Despite the collapse of confidence that culminated in President George W. Bushs July 30 signature on the hastily assembled corporate governance and anti-fraud law, at least two design firm CEOs reassured employees that the corporate ills that generated the landmark legislation dont happen in construction. "We put time on a time sheet and bill for it," said one CEO during a teleconference message to his staff. "There isnt even a potential to do the things that Enron and WorldCom did."
Executives and experts downplayed the impact on an industry as conservative and steady as construction. "Were not as vulnerable," says Paul Zofnass, president of consultant EFCG Inc., New York City. Public companies are directly affected by the new law, but privately held ones are not, although many CEOs say they are already following the law or plan to.While the governance law covers everything from federal oversight of the accounting profession to whistleblower protections, new provisions touch corporate executives more closely than ever (see chart below). But many are waiting to see the fine printthe details of rules to be issued in the next few months by the federal Securities and Exchange Commission. "Its hard to to know if their impact is really being given thought, especially as they impact honest executives who are trying to do a good job of disclosure," says Roseyn Bar, vice president and general counsel with Martin Marietta Materials Inc., Raleigh, N.C.
The still-to-be-drafted SEC rules will require companies that issue securities to reveal more information more quickly about their finances and practices. In future annual and quarterly reports to SEC, companies will have to "disclose all material off-balance sheet transactions, arrangements and obligations" that affect them.
Jacobs Engineering Group Inc., Pasadena, Calif., didnt waste time in complying. The firm announced Aug. 2 that CEO Noel Watson and CFO John Prosser "filed sworn statements" with SEC affirming its most recent 10Q, 10K and other filings. Watson called this a "public demonstration of personal responsibility." Prosser adds that "if you wait until the last minute, it will create questions in everyones mind."
One key area of interest is a possible new rule requiring companies to expand disclosure of critical estimates, but its full effect wont be known until SEC defines the term, says one contractors CFO. The agency may also decide to seek a larger regulatory role in financial reports on joint ventures, especially those involving parent company guarantees, letters-of-credit and surety, says Scott L. Beiser, managing director of investment banker Houlihan Lokey Howard & Zukin, Los Angeles.
The new law probably will prod more companies to appoint more independent directors, especially companies that are dominated by a single stockholder or a family, notes Beiser. Gerald Salontai, CEO of San Diego-based Kleinfelder, says his privately-owned companys seven-member board has only one non-employee, independent director. Partly as a result of a recent peer review, Kleinfelder will soon name another outside director, he says.
While fewer companies dominated by a single large shareholder will be able to pass off the shareholders cronies as "independent," recruiting new outside directors may not be as easy as before, notes Frank A. DeMartino, president and chief operating officer of Pasadena-based Parsons Corp. Directors will be wary of legal liability. One law firm is already offering to perform "passive liability audits" for directors and executives in light of the new law.
Outside board members are vital and add to a boards credibility, say executives who serve in that capacity. "Inside boards tend to know too much and are biased by the decision-making process," says Zoltan Stacho, former president of Holmes and Narver who now serves on the boards of major design firms.
Others believe that a new era of corporate wariness could entwine designers. Paul Haglund, director of finance for Greeley and Hansen, a Chicago-based engineering firm, says capital investment decisions by public companies may require them to keep careful records of advice from design firms and contractors. Should projects prove costly and hurt a companys financial performance, the build/no-build decision and how it was made could become a focus.
The new law will probably limit further the number of construction companies that sell stock in public markets because the extra costs and risks will tilt the decision against public offerings. Los Angeles-based AECOM has a pending initial public offering but last month announced to employees a postponement until at least September because of market conditions, sources say. The new law may prompt managers and directors at other public companies to take them private again, if the stock market reception of recent years hasnt already done so, say executives and analysts.
The directors of STV Engineers, New York City, took the company private last year after years of harsh treatment of their stock by financial markets and investors who showed little interest or respect for construction, says CEO Dominick M. Servedio. As a private company, STV is operating "basically the same" as it did when it was public. "We were schooled under the public side. We will maintain those controls."
LOAN RESTRICTIONS. One aspect of the law that may discourage stock offerings is the prohibition against nonhousing-related loans to officers that arent made available to other employees. Such loans are common and the restrictions may irritate a small publicly traded company with a single individual or family dominating shareholders. "It will definitely force people to think a lot harder and longer about going public," says Jeff Egertson, director of construction industry services for accountant Deloitte & Touche LLP, New York City.
The CFO at one company that went public during the 1990s says those years will be looked on as the good old days. "It wont be as easy as it was, especially with the added burden of reporting," says Michael R. Hill, CFO of steel erector Schuff International Inc., Phoenix.
The industrys top publicly traded companies, however, have had to respond to investors increased demands for information during recent years. Fluor Corp., Aliso Viejo, Calif., already provided an enhanced picture of its activities in its latest annual report, including details on surety capacity, letter of credit use and restrictions on loan and bond covenants.
While contractors are barred by confidentiality agreements with clients from providing project details, "Fluor has gone farther than anyone else" as far as disclosing useful information, says John McGinty, engineering and construction analyst with Credit Suisse First Boston. Fluor provides backlog, margins on the backlog, profitability, and other data on five separate market segments, he says.
Disclosure has now risen in priority among corporate executives. Recently, Fluor announced a pretax charge of $26 million in the second quarter, $14 million of that because of an unfavorable arbitration ruling on a mining project in Chile, which is now being appealed. The announcement is an example of how an arbitration from a long-completed project could complicate financial reporting long after the construction is done.
"Our culture tends for us to err on the conservative side," Fluor Chairman and CEO Alan Boeckmann told analysts and investors in a recent conference call. "The second-quarter results show a reduction in expected claims recovery. Its our approach given the obvious industry concern on corporate governance and disclosure....It may be overreaching, but it reflects current results."
A few contractors say they are worried about an SEC proposal to cut a month from the time companies now are allowed to submit annual and quarterly reports. Because large contractors gather information from so many different projects and people, hurrying the estimates may introduce errors, they claim.
Jeffrey M. Levy, president of Emcor Group, Norwalk, Conn., says speedier reporting wouldnt trouble his firm because it already updates its financial reporting monthly. Says Levy: "We dont make believe we earned money we didnt earn."