The law is like a tree, it is always growing and in need of pruning over time. The Sarbanes Oxley act was put together with great intentions towards risk management and to amend the corporate governance structures of U.S. listed firms. Sarbanes Oxley has not had a major impact on the corporate governance structure of Nexen Incorporated.
What initially interested me the most about this cross listed firm was its fairly high rating in the 2011 Globe and Mail board games corporate governance rankings. I was very curious as to how the Calgary based company Nexen Inc. is considered to have the best corporate governance ranking amongst the energy industry in Canada, according to the globe and mail board games. Nexen's history can be traced back to 1920 when an oil exploration company named Occidental Petroleum was founded out of Los Angeles. At the time they were a struggling company until a man named Armand Hammer invested approximately $100,000 into the company which at the time only had a net worth of $34,000 (Hammer). A short time later the company struck oil and Armand became the CEO in 1957 after buying shares and electing himself into the position. Armand expanded the company expeditiously and in 1963 he had acquired the Jefferson Lake Petrochemicals of Canada Ltd operation. After acquiring this crude oil, natural gas, and sulphur operation, in 1971 the extension had created Canadian Occidental Petroleum Ltd. otherwise now known as Nexen Inc.
The two joint companies, Occidental Petroleum & Canadian Occidental Petroleum, gained independence from each other in 2000 over the desire to be the majority property owner of the oil operation in Yemen. The Yemen operation was Canadian Occidental Petroleum's biggest asset at the time, producing 210,000 barrels of oil per day. Canadian Occidental owned 52% interest in the property, whereas Occidental owned 38% (History of Nexen Inc.). Occidental offered to buy them out but were rejected and could not gain enough interest from other firms to help them acquire full ownership of this asset due to conflicting interests of the same desire from other firms. This disagreement amongst the two companies ended up creating a shareholder vote where the Canadian shareholders approved a rights plan to create a 'poison-pill'. In February 2000 Occidental Petroleum sold its interest back to Canadian Occidental Petroleum, which soon after assumed the name of Nexen Inc., and the Ontario Teacher's Pension Fund for 1.2 billion (History of Nexen Inc.). Nexen Inc. is currently the fourth largest oil exploration and production company in Canada. Going into 2013 they are faced with the potential merger of a Chinese state owned enterprise known as CNOOC Ltd. This specific challenge creates a whole new concept of possibilities concerning the corporate governance structure currently implemented at Nexen Inc. and whether or not Sarbanes Oxley (SoX) will even be a relevant factor for the future of Nexen Inc.
Nexen Inc. is in an industry where every bit of information released to the public about upcoming endeavors will have a major financial impact on stock & share prices. Statements referring to estimates of oil found in new ventures can easily be falsified or misleading to allow internal shareholders to prosper, especially pre-SoX. Good corporate governance is a key factor in surviving amongst the oil and energy industry, particularly when it comes to the prospect of new external investors. As of 2011, Nexen Inc. is rated as third in the Globe and Mail corporate governance board games rankings (Board Games, 2011). Nexen Inc. has designed their corporate governance structure around transparency first and foremost. Considering the industry they are in, making allegations of potential operations only gets you so far, the key criteria people are looking for upon making these statements is the proof of it, something you can't hide within accounting statements.
In order for Nexen Inc. to pursue new oil & energy ventures they rely on external financing to do this. Nexen Inc. publicly discloses a wide variety of information above and beyond national requirements. They currently follow the National Policy 58-201 - Corporate Governance Guidelines set out by the nation. These guidelines are not mandatory, but it is mandatory for Nexen to disclose whether or not they follow these procedures, and which parts they do not and what courses of action they take in lieu of them. Nexen Inc.'s determination to achieve noteworthy good governance can also be attributed to the implementation of their Corporate Governance and Nominating Committee. This committee assists the board with evaluating board members, recommending new ones as well as the development and implementation of new corporate governance policies. Nexen Inc. publicly discloses all of their governance practises & policies in full disclosure annually. They do this through their website governance link as well as through their annual report and proxy circular in which they are fully compliant to all relevant Canadian and U.S. laws or rules. Nexen Inc. has kept track of a revision history pertaining to their policies that is also publicly available located in appendix a. There are revisions dating back to pre-SoX made available to the public for compliance considerations and to provide a more secure foundation for present and future investors.
The Sarbanes Oxley Act was enacted July 29, 2002 post Enron, WorldCom, & Tyco International scandals (SoX 101, 2005). The purpose of this act is to deter internal abuse of accounting procedures and to provide better security for external investors. The Senate clearly portrays this by referring to SoX as the Public Company Accounting Reform and Investor Protection Act. SoX was the answer to internal accounting abuse where people like directors prospered from the fall of a major company costing people millions but gaining off of this loss. At the time of its implementation it created stricter rules and procedures so much so that it over enforced regulation amongst companies in order to comply with it. Section 404 of SoX is the most costly regulation to comply with. Section 404 requires that the annual report include an Internal Control Report that the company will be found liable for. It also states that external auditors must verify the accuracy of the statements made (SoX 101, 2005). The costs of these external auditors for all financial reports made can be costly. In 2011, according to appendix b, Nexen Inc. spent a total of just over $3.38 million on auditing, compared to just under $5 million spent on auditing in 2010. Compliance costs for the SoX act are becoming less expensive over time but they are still in a gross excess in order to remain diligent. Section 304 of SoX is another regulation that ensures that any statements made on behalf of Nexen Inc. concerning performance results that are falsified will be reimbursed by the CEO and CFO as required by law (Schneider, 2008).
Although SoX was implemented due to a public outcry for immediate action, its current implementation is over regulated and too costly for most companies to comply with, especially smaller ones. Many other countries have similar regulations in place with far less costs associated towards auditing fees. Even though SoX's main focus is to keep companies transparent and in compliance with proper accounting standards, Nexen Inc.'s industry does not invite the same amount of abuse that SoX was developed for. Nexen Inc. must be transparent in order to attract investors and there are similar regulations with far less costs associated in Canada for accounting procedures such as the Generally Accepted Accounting Principles (GAAP), and the International Financial Reporting Standards (IFRS). Regardless of SoX, it has always been in Nexen's best interests to abide with good corporate governance practises as they need it for external financing as well as a good reputation in the public view as they are dealing with the extraction of natural resources.
One of the more major issues concerning the current and future affairs for Nexen Inc. is the potential merger by CNOOC Ltd. They have offered $15.1 billion to take over Nexen Inc. (Cattaneo, 2012). One of the more challenging issues concerning this take over besides the overwhelming amount of money shareholders will receive from this is that CNOOC Ltd. is a Chinese state owned enterprise. China has been known not to deal with foreign investors in their own country and this is a prime example of the Chinese market expanding but not sharing as well. Although this overwhelming offer may benefit Nexen Inc.'s shareholders and stakeholders now, the long term effect is that we as a nation will have potentially given up a lot for it. We will have given up our fourth largest Oil and Gas Company, the property interests associated with company operations as well as the national resources we owned within those property operations to a foreign government essentially. Giving up national natural resources is a topic that the public has a big problem with as viewed on the Financial Post comments in the article 'Outcome of $15.1-billion Nexen-CNOOC merger is murky', see appendix c. If this deal does go through, it opens up possible new need for foreign investment policies. It could change the corporate governance structure of Nexen Inc. since there is not as strong of an urge for external finance now that they have the possibility of receiving Chinese government subsidiaries. It will most likely have a negative impact on the economy since natural resource cash flow is leaving the country, and SoX may become obsolete if CNOOC Ltd. chooses to withdraw from the U.S. stock market. The U.S. stock market is currently the second largest as Hong Kong has recently emerged as the top prospect, China may be better off trying to create international relations with Hong Kong instead of trying to abide by SoX and the costs associated with it.
In conclusion, although SoX has played a major role in regulating accounting policies amongst public firms in the United States, SoX has played no major role on impacting the corporate governance structure of Nexen Inc. Due to the industry Nexen Inc. is in, transparency was already a vital factor for them in seeking external financing from foreign and public investors. The corporate governance structure implemented by Nexen Inc. pre-SoX was already sufficient enough for investment security and Canada had already had public accounting policies of disclosure in place. The implementation of SoX for Nexen Inc. increased auditing costs to astounding figures for the company and made the CEO and CFO more liable for falsely accused statements if they occur. The future of this company is very uncertain as they wait for the approval from the government pertaining to this merger. The majority believe it will go through, at that point the possibilities of what will happen afterwards to the corporate governance structure of the company is uncertain, along with many other variables pertaining to this takeover. If CNOOC Ltd. is successful in this endeavor, relations with the U.S. may no longer exist. SoX may be too much of an unnecessary cost to comply with as it has been the case for many other companies once listed in the U.S. stock exchange. There are many other emerging stock markets with potentially more profitable listings available internationally, such as Hong Kong and the UK, SoX is deterring companies from cross listing in the U.S. and giving other stock markets a chance to thrive. In order for SoX to no longer be a threat to cross listed firms and be of future relevance, it is need of amendment, just as a dead branch is in need of cropping to establish new growth.
