Churning is for Butter, not for Business Managers

An essential element in managing an organization is continuity: the idea that the same people will function in their jobs for an extended period of time so that their corporate responsibilities are conducted efficiently and effectively. Naturally, any business experiences some turnover, whether from new opportunities, departures or other events. However, this process should proceed with the minimum of disruption to the conduct of the company’s affairs. The regulatory environment has become so difficult for many managers that even 6-figure salaries are insufficient compensation to motivate them to stay in their current positions.

A recent survey by Liberum Research reports that the trend of recent years in finance continues to show high levels of management change. For example, more than 2,300 chief financial officer (CFO) positions turned over in 2006, with fastest rates of “churn” in businesses with $1 billion or more in revenues. The average time in position was 30 months, about one-half of the 5 year tenure in 2002. A major cause reported by Liberum is stress from such sources as regulation and global competition.

Stress has always been a component of any job, but current pressures far exceed past demands for profits and growth. The Sarbanes-Oxley Act of 2002 (Sarbox), passed in response to such fraud cases as Enron, WorldCom and Tyco International, establishes a large body of mandatory actions by public companies. Sarbox broke new ground by mandating that U.S. publicly-traded corporations regularly assess their processes to ensure transparency and protect shareholder value. The law was enacted to restore investor confidence by requiring actions concerning financial reporting, conflicts of interest, corporate ethics and accounting oversight. Heavy fines for senior managers and their corporations, and even imprisonment, are available remedies under Sarbox; the idea was to construct a strong enough incentive for business executives to be good citizens.

Sarbox makes new law in several important areas, some of which may create havoc for corporate managers, accountants and regulators. As one example, chief executive officers are now required to certify that a periodic financial report “fairly represents, in all material respects, the financial condition and results of operation of the issuer.” A knowingly false certification can result in a fine of up to $5 million and imprisonment of up to 20 years. Although Sarbox does not contain any clarification for this process, many public companies are requiring finance managers to “sub-certify” the sections of the financial reports for which they are responsible. One survey noted the following areas as the most common areas where financial professionals were being asked to sub-certify, leaving them with unresolved issues of liability:

· disclosures in management’s discussion and analysis or in footnotes

· specific account balances in banks

· compliance with company policies and procedures

· adequacy of internal controls in their department or business function

· compliance with company code of conduct

The answer to the fraudulent actions of a few very bad actors is not to pass expensive and overly punitive legislation. This solution contributes to the enormous cost of operating business and stresses managers to the point of their leaving their positions after only a short term of service. Sarbox should be repealed and other existing law used when fraud is detected. Incidentally, this was how the chief executives of Enron – Ken Lay and Jeffrey Skilling – were successfully prosecuted.


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