1a. Describe the history of Ford, its current business, operating sectors, and reportable segments. Ford Motor Company was incorporated in Delaware in 1919. They acquired the business of a Michigan company, also known as Ford Motor Company, which had been incorporated in 1903 to produce and sell automobiles designed and engineered by Henry Ford. They are one of the world’s largest producers of cars and trucks. They and their subsidiaries also engage in other businesses, including financing vehicles. They have two operating sectors: automotive and financial services.
Within these sectors, their business is divided into reportable segments based upon the organizational structure that they use to evaluate performance and make decisions on resource allocation, as well as availability and materiality of separate financial results consistent with that structure. Automotive segment is divided into “Ford North America”, “Ford South America”, “Ford Europe”, “Ford Asia Pacific Africa”, “Volvo”. Financial services consist of two reportable segments, “Ford Motor Credit Company” and “Other Financial Services”.
1b. Describe the factors affecting Ford’s profitability and factors affecting the automotive industry in general. (P4) The profitability of their business is affected by many factors, including: * Wholesale unit volumes; * Margin of profit on each vehicle sold; which in turn is affected by many factors, including; * Mix of vehicles and options sold; * Costs of components and raw materials necessary for production of vehicles; * Level of “incentives” and other marketing costs;
* Costs for customer warranty claims and additional service actions; and * Costs for safety, emissions and fuel economy technology and equipment; and * As with other manufacturers, a high proportion of relatively fixed structural costs, including labor costs, which mean that small changes in wholesale unit volumes can significantly affect overall profitability. The worldwide automotive industry, Ford included, is affected significantly by general economic conditions over which they have little control.
The decision whether to purchase a vehicle may be affected significantly by slowing economic growth, geo-political events, and other factors (including the cost of purchasing and operating cars and trucks and the availability and cost of credit and fuel). 1c. Compare the nature of Ford’s history, business sectors, and reportable segments to those of Toyota. Toyota Motor Corporation is a limited liability, joint-stock company incorporated under the Commercial Code of Japan and continues to exist under the Corporation Act.
Toyota commenced operations in 1933 as the automobile division of Toyota Industries Corporation (formerly, Toyoda Automatic Loom Works, Ltd. ). Toyota became a separate company on August 28, 1937. In 1982, the Toyota Motor Company and Toyota Motor Sales merged into one company, the Toyota Motor Corporation of today. As of March 31, 2010 Toyota operated through 522 consolidated subsidiaries and 226 affiliated companies, of which 56 companies were accounted for through the equity method. Differed from Toyota, Ford turned into the Corporation of today by acquirement.
Toyota has three business segments. Besides the two which Ford has, Toyota’s third segment is “all other operations”. Additionally, Toyota has a more detailed division of the business sectors. Therefore, they have more reportable segments. Toyota’s automotive operations include the design, manufacture, assembly and sale of passenger cars, minivans and commercial vehicles such as trucks and related parts and accessories. Toyota’s financial services business consists primarily of providing financing to dealers and their customers for the purchase or lease of Toyota vehicles.
Toyota’s financial services also provide retail leasing through the purchase of lease contracts originated by Toyota dealers. Related to Toyota’s automotive operations is its development of intelligent transport systems (“ITS”). Toyota’s all other operations business segment includes the design and manufacture of prefabricated housing, information technology related businesses including an e-commerce marketplace called GAZOO. com, and sales promotions for KDDI communication related products (predominantly the au brand). 2a. What is the purpose of the Form Def 14A?
A proxy statement is a statement required of a United States firm when soliciting shareholder votes. This statement is filed in advance of the annual meeting. The firm needs to file a proxy statement, otherwise known as a Form DEF 14A, with the U. S. Securities and Exchange Commission. This statement provides important information and is useful in assessing how management is paid and potential conflict-of-interest issues with auditors. 2b. What does “Def” stand for? “Def” stands for “definitive proxy statement”. 2c. What types of information does a proxy contain?
According to Ford Def 14A: “A proxy is another person that you legally designate to vote your stock, if you designate someone as your proxy in a written document, that document also is called a proxy or a proxy card. ” The proxy discloses important information about issues to be discussed at an annual meeting, lists the qualifications of management and board members, serves as a ballot for elections to the board of directors, lists the largest shareholders of a company’s stock and provides detailed information about executive compensation.
3a. Who are the board members that are standing for election at Ford in 2010? (P12) Stephen G. Butler, Kimberly A. Casiano, Anthony F. Earley, Jr. , Edsel B. Ford II, William Clay Ford, Jr. , Richard A. Gephardt, Irvine O. Hockaday, Jr. , Richard A. Manoogian, Ellen R. Marram, Alan Mulally, Homer A. Neal, Gerald L. Shaheen, and John L. Thornton. 3b. Which of them has been deemed “independent” of Ford? (P18) Stephen G. Butler, Kimberly A. Casiano, Anthony F. Earley, Jr.
, Richard A. Gephardt, Irvine O. Hockaday, Jr. , Richard A. Manoogian, Ellen R. Marram, Homer A. Neal, Gerald L. Shaheen, and John L. Thornton. 3c. How does Ford determine director independence? (P18) A majority of the directors must be independent directors under the NYSE Listed Company rules. The NYSE rules provide that no director can qualify as independent unless the Board affirmatively determines that the director has no material relationship with the listed company.
Ford adopts a lot of standards in determining whether or not the director has a material relationship with the Company and these standards are contained in Ford’s Corporate Governance Principles. 3d. Why does independence matter to shareholders? The board of directors represents the majority of stockholders to ensure the organization is run according to the organization’s charter and that there is proper accountability. If the directors are not independent, they can’t protect the shareholders’ interests.
For example, they may have inadequate oversight of management, be dominated by management. 3e. What characteristics is Ford seeking when considering individuals to serve on its board? (P5) Among the most important qualities directors should possess are the highest personal and professional ethical standards, integrity, and values. They should be committed to presenting the long-term interests all of the shareholders. Directors must also have practical wisdom and mature judgment.
Directors must be objective and inquisitive. Directors must be willing to devote sufficient time to carrying out their duties and responsibilities effectively, and should be committed to serve on the Board for an extended period of time. Directors should also be prepared to offer their resignation in the event of any significant change in their personal circumstances that could affect the discharge of the responsibilities as directors of the Company, including a change in their principal responsibilities.
3f. How are non-employee board members compensated? Could the nature of the compensation potentially affect the director’s independence? Explain. They will have the following compensation: $200,000 per annum, $5,000 Committee chair fee and $10,000 presiding director fee. The board of directors also considered that restoring compensation to competitive levels will permit the company attract new directors in an environment where it is increasingly difficult to attract qualified directors.
Moreover, the board of directors continues to believe that it is appropriate that a significant portion of non-employee director compensation be tied to shareholders’ interests and, therefore, has required that 60% of a director’s annual board membership fee be deferred in common stock units under the Deferred Compensation Plan for Non-Employee Directors. All other aspects of director compensation remain unchanged. In my opinion, the nature of the compensation potentially affects the director’s independence. As mentioned above, 60% of the director’s annual board membership fee be deferred in common stock.
Therefore, the directors will have the motive to raise the common stock price in order to get paid higher in their own interests. By doing so, the independence of the non-employee has been impaired apparently. 4a. Describe Ford’s audit committee and its duties The Audit Committee is composed of four directors, all of whom meet the independence standards contained in the NYSE Listed Company rules, SEC rules and Ford’s Corporate Governance Principles, and operates under a written charter adopted by the Board of Directors.
Ford management is responsible for the Company’s internal controls and the financial reporting process. The independent registered public accounting firm, PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”), is responsible for performing independent audits of the Company’s consolidated financial statements and internal control over financial reporting and issuing an opinion on the conformity of those audited financial statements with United States generally accepted accounting principles and on the effectiveness of the Company’s internal control over financial reporting.
The Audit Committee monitors the Company’s financial reporting process and reports to the Board of Directors on its findings. The Audit Committee also considered whether the provision of other non-audit services by PricewaterhouseCoopers to the Company is compatible with maintaining the independence of PricewaterhouseCoopers and concluded that the independence of PricewaterhouseCoopers is not compromised by the provision of such services. Annually, the Audit Committee pre-approves categories of services to be performed (rather than individual engagements) by PricewaterhouseCoopers.
As part of this approval, an amount is established for each category of services (Audit, Audit-Related, and Tax Services). In the event the pre-approved amounts prove to be insufficient, a request for incremental funding will be submitted to the Audit Committee for approval during the next regularly scheduled meeting. In addition, all new engagements greater than $250,000 will be presented in advance to the Audit Committee for approval. A regular report is prepared for each regular Audit Committee meeting outlining actual fees and expenses paid or committed against approved fees.
4b. Who is the designated financial expert on the audit committee? Does the designation of only one individual as a financial expert seem adequate for the complexity of Ford and the requirements of the Sarbanes-Oxley Act? Stephen G. Butler is the Chair of the Audit Committee and its designated financial expert. The Sarbanes-Oxley Act (SOX) (U. S. House of Representatives 2002) required the Securities and Exchange Commission (SEC) to adopt rules requiring each public company to disclose whether its audit committee includes at least one member who is a financial
expert. The SEC argues that having at least one financial expert on the audit committee should improve the quality of information available to investors. It’s not easy to say whether the designation of only one individual as a financial expert is certainly adequate or not for the complexity of Ford, but it meets the requirements of the Sarbanes-Oxley Act. Under an SEC proposal unveiled in October, individuals would need experience in preparing or auditing financial statements.
That could exclude chief executives who haven’t been involved directly with preparing financial statements, career academics and even someone who served on the Financial Accounting Standards Board, the U. S. accounting-standards setter. The experience also would need to be with a “comparable” public company, and it also required: understanding of generally accepted accounting principles and experience with internal accounting controls. Stephen G. Butler used to be Chairman and Chief Executive Officer of KPMG.
The Board said they believe Mr. Butler’s extensive experience in the accounting profession, both in the United States and internationally, as well as his executive experience as Chairman and CEO of KPMG for several years and provides Ford with financial expertise that has been instrumental in guiding the Company through its restructuring. But it not clearly mentioned if he is fulfilled exact financial experiences in the same industry or even for the comparable public companies.
In addition, meeting the definition isn’t the only concern the Board has; they should consider all matters about risks, responsibilities and independence even personality issues and make the decision. Since the Board believes one financial expert is good for the whole company, we think it’s probably fine as far as right now instead of to say if it’s adequate or not. 4c. Review the audit committee’s report and describe its primary contents. The Audit Committee Report describes the organization and responsibilities of Ford’s Audit Committee.
The independent registered public accounting firm, PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”), is responsible for performing independent audits of the Company. The Audit Committee monitors the Company’s financial reporting process and reports to the Board of Directors on its findings. The Audit Committee’s Reports mainly described the details of audit fees, audit-related fees, tax fees, all other fees, total fees, and auditor independence during year 2009. 5a. Who is the auditor for Ford? Who is the auditor for Toyota?
According to Ford’s audit committee report, The independent registered public accounting firm, PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”), is responsible for performing independent audits of the Company’s consolidated financial statements and internal control over financial reporting and issuing an opinion on the conformity of those audited financial statements with United States generally accepted accounting principles and on the effectiveness of the Company’s internal control over financial reporting.
As reference to Toyota’s 20-F, Toyota has seven corporate auditors, four of whom are outside corporate auditors. They are Masaki Nakatsugawa, Yoichi Kaya, Yoichi Morishita, Akishige Okada, Kunihiro Matsuo, Chiaki Yamaguchi, and Yoshikazu Amano. The Report of Independent Registered Public Accounting Firm for Toyota was issued by PricewaterhouseCoopers. 5b. What were the Ford 2009 audit fees as a percentage of (a) total revenue, and (b) total assets? The Ford 2009 audit fees were $42. 7 million; the revenue for 2009 was $118,308 million; the total asset of 2009 was $194,850 million.
So the Ford 2009 audit fees were 0. 036% of its 2009 revenues and 0. 022% of its 2009 total assets. 5c. What were the Toyota 2009 audit fees as a percentage of (a) total revenue, and (b) total assets? Compare these amounts to those for Ford and discuss possible reasons for and implications of the differences. The Toyota 2009 audit fees were 3,539 million Yens; the revenue for 2009 was ? 18,564,723 million; and the total asset of 2009 was ? 29,062,037million. So the Toyota 2009 audit fee was 0. 019% of its revenue and 0. 012% of its total assets.
Toyota’s 2009 audit fees as the percentages of its total revenue and total assets are lower than the percentages of Ford for 2009. As these two companies’ disclosures about the audit fees, the audit services to Ford include the Company’s Quarterly Report on Form 10-Q in addition to the Form 10-K, while Toyota doesn’t need to prepare Form 10-Q in addition to Form 20-F although its audit services include quarterly reviews over financial reporting of Toyota and its subsidiaries and affiliates. This is one possible reason for the lower audit fees percentage for Toyota compared to that’s for Ford.
As mentioned in the part C of the first question, Toyota has more reportable segments than Ford, however, it has lower audit fees percentage. The efficiency of the internal control in Toyota may be a reason. Because of the sound internal control, audit firm will spend less time in the auditing process, which may lead to a saving in audit fees. 5d. Audit fees were not always publicly disclosed. In fact, such disclosure only became mandatory since the year 2000 in the United States. Why is public disclosure of audit and other fees paid to the audit firm important?
The SEC and Congress have promulgated a variety of rules that are grounded in the notion that auditor independence is vital to the production of high-quality audits and that fees paid to auditors for both audit and non-audit services may impair such independence. In November 2000, the SEC issued a directive requiring public companies to disclose audit and audit-related fees paid to their outside auditors. The initial rule adopted by the SEC required that companies disclose fees paid for audits and quarterly reviews in the “audit fees” category.
The expanded rule requires companies to include any fees for services performed to fulfill the accountant’s responsibility under GAAS. Additionally, audit firms are now prohibited from providing such services as financial information system implementation and design, internal auditing, and a number of other services. The public disclosure of audit fees paid to the audit firm has improved the precision of audit pricing and this is a potentially more fundamental and lasting consequence of public disclosure and it helps the audit firms to maintain their independence during audit procedures.
7. Read Toyota’s corporate governance disclosures. What are the significant differences in corporate governances in corporate governance between Toyota and Ford? According to Toyota’s 20-F, Item 16G, Corporate Governance, there exists “Significant Differences in Corporate Governance Practices between Toyota and U. S. Companies Listed on the NYSE”. Since Ford is one of the companies listed on the NYSE, the significant differences in corporate governance practices between Toyota and Ford should comply with the statement of Item 16G.
Pursuant to home country practices exemptions granted by the NYSE, Toyota is permitted to follow certain corporate governance practices complying with Japanese laws, regulations and stock exchange rules in lieu of the NYSE’s listing standards. Toyota’s corporate governance practices and those followed by domestic companies under the NYSE Corporate Governance Rules, like Ford, have the following significant differences: 1) Directors. Toyota currently does not have any directors who will be deemed an “independent director” as required under the NYSE Corporate Governance Rules for U.
S. listed companies. Unlike the NYSE Corporate Governance Rules, the Corporation Act does not require Japanese companies with a board of corporate auditors such as Toyota to have any independent directors on its board of directors. While the NYSE Corporate Governance Rules require that the non-management directors of each listed company meet at regularly scheduled executive sessions without management, Toyota currently has no non-management director on its board of directors.
Unlike the NYSE Corporate Governance Rules, the Corporation Act does not require, and accordingly Toyota does not have, an internal corporate organ or committee comprised solely of independent directors. 2) Committees. Under the Corporation Act, Toyota has elected to structure its corporate governance system as a company with corporate auditors, who are under a statutory duty to monitor, review and report on the management of the affairs of Toyota. Toyota, as with other Japanese companies with a board of corporate auditors, but unlike U.
S. listed companies subject to the NYSE Corporate Governance Rules, does not have specified committees, including those that are responsible for director nomination, corporate governance and executive compensation. 3) Audit Committee. Toyota avails itself of paragraph (c)(3) of Rule 10A-3 of the Exchange Act, which provides a general exemption from the audit committee requirements to a foreign private issuer with a board of corporate auditors, subject to certain requirements which continue to be applicable under Rule 10A-3.
8a. Review the code of ethics for senior management and the board of directors. What are the main components of these codes? Provide a critique of the components and overall message contained in the codes. The main components in Code of Ethics for Members of the Board of Directors are: 1) Conflict of interest; 2) Corporate Opportunities; 3) Confidentiality; 4) Compliance with laws, rules and regulations; fair dealing; 5) Encouraging the reporting of any illegal or unethical behavior; and 6) Compliance Procedures.
The first part “Conflict of interest” is the most important and focused. The main components in Code of Ethics for Senior Finance Personnel are: 1) to ensure that external and internal financial data, and other information contained in their public reports, are complete, accurate, timely, understandable, and present the facts fairly; 2) to uphold honest and ethical conduct, especially in relation to the handling of actual and apparent conflicts of interest.
These conflicts may arise from any transaction between the Company (or other companies with which the Company does business) and an employee that is not part of a program generally available to all employees or a Human Resources-approved program; 3) to report any conflict of interest (actual or apparent), any violation or suspected violation of this code of ethics, or any unusual event, in accordance with FM 90-10-40; and 4) to ensure the Company is in full compliance with the law, all applicable rules and regulations, and Company policy, both in letter and in spirit. Critique:
These two codes of ethics of Ford meet SEC’s requires about “code of ethics”, which should is defined in new Item 406 of Regulation S-K and new Item 406 of Regulation S-B as a codification of standards that is reasonably designed to deter wrongdoing and to promote: honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
full, fair, accurate, timely and understandable disclosure in SEC reports and in other public communications; compliance with applicable governmental laws, rules and regulations; prompt internal reporting of violations of the code of ethics to appropriate person or persons identified in the code of ethics; and accountability for adherence to the code of ethics.
By issuing the code of ethics, Ford intends to focus the senior officers and each director on areas of ethical risk, provide guidance to directors to help them recognize and deal with ethical issues, provide mechanisms to report unethical conduct, and help foster a culture of honesty and accountability. The code of ethics for senior management and the board of directors provide an important support to Ford’s corporate governance and the audit.
The quality of a company’s governance is critical to the external auditor and investor because the company with strong corporate governance and high-quality ethical standards generally perform better and has higher-quality financial information than those that are weak on these dimensions. The risk of violating the code of ethics is still high. The directors and senior managers have motives to act in their own interests.
The issue of the code of ethics would not illuminate the risk by itself. 8b. What guidelines are provided as to how deviation from the company’s code of ethics will be handled? In the sixth part of code of ethics for Members of the Board of Directors, Compliance Procedures, the code states that: Any suspected violations of this Code should be reported promptly to the Chairman of the Board of Directors, the Chair of the Nominating and Governance Committee or the Presiding Director.
Violations will be investigated by the Board or by a person or persons designated by the Board and appropriate action will be taken in the event of any violations of the Code. Any waiver of this Code occurring subsequent to its effective date may be made only by the Board of Directors or the Nominating and Governance Committee and any such waiver will be promptly posted to the Company’s public website.
The code of ethics for senior personnel announces that: Any employee who violates this code of ethics is subject to disciplinary action, which may include termination of employment. The same is true of any employee who knows of but fails to report another employee’s violation of law or Company policy.