John M. Rintamaki
One American Road
Ford Motor Company
November 27, 2002
VIA EMAIL (firstname.lastname@example.org)
Mr. Jonathan G. Katz
Re: File No. S7-40-02
Dear Mr. Katz:
On behalf of Ford Motor Company, I am responding to your request for comments on the proposed rule regarding disclosures about a "financial expert" serving on a public company's audit committee.
Our basic concern with the proposed rule is that it will require a level of specific expertise and experience that could be at odds with the proper role and qualifications of public company directors. More specifically, the proposed rule's definition of "financial expert" is so restrictive that it will dramatically limit the pool of individuals who both meet that definition and posses the other qualities public companies look for in a director. In addition, by identifying a particular board member as having very detailed financial audit expertise and experience, the proposed rule will likely create special responsibilities, and could create corresponding special liabilities, for that director. We question whether this is appropriate and believe that it will, in any event, compound the difficulty in finding and attracting directors who qualify under the rule.
Although Section 407 of the Sarbanes-Oxley Act of 2002 (the "Act") and the proposed rule would require only disclosure of the existence or nonexistence of a financial expert on an issuer's audit committee, market and other forces will pressure issuers to have a financial expert on their audit committees. Thus, the concerns with the proposed rule will become a practical reality for many issuers if it is adopted as proposed. Obviously, any member of an audit committee must first be a director. Finding and attracting good directors - individuals with practical wisdom and mature judgment who are both objective and inquisitive and possess a broad range of experience - is always a difficult task. The task will be substantially more difficult if the individual also must possess the very detailed and specific skills and experiences of a "financial expert" as defined in the proposed rule, and be willing to take on a possibly disproportionate liability for corporate errors or misconduct, whether actual or asserted. Of course, further compounding these difficulties is that hundreds of public companies will be looking for such individuals at the same time.
Nevertheless, we recognize that the Commission is mandated by Congress to define "financial expert" and we offer the following to permit the Commission to fulfill its statutory mission while preserving the ability of issuers to find and attract qualified directors.
Restrictive Definition of Financial Expert
The restrictiveness of the proposed definition is two-fold. First, the proposed rule seems to go beyond the statutory mandate that the Commission "consider" the attributes enumerated in Section 407(b) of the Act in formulating a "financial expert" definition. The proposed rule requires that each attribute must be present to qualify as a financial expert. It would seem that the Commission could have formulated a rule to require that some combination, but not all, of the enumerated attributes be present. How many attributes should be present, how much weight should be given to each attribute or whether a minimum combination of attributes must be present, are matters that could be specified in the rule or left to the determination of the board of directors of the issuer, which, in the latter case, would have to be disclosed. In any case, while there are many competent and capable people who possess more than one of the attributes, there are far fewer who possess them all. We think it would be appropriate and consistent with the Commission's legislative mandate to formulate a definition that doesn't require each attribute be present to qualify an individual as a financial expert.
Second, two of the attributes seem particularly restrictive. Instructions 1.b. and 1.c. to proposed Item 309 of Regulation S-K provide that a "financial expert" must have:
b. Experience applying such generally accepted accounting principles in connection with the accounting for estimates, accruals, and reserves that are generally comparable to the estimates, accruals and reserves, if any, used in the registrant's financial statements;
c. Experience preparing or auditing financial statements that present accounting issues that are generally comparable to those raised by the registrant's financial statements;
Each of these attributes requires that the experience be with issuers that have "generally comparable" accounting issues or reserve requirements. It is unclear what "generally comparable" means for a company such as ours, an original equipment manufacturer ("OEM") in the global automotive industry. Because of the uniqueness of our industry and the limited number of companies in the industry, the phrase could be construed to mean that the experience must be with another automotive OEM. Although experience with manufacturers of other durable consumer goods (e.g., appliances, recreational vehicles, boats) might be considered to be "generally comparable," experience with other consumer companies (e.g., electronics, soft goods) might not. Even experience with suppliers to the automotive OEMs might not be considered "generally comparable" because such suppliers do not face some of the same accounting issues or reserve requirements that the OEMs face. For example, suppliers do not have accounting issues or reserve requirements with respect to marketing incentives or credit losses relating to a captive finance subsidiary. We urge the Commission to consider eliminating the "generally comparable" requirement or at least clarifying that it should be construed broadly.
In addition, the attribute described in Instruction 1.c. requires that the experience must be that of preparing or auditing financial statements of generally comparable issuers. This requirement essentially would limit the universe of available "financial experts" to persons who have been a public accountant or a senior accounting officer of a public company with financial statements that present generally comparable accounting issues. The Commission specifically requested comment on whether this requirement should be broadened to include persons who have had experience in "reviewing or analyzing" such financial statements. We think it should be so broadened.
The intent of the Act is that members of audit committees should not function as auditors or accounting experts, but rather should be capable, through education, experience or otherwise, of properly monitoring the performance of the independent auditors and the internal accountants of the issuer so as to provide some assurance that the issuer's financial reports are prepared in a manner that makes them accurate and complete. It is not necessary to have actual experience in "preparing or auditing" financial statements to effectively provide this monitoring function. CEOs and CFOs who may not have actual experience in preparing or auditing financial statements (and, as a result, would not qualify under the proposed "financial expert" definition) must monitor, and now must personally certify the effectiveness of, the functions relating to the preparation of their company's financial statements. In addition, persons steeped with experience in analyzing financial statements of public companies, such as accounting professors, government regulators, and research analysts, could be capable of effectively monitoring the preparation of an issuer's financial reports. Yet without actual experience in preparing or auditing financial statements, those persons would be excluded from the proposed definition of financial expert.
Increased Potential Liability of Persons Designated "Financial Expert"
We appreciate the Commission's statements in the proposing release that the mere designation of a financial expert should not impose a greater duty on that individual or a lesser duty on those directors not so designated. We also appreciate the Commission's intent that an audit committee member designated a financial expert is not to be considered an "expert" for purposes of Section 11 of the Securities Act of 1933, as amended. We are concerned, however, that if these sentiments do not have the force of law, audit committee members designated a financial expert may have greater exposure to potential personal liability under state corporate laws or otherwise than do the other directors. In addition, they may be obliged, in carrying out their responsibilities as described in the proposing release, to spend far more time with a company and its processes than any director might envision. Certainly, attending one- or two-day board meetings six to 12 times a year would not be adequate if the responsibility of the financial expert is broadly interpreted. As discussed above, any risk of greater liability by virtue of being designated a "financial expert" will make it very difficult to attract candidates who meet whatever definitional requirements ultimately are adopted.
The Commission should do whatever it can from a regulatory standpoint to limit the liability exposure under the federal securities laws of a director designated a financial expert to the levels applicable to all other directors not so designated. In addition, the Commission should support and encourage state legislatures to change their state corporate laws to clarify that mere designation of a director as a "financial expert" under the Act does not increase the fiduciary duties of that director under state law.
Should you have any questions or would like to discuss our comments, please feel free to contact me by telephone at 313-323-2260 or by email at email@example.com.