July 01, 2009
Website disclosure: still a bad idea
Posted by Usha Rodrigues

Let's talk about excessive corporate luxury spending.  After the hullabaloo about the $440,000 AIG retreat in October 2008, and news in January of John Thain's $1.2 million office renovations, and the Citigroup plane fiasco, the luxury expenditures section of ARRA was inevitable.  The Act requires that the boards of TARP recipients adopt "a companywide policy regarding excessive or luxury expenditures, as identified by the Secretary, which may include excessive expenditures on—

(1) entertainment or events; (2) office and facility renovations; (3) aviation or other transportation services; or (4) other activities or events that are not reasonable expenditures for staff development, reasonable performance incentives, or other similar measures conducted in the normal course of the business operations of the TARP recipient."

Buried in Treasury's June 15 interim final rule on TARP Standards for Compensation and Corporate Governance is a requirement that the boards of TARP recipients by September 19th "adopt an excessive or luxury expenditures policy, provide this policy to Treasury and its primary regulatory agency, and post the text of this policy on its Internet website, if the TARP recipient maintains a company website.  After adoption of the policy, the TARP recipient must maintain the policy during the remaining TARP period.

As the executive summary explains, Sarbanes-Oxley provided a similar method of disclosure of codes of ethics under Section 406.  Memo to Treasury: this doesn't work.  Letting companies make up their own rules and then disclose when they break them is a bad idea.  Clearly the incentive for the company is to make the policy as weak as possible.  

Note that these regulations, unlike Section 406, don't require disclosure of any waivers granted from the policy, just the policy itself and any amendments to it.  Presumably the requirement that the policy be "maintained" means that no waivers or exceptions are allowed.  But a company's luxury policy could provide that "officers may not spend more than $50,000 on a company car unless approved by the board."  The CEO then buys a $180,000 Lamborghini. As long as the board approved it, the expenditure would be in accordance with the policy.  (This particular trick is how some companies avoided "actually" violating Sarbanes 406, by the way).

Furthermore, website disclosure is flawed because it's ephemeral.  If you require companies to make filings with the SEC via EDGAR, then you create an easily searchable database for researchers.  In contrast, websites and the pages on those websites come and go, and the WayBack Machine has a 6-month lag. 

I know, I know, I'm overreacting.  Not all TARP recipients are SEC-reporting companies, and anyway, luxury expenditures are small regulatory potatoes. I just don't like website disclosure, and letting companies make up their own rules is faux regulation in my book.  Better not to regulate than to pretend to.

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