The Cosmetic Corporate Governance – Will Companies Learn Lessons From the Global Financial Crisis!

The impact of the crises started to diminish. Still, all key players, including top executives, regulators and investors, have much to learn from the global financial failures. The Organisation for Economic Co-operation and Development (OECD) Steering group has issued a report entitled Corporate Governance Lessons from the Financial Crisis. This Report concludes that among major contributors to the financial crisis are failures and weaknesses in corporate governance arrangements. When they were put to a test, corporate governance routines did not serve their purpose to safeguard against excessive risk taking in a number of financial services institutions.

Other key contributors to the global financial crises include failures in transparency, failures in lending standards; failures in prudential standards; failures in risk-management.

As to the remuneration of top executives, the real problem was not the amount they receive; it is how companies pay them. The bad bonus culture encourages a short-term thinking: hit as many deals as you can this year and get a larger bonus! That approach pushed executives to focus their attention to achieving short term objectives at the expense of sustainable growth objectives.

Most financial institutions link compensation to quarterly performance, encouraging short-term gambles. When the bets win, executives get the rewards, but when the bets sour, as they have in the latest financial crunch, the executives who took the risks do not have to return their fat-cat bonuses. The executives were, in most cases, no longer gambling with their own net worth. It was the shareholders who took the hit. Thus the executive greed acted as fuel thrown on the fires of and contributed to the blazing global financial crisis. The right approach if we are going to keep the financial system from being misused by top executives’ greed again is to maintain a partnership between the top executives and have their net worth tied to the organisations’ well-being. As a result, they would be cautious about taking big risks and discourage the malpractice of running after short terms gains. Also, we need to replace bonuses with better, longer-term compensation such as deferred cash pay and restricted stock.

The directors of the troubled institutions appear to have provided only the thin-surfaced supervision to control the greed of top executives. The boards of the collapsed firms carry the full responsibility. Each month they see the numbers. They are also responsible for compliance with regulations. And they set the remunerations packages for the top executives. However the troubled firms just ticked the boxes for good corporate governance in their annual reports. In other words, there organisations presented an obvious example of the cosmetic corporate governance to fool different stockholders including investors, rating agencies and regulators!

The current global financial crisis has shed light on how poor risk management could lead to catastrophic results. The risk management systems have failed in many cases due to corporate governance procedures rather than the inadequacy of computer models alone.

With the advent of new products such as sophisticated derivatives and certificate of deposits, they posed unknown risks. Risk management may not have been up to the task since many of the standard quantitative models and users of these models regularly misjudged the systematic nature of risks. To some extent this was due to product complexity and over-reliance on quantitative analysis. Sadly, many risk evaluations were wrong including those provided by rating agencies.

The directors of the collapsed financial institutions should have better understanding of the risk implication at the time of taking decisions related to sophisticated products such as derivatives. The reality is many board members had inadequate knowledge on the sophisticated new products and likely were embarrassed to show that they lack the adequate knowledge! Here where directors’ education and orientation fails as best corporate governance best practice. On going education is important to ensure that the directors are familiar with all aspects of the company’s affairs with a particular focus on risks. Each director must receive customized orientation programs in areas where he\she lack adequate knowledge in order to be able to effectively undertake the fiduciary oversight role.

Finally, the concept that in bad times companies would be more interested in supporting their profitability and accordingly will not have time for corporate governance is irrational. The integrity cannot be compromised because corporate governance is not seasonal – it is for all times and must be embedded in senior corporate executives and directors. Companies must not put corporate governance on the shelf in bad times. It is like a muscle, must be exercised or it will atrophy

Hany is a seasoned banker with 20 plus year’s general banking experience in the Middle East and considered as a leading subject matter expert with extensive experience in compliance, training and corporate governance best practices and on money laundering and terrorist financing controls. He provides advice and direction to the board and management with respect to corporate governance practices and formulates corporate policies.

Hany is a renowned public speaker and author of articles covering a variety of subjects. He is constantly rated as a ‘passionate,’ ‘dynamic,’ and ‘engaging’ speaker. He writes to local and regional news media is often quoted in the press.

Previously he has held several senior management positions in leading banks in Egypt and the gu

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Are Your Prepared for These Year End Income Tax Issues?

Over the course of the year, I’m sure you’ve noticed the ridiculous way our Congress has acted to update our tax laws. By including tax code provisions in a highway bill, a mass transit bill, and a trade package bill- plus within the Bipartisan Budget Act and the PATH (Protecting Americans from Tax Hikes) Acts. (Those last two were, indeed, logical places to regulate taxes.)

There is a chance that the lame duck Congressional session may act on some tax regulations, but given that these folks work about 1 day a week- and then complain how many lazy folks are out across the US not entering the workforce (that is the pot calling the kettle black)- I am not sanguine they will. So, unless they do- this will be the last year that mortgage insurance will be deductible and foreclosed home debt will not be a taxable situation, among a few other items that expire this calendar year.

But, I figured it would be helpful if I combined all these changes into a coherent mass (which our legislators clearly have not), so you can be prepared for the 2016 tax season. (Remember, you file your taxes for 2016 by April 2017. Oh- and if you are a business, the odds are the date your taxes are due, also changed. More on that below.)

Students and Teachers (PATH Act provisions)

Students got a permanent change for deductibility of tuition via the American Opportunity Tax Credit. This provides up to $ 2500 of tax credit for lower-income filers for the first four years of higher education (with a possibility of 40% of the unused credit being received as a refund- if no other taxes are owed). As long as the students are enrolled at least half time for one term of the year and not convicted of drug violations. The real change is that filers must include the EIN of the college or university involved- and demonstrate that they paid the tuition and fees they claim- not what the institutions may list on the 1098-T form.

On the other hand, the tuition deduction for other students will expire at the end of this year. Oh, and that generous (sic) deduction teachers get for buying supplies for their students that schools don’t supply is now permanent- all $ 250 of it. (Most teachers spend at least twice that!)

Pensions and IRA

Folks older than 70.5 years of age no longer have to rush to transfer their IRA (or portions thereof) to charity, because that provision is permanent. (PATH) Please note that the IRS demands that these transfers not be rollovers. One must employ a trustee to transfer the funds; and that trustee cannot hand you the funds to deliver to the charity. If they do, you lose the exemption. No surprises I am sure when I remind you that there must be a contemporaneous acknowledgement (that means a timely receipt) from the charity for that deductible donation or transfer.

Heirs and Estates

While still in the wrong venue, the Highway Bill did fix a big problem. Folks (or entities) that inherit assets from an estate are now required to use the basis filed in the 706 form for their own calculations. (Just so you know, the rules stipulate that estates can value items as per the date of death, or by alternate choice 9 months after that date. Too many “cheaters” would use a different basis for the property they inherited, thereby cheating the tax authorities with alternative valuations.)

To keep this rule in place, executors are now required to stipulate (i.e., file for 8971 and Schedule A of the 706) said value to all heirs and to the IRS. Which means anyone who inherits property- and thought they didn’t need to file Form 706 because the value of the estate was below the threshold for Estate Tax better reconsider. Otherwise, the heirs may be hit with a penalty for using the wrong basis for that inherited asset when they dispose of same.

Why? Because if a 706 form is never filed, the basis of all assets inherited is now defined as ZERO!!!!! It gets worse. Because if an asset were omitted from Form 706, the basis of that property is now determined to also be ZERO. (Unless the statute of limitations is still opened, when an Amended 706 can be filed to correct this omission.)

Another kicker. If the 706 form is filed LATE, the basis of all assets that should have been included are also set at ZERO. Some tax advisors feel this one little provision could be challenged in court. But, let’s just be prudent and file all those 706 Estate Tax returns in a timely fashion. (Filing a 706 when the estate value is below the filing threshold is called a Protective 706 Filing; we’ve been doing those for years. And, we strenuously examine the assets often to the consternation of the heirs- to ensure that all the non-worthless assets are included. You know, that 36 diamond tennis bracelet your grandma promised you would inherit when you turned 16.)

Oh, yeah. Another really big kicker for this little item. Under IRC 6501, the IRS has three years to catch cheaters who misstate certain items (like income taxes [except for continuing fraud], employment taxes, excise taxes, and for this provision- estate taxes and the results therefrom). No more. If an asset from an estate is misstated so that it can affect more than 25% of the gross income on a tax return will now have a SIX year statute of limitation.

Mileage Rates

Not surprisingly, the mileage rates for 2016 are lower than they were last year. Business mileage is now deducted as 54 cents a mile; driving for reasons that are medical or moving are only worth 19 cents each. When we drive to help a charity, we only get 14 cents a mile.

As is normally true, we have no clue what those rates will be for 2017. The IRS normally prepares those well into the calendar year.

Real Estate

The PATH ACT made permanent the ability of taxpayers to contribute real property to qualified conservation charities.

Health and Health Insurance

The Highway Bill (yup) came up with a bouquet of flowers for our veterans and folks currently serving in the military. No longer will they be unable to contribute or use HSA (Health Savings Accounts) should they receive VA or armed service benefits.

Along that same vein, the Highway Bill enabled all those who purchase- or are provided by their employers- high deductible insurances (about $ 1500 for a single person) to use HSAs, too.

Oh, and assuming Obamacare is not overturned, there is a permanent exemption from penalties for those receiving VA or TriCare Health Benefits. (For employers, the Highway Bill also exempts all such employees from being included in determining the 50 employee (full-time or equivalent) threshold provisions.)

Employers

There were more than a few changes for employers. More than the exemption for the VA and armed service personnel from inclusion in Obamacare provisions mentioned above.

Like ALL 1099s and W-2 are now due by 31 January. That’s a big change for many folks who barely get their stuff together to file 1099’s. It means that companies need to contact their tax professionals really early- to let them verify that all relevant contractors and consultants receive those 1099s on time. Because the penalties have also increased.

The Work Opportunity Credit has been extended through 2019. This applies to Veterans (which is why you keep hearing Comcast advertising its commitment to hire some 10,000 veterans over the next few years- they’re no dummies). Other targeted groups include what are termed those receiving Temporary Assistance for Needy Families (TANF), SNAP (what used to be termed Food Stamp) recipients, ex-felons, and some of those living in “empowerment zones”.

Families and Individuals

The PATH ACt made the enhanced child tax credit (up to $ 1000, income dependent) a permanent provision of the code. As well as the Earned Income Tax Credit provisions that were to expire.

Social Security taxes are not going up per se- but the income basis upon which one pays them is. For the last two years, there was a tax holiday for all wage income (or self-employed income) that exceeded $ 118,500. Next year (2017), the taxes will be collected for totals of up to $ 127,200.

If an employee is working overseas and has income

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Instant Messaging – How Can This Hurt Our Company, It’s A Personal Choice?

By now almost everyone has heard of Instant Messaging or IM. Depending on your generation, you either are an avid user or your children use it. What started out as a social networking tool for adolescents on the home computer is now gaining recognition in the office environment as an alternative communication tool. Do you know all of the capabilities and risks of this casual tool?

Instant Messaging use has merit –

it is quick, direct and conversational – like a phone conversation, yet you can still multi-process
it supports group talk – several people in one conversation or session accounts and
usage is typically free via the major providers – MSN, Yahoo, AOL
Since it is often not formally implemented by the company as a work tool, it is considered personal and lacks oversight. Many employers do not even have a written usage policy. IT views it as one less area to monitor and support. Here is where the problems can begin.

Two factors every employer needs to consider if you opt to ignore IM in your workplace –

With the recent Supreme Court clarification on e-discovery rules, responsibility and accountability for workplace behaviour lies with the employer. Any digital data stream that occurs on a company asset (i.e. workstation, laptop) is subject to review and retrieval upon request. The history span covered is usually three to seven years, depending on your industry’s compliance initiatives (i.e. SOX, HIPPA, NASD, etc.). An employer needs to show reasonable efforts to manage the entire corporate network. A company also needs capability to produce specified content reports and dialogues on requested employee(s) over a given time period. Typically the courts allow up to thirty days to comply. Failure to deliver has shown favor to the plaintiff in recent cases and in some rulings, punitive fines for non-delivery were rendered as well. That’s the legal consequence and can be a daunting enough reason to take measures for controlling IM.
IM technology has also become more versatile, and is continuing to evolve. You can still chat with your friends as originally designed. However, did you know you can also play interactive games, gamble, watch videos, draw on whiteboards, video chat or transfer files of all sizes. All of this activity is outside the network’s scrutiny – ‘under the radar’ – with no record of activity. This is becoming a preferred way of passing along new viruses, malware and worms.
Conclusion
Left unchecked, at minimum it can cost you productivity and bandwidth. It also can become a conduit for losing Intellectual Property, attracting viruses, sexual harassment, litigation or more. Your company could be in line for a PR nightmare and costly litigation.

A common reaction for a company is to ‘shut it down and do not allow any IM’. Are you sure that is effective? We had a large prospect that was absolutely positive no personal IM took place on their corporate network due to controls they put in place. They allowed us to monitor (look only) at their network environment for one week with our systems. We counted 1.6 million unsanctioned messages that crossed their network – unchecked or tracked.

Instant Messaging is not coming – it’s here. The laws now say we need to manage the technology the same as we do for email.

We work with companies to assure their data and messaging is in compliance and secure. Our solutions are state of the art, quick to implement, cost effective and provide the comfort to know your data is secure. A phone discussion is a great way to assess your environment and what would be the best action plan. Visit our website Enclave Data to learn more.

You have the responsibility to maintain your company’s digital environment, with the right tools you can now also have the control to assure compliance and protect your company’s assets.

Dan Schutte is the President of [http://enclavedata.com] in Centennial, Colorado. Enclave specializes in messaging security, content filtering, anti-spam software, email/IM archival and compliance. Visit our [http://www.enclavedata.com] to read actual Case Studies of how companies have successfully protected their data network and met complianc

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