Halliburton executive blasts Sarbanes-Oxley Act

June 9, 2003
Spurred by fear of incarceration, US executives are neglecting better alternatives in a scramble to comply with the Sarbanes-Oxley Act of 2002, the president and CEO of Halliburton Energy Services said.

Spurred by fear of incarceration, US executives are neglecting better alternatives in a scramble to comply with the Sarbanes-Oxley Act of 2002, the president and CEO of Halliburton Energy Services said.

The act requires principal executive and financial officers to certify corporate financial and other information in quarterly and annual reports to the Securities and Exchange Commission.

"Sarbanes-Oxley is the most ridiculous thing I've seen. We are spending more time doing certification processes that don't improve internal control or the quality of anything," John Gibson told some 400 oil industry and accounting participants at an energy conference sponsored by KPMG LLP in Houston. "It is a letter-signing activity that appears to lower levels of management to be blame-assignment as opposed to change in corporate commitment to integrity," he said. "If shareholders could see how much money is being spent to say 'I'm honest,' they would be appalled."

Gibson's denouncement of the federal law that grew out of the Enron Corp. and other corporate scandals in recent years drew applause from the audience.

"I'm certifying things now that I didn't know companies did," Gibson complained. Moreover, he said, "The trouble is that people of no integrity are going to sign certifications regardless. So the biggest role of the board of directors is the selection of leadership with integrity. There is no replacing integrity in corporate America, and the absence of it is the problem that we're having today."

Complete transparency needed

Gibson advocates complete transparency of corporate financial dealings as a better means of exposing dishonest dealings. "I think transparency is more important than all of these ineffective, cost-driving methodologies that could get worse over the next 5 years," he said. "I can't imagine a world in 10 years where all of my (corporate) financials aren't completely exposed, 100%. You won't determine which (financial) segments to report; you'll just report everything." That will be the biggest factor in changing the ethics and performance of boards and management over the next decade, he said.

"We're headed for total transparency on a real-time basis," agreed J. Terry Strange, retired vice-chairman of KPMG and now on the boards of directors of three firms.

However, Strange said the Sarbanes-Oxley Act "is going to slow down that evolution because companies are hunkering down and trying to deal with the old way of (financial) reporting, according to the (new) rules. It will slow down the evolution of full financial transparency and the total flow of information from the enterprise to the external user, but I think we're going to get there in this decade. The information technology is there, and (this evolution) won't wait."

Holly J. Gregory, a partner in Weil, Gotshal & Manges LLP, specializing in corporate governance, said, "I don't think we will see any more serious regulation for the next 2 years" as the industry struggles to adapt to Sarbanes-Oxley. "I think we're going to get a breather to see what works. But that could change in a moment if we have another scandal or two," she said.

Strange is troubled by Section 404 of the Sarbanes-Oxley Act that dictates management assessment of internal controls and auditing standards. "Companies are scrambling to create all this massive documentation of internal controls," he said. "I would argue that companies ought to be spending more time looking at their systems of controls and making the improvements that are needed."

Agenda concerns

"The key issue facing boards today is: How do they know they are getting the right issues on the agenda, and how do they know they are getting the right information," said Gregory. "Until we see the board develop a leadership structure that ensures the independent directors are having some influence on these processes, I think we have to have some real concerns."

Gregory said executive sessions with board members and corporate management "are a great way to start getting independent directors involved in asking questions about whether or not they are focusing on the right issues and if they are getting the right information or asking for the right information. But it's important that it not be wholly management-driven. Clearly, management has the best ideas about what should come to the board, because they know what the issues are. But it's dangerous for boards to be wholly dependent on CEOs to bring issues up to the board."

To Gibson, the "whole concept of an agenda" is "bothersome" because "it is less open" and can lead to "manipulation of the issues that boards are involved in."

Rather than calling on the experience and knowledge of a board's outside directors to improve the company's success, he said, too often management sees the board "as a regulation body, as a process approval body" and no longer as "a sounding board for senior (management) leaders" to review plans and improve performance.

Ethics, trust

On business ethics, Gibson said, "We so often want to talk about the difference between right and wrong, but no board is called on to make a decision between right and wrong. They are always called upon to make decisions associated with right and right. Boards make mistakes; companies make mistakes in choosing between two right decisions."

In the majority of those cases, he said, "you can disagree with their judgment, but you can't disagree with their integrity."

There is no short course for the energy industry to win public trust, said Gibson. "It's going to be a demonstrated long-term performance," he said. "The biggest driver is going to be transparency."

Still, he said, ridding industry of "a large number of no-integrity leaders" is an important step. Although most people in business are honest, he said, "there are bad people in companies of all sizes; this problem exists down to companies of sole proprietorship. There are bad people in this world, and you shouldn't give them any authority."

Selection of good corporate leaders is "the No. 1 responsibility" of boards, he said. Subordinate employees "will do things that are wrong if leaders exemplify wrong behavior.

"If you are spending too much on expense accounts and using the corporate plane for your personal use, if you are demonstrating the wrong kinds of behavior, by God, you're setting an example for your whole organization, and you're going to end up with an organization much like those that we've seen go down in the last year or 2," said Gibson.