screen all charities before including them in an approved matching or direct grant database. Pre-qualify these charities based on internal policies, as well as checking them against known terrorist link resources such as the OFAC (Office of Foreign Assets Control) list.
• Screen charities that have received grants in the past, not just those that are new. Even if the donor thinks it knows the organization, somewhere down the line there may be a link to terrorism.
• Insist that charities actively acknowledge compliance with company internal policies -- in areas such as PATRIOT Act compliance, nondiscrimination, overhead costs, lawsuits, religious policy, etc. -- on an annual basis.
• Reaffirm the status of each charity prior to every funding cycle. This could mean doing so 4 to 12 times a year, depending on whether the company offers payroll deduction of contributions.
• Offer a fair and open appeals process for nonprofits identified as problems or exclusions. Screening software can contain inaccuracies, and human beings can make mistakes.
  

Canadians Get Guidance On MD&A Disclosure

Canada's Chartered Accountants have issued new guidance to help companies improve Management's Discussion and Analysis (MD&A) disclosures about off-balance sheet arrangements and related exposures. The new "interpretive release" is designed to encourage management to see MD&A as an opportunity to disclose more about its off-balance sheet arrangements than what may be included in the notes to the financial statements.

"Enron and similar corporate situations in the United States demonstrated the need for greater disclosure in this area," says Chris Begy of the Canadian Institute of Chartered Accountants' (CICA) Canadian Performance Reporting (CPR) Board. "The MD&A is an excellent vehicle for helping investors understand the purpose and nature of a company's off-balance sheet arrangements and their impact on results, and enables investors to hold management accountable for the performance and transparency of those arrangements."

The release, the first in a series of interpretive releases, supplements the general guidance in an MD&A preparer's handbook issued by the CICA in November 2002.

"According to this new guidance, management should use the MD&A to explain to investors why it is using off-balance sheet arrangements, how they impact results, what risks are involved and how they are being managed," says Begy.

The guidance recommends that off-balance sheet arrangements should be disclosed if they have or are likely to have a material current or future effect on the entity's financial condition, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.

This release is available at the CICA Web site, www.cica.ca.

Mid-Sized Firms Report Sizable Pension Woes

Pension funding and accounting issues at General Motors Corp., Ford Motor Co. and other corporate giants have garnered a lot of ink in recent months following three years of sour investment results. But under-funded pensions are also a serious problem at mid-sized companies, according to a new survey by SEI Investments Inc.

The Oaks, Pa.-based firm recently surveyed senior finance executives at 151 companies in the U.S., the U.K., Canada and the Netherlands, just over half of them public. Sixty-two percent of the respondents confessed that their plans were under-funded - and many of them are adjusting their corporate strategies as a result, said Jim Morris, an SEI senior vice president who helped guide the study. Just over two-thirds said their plan woes had hurt their reported results, and a fourth said they had to adjust their business plans to compensate.

Many respondents "are diverting money from their business to fund their plan," Morris said. Worse yet, more than a quarter of the respondents said they had been forced to close their defined-benefit plan and convert it to a defined-contribution one - usually a 401(k) plan. Yet, such conversions must be fully funded, Morris noted.

The most common responses to under-funding were to adjust the investment strategy (54 percent) and increase employee contributions (44 percent). Just 6 percent admitted to having reduced benefits - although 17 percent indicated they would probably do so in the future.

Simple or Not, W-4s Can Prove Painful
One of the simplest tasks a new employee undertakes -- filling out his or her W-4 form -- can cause sticky problems for both employee and employer if not done correctly. Experts say companies need to pay close attention, especially when workers claim a plateful of exemptions.

Problems can start right with the basics - the employee's correct full name and Social Security number, said Scott Mezistrano, manager of government relations, American Payroll Association, speaking on a recent Tax Talk Today Internet broadcast. "It's important that both are correct, to save time for everyone, to avoid penalty and to ensure that the employee gets his or her retirement benefits."

Panelists on the program confirmed that it is not a violation of privacy laws for the employer to ask to see and even photocopy the employee's Social Security card, to make sure everything is accurate.

Payroll managers should allow employees to change withholding at any time. On the other hand, payroll managers are not required to accept W-4s they know to be invalid, because of statements made by the employee, illegal alterations or the use of the W-4T. If employers think a form is "questionable," they can send it to the IRS for examination, but they have to process payroll according to that W-4 until a decision is made.

"In the past 12 months, we've received 840,000 questionable W-4s from employers. But we still think we're missing some," said Stephen Barnes, operations manager for Collections at the IRS Compliance Center. "We need help from employers in finding people who are using the firm to circumvent the tax system." According to Barnes, a red flag goes up with the IRS when an employee claims more than 10 exemptions. Employers should place those forms in the "questionable" category, he said.

Penalties are possible for both parties. The employee can be fined $500 for submitting a fraudulent W-4. When the IRS responds to a questionable W-4 and informs the employer what "lock-in" withholding rate should be set, the company can incur heavy fines for not complying.