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Board members should be combing through their books for insider trades — and re-examining their stock and option awards programs — after the Columbus Dispatch’s reports on the Big Lots case and the WSJ report on that case and four other companies where executives are under investigation for insider trading.  The WSJ report that at least 4,185 executives may have engaged in suspicious trades since 2004 should be giving board members and shareholders pause.

The use and spread of insider information damages our capital markets – and hurts the reputations of firms that do not comply with rules to keep our markets fair. Morgan Stanley paid $5 million for the part they played in providing information to favored analysts in the Facebook IPO. Netflix has also come under scrutiny for potential leaking of material information to a select group.

Regulation FD (fair disclosure) has been important to our capital markets and was designed to stop insider trading in its tracks so that there is a (more) level playing field for all investors. It’s important that companies comply.

Please read the article here.  (I welcome your comments at ebloxham@thevaluealliance.com)

http://management.fortune.cnn.com/2012/12/17/why-netflix-got-into-hot-water/

The Value Alliance and Corporate Governance Alliance http://www.thevaluealliance.com/
Copyright 2012 The Value Alliance Company. All rights reserved.

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Although most board members don’t suffer much personally if sued, no one wants the kind of publicity HP’s board is experiencing related to its Autonomy purchase. But now taxpayers are on the hook to sort this all out.

Here’s my recent article on red flags at HP. It provides a short roadmap for boards and investors that don’t want to burn through cash. And provides the inside scoop, for those who don’t know it, into phraseology that means more than one might suspect.

http://management.fortune.cnn.com/2012/11/30/hp-meg-whitman-autonomy-2/

Clearly, long term holders would benefit from some transparency into the company’s process as part of signing off on deals.

In due diligence, smart boards don’t rely just on multiple auditors or investment bankers. They use internal resources or hire outside parties to look behind the numbers and determine what’s really going on.

One CFO who recently went through an acquisition expressed it as “connecting the numbers to the business,” explaining their use of outsiders to help them get an understanding of what was really happening with the numbers, in order to arrive at a fair valuation. In contrast, the investment banks they hired just took the numbers “as is”. As a result, their valuation analyses didn’t provide much value. (Not to mention the bias related to the lack of independence/inherent conflicts of interest.) And although they hired auditors as well, they only hired them to do what they do best. They did not use them to analyse what was going on behind the surface to arrive at a solid valuation.

Certainly outside reports from analysts, short sellers and the press — and information on the web should be de rigueur reading material for the board of any company seeking to acquire another firm.

The Value Alliance and Corporate Governance Alliance http://www.thevaluealliance.com/
Copyright 2012 The Value Alliance Company. All rights reserved.

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_____________________________________________________________________ 

On the debt ceiling crisis: Don’t we have enough crises to deal with without manufacturing one?

Reading (July 27):
NYT (Steven Davidoff): Proxy Access in Limbo after Court Rules Against It        “How do you quantify the costs and benefits of democracy?”   http://dealbook.nytimes.com/2011/07/27/proxy-access-in-limbo-after-court-rules-against-it/?nl=business&emc=dlbkpma21

WSJ (David Wessel): What’s Wrong With America’s Job Engine?          “Over the past 10 years..The labor force has grown by 10.1 million.But the number of private-sector jobs has fallen by nearly two million.”
http://online.wsj.com/article/SB10001424053111904772304576468820582615858.html?mod=ITP_marketplace_0

WSJ (Willa Plank): CEOs in Their Own Words: Don’t Plan on Much Hiring          ”Outside of rail and technology companies, almost none of them discussed long-term plans to significantly expand their work force.” http://online.wsj.com/article/SB10001424053111904772304576470484142293112.html

Writing (July Fortune):
U.S. jobs crisis: It’s time for corporate leaders to step up          “So the real question is what, without government assistance, can the overseers of U.S. corporations do to help solve the national demand for jobs?” http://management.fortune.cnn.com/2011/07/27/us-jobs-crisis-corporate-leadership/?section=magazines_fortune

Apple’s no-win CEO succession efforts          “Taking the work of the board offline means there is a working problem with the board online — signaling that a problem with process, power, or personalities at the board level needs to be resolved. It behooves any board in such circumstances to try to address the real source of the difficulty, rather than use alternate means to accomplish a goal.”
http://management.fortune.cnn.com/2011/07/25/apple%e2%80%99s-no-win-ceo-succession-efforts/

News Corp directors: Half way out the door?      ”Only time will tell whether support of the stock and support of the management go hand in hand. The company used to have “equity ownership requirements” for directors, according to the company’s 2008 proxy. Those requirements were not included in the company’s 2009 or 2010 proxy reports.”
http://management.fortune.cnn.com/2011/07/19/news-corp-directors-half-way-out-the-door/

What’s in store for Rupert Murdoch?         John M.”Nash thinks that CEOs should not sit on any board, including their own company’s board. The CEO can attend board meetings, but ‘shouldn’t have a vote,’ Nash says.”
http://management.fortune.cnn.com/2011/07/19/what%e2%80%99s-in-store-for-rupert-murdoch/

Who can right the ship at News Corp?         The right tone at the top, good governance. None of those words sound so sweet – or powerful – as in the midst of crisis. In the helter and skelter of the every day, they can be brushed off as meaningless. In the midst of an engulfing crisis, though, it is no longer possible to simply repair them, to put lipstick on the pig  – they must be made again whole cloth.     http://management.fortune.cnn.com/2011/07/18/who-can-right-the-ship-at-news-corp/

How to get paid like a U.S. CEO          “The research shows that U.S. CEO pay is higher primarily because U.S. CEOs are awarded high levels of equity compensation, which includes pay in the form of company stock and stock options…When companies have U.S. institutional owners, boards are more likely to offer high levels of equity compensation (and, in turn, total compensation), the research shows.”
http://management.fortune.cnn.com/2011/07/05/how-to-get-paid-like-a-u-s-ceo/

Will Bank of America execs get to keep their bonuses?             “Implement bonus deferrals — so executives have to wait to be paid the full amount of their bonuses. Bonus deferrals help ensure that pay is made on an accurate performance assessment and that there aren’t any billion dollar ‘oops’ moments lurking in the background.” http://management.fortune.cnn.com/2011/07/01/will-bank-of-america-execs-get-to-keep-their-bonuses/

The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com
 
Eleanor Bloxham www.eleanorbloxham.com
 
Copyright 2010 The Value Alliance Company. All rights reserved.

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Nominating and governance processes and independent board oversight: Do they really matter? If so, to whom?
 

In a Digest publication late last year, I wrote about an ISS policy survey that found that investors, in all markets, ranked board independence as the most important governance topic. http://www.thevaluealliance.com/PDF/CGADigest12012010.pdf http://www.issgovernance.com/files/ISS2010-2011_PolicySurveyResults.pdf
 

Of course, there are a number of ways independence is important. One is the independence of board members (including independent mindedness). Another is effective independent board oversight. Paralleling these are independent processes to nominate directors.
 

In a January 28 article for Fortune.com, I wrote that “HP’s 2010 proxy explains that the nominating and governance committee, chaired by Lucille Salhany, is in charge of identifying board openings and candidates. The proxy also explains that the committee hires a professional search firm to help it perform these tasks.” “When HP puts out its next proxy filing, shareholders ought to closely examine how the company describes its [director] succession process and the chair’s role,” I advised. With 20-20 hindsight, this advice was not as broad as it should have been: I should have recommended clearly examining the press reports leading up to the annual meeting as well. http://management.fortune.cnn.com/2011/01/28/hp%E2%80%99s-board-shakeup-apothekers-master-plan/ 
 

More fully, the disclosure in the 2010 proxy read: “The Nominating and Governance Committee uses a variety of methods for identifying and evaluating nominees for director. The Nominating and Governance Committee regularly assesses the appropriate size of the Board and whether any vacancies on the Board are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Nominating and Governance Committee considers various potential candidates for director… HP engages a professional search firm on an ongoing basis to identify and assist the Nominating and Governance Committee in identifying, evaluating and conducting due diligence on potential director nominees. On September 17, 2009, the Board elected Mr. Andreessen as a director effective immediately. Mr. Andreessen was identified by the professional search firm.” http://www.sec.gov/Archives/edgar/data/47217/000104746910000369/a2196150zdef14a.htm#cc71401_director_nominees

Are Board Nominations’ Processes An “Internal Policy”? Contrary to many press reports that characterized the HP nominations process as an “internal policy”, (just search on google for: hp internal policy nominations), the nominations process of any public company is not just any old internal policy. It matters in understanding the governance of the firm and how that operates. Clearly SEC mandates spelling out the requirement to disclose board nominations processes elevate them beyond mere policies to be changed on a whim. And the fact that some investors view nominations processes as material should, as well, make characterization of a board’s nominations process as a mere “internal policy” untenable.
 

Best Practice on Disclosure? That said, although changes to the nominations process may be considered material by some investors, companies can fail to disclose changes to the nominations process until the next proxy, generally with no fear of SEC action or liability.  Is that the best practice? No. The nominations process is a required disclosure. If the process changes, then hopefully the company is proud of the changes and will want to share them with the public. Even if they aren’t particularly proud of the changes, if they want to maintain good relations with a variety of stakeholders, letting them know when the changes have been made, rather than waiting until the next proxy is filed, would be the order of the day.
 

A board’s nominations process involves decisions on three dimensions: who should go, who should stay (with or without additional coaching) and who should come on to the board. All three are important.
 

 

Regarding the process at HP, there have been a number of disclosures. In addition to the proxy, news reports have formed a patchwork of information on the subject. Here are some of the highlights in HP’s own words. ((As background, at HP, Leo Apotheker is the CEO of HP appointed effective November 1, 2010. Ray Lane is the Chair and a new board member effective November 1, 2010.)

 

In a January 20 interview on CNBC, Ray Lane, a newly appointed director and chair said that “we were fortunate enough to have four board members … we had four board members who voluntarily said, ‘I would step back because I’ve served this board a long time and I’m willing to step off if that’s what’s required’ and it allowed us to go out and look at three or four or five board members to compliment what we need going forward.” (Two of the four directors who resigned had served since 2007.) Regarding the new appointees, he said: “Most of these names were known to Leo [Apotheker, the CEO of HP] or myself.  We have a lot of experience with these individuals. I don’t think we are doing anything new here or surprising because we’ve known these individuals so long.”  He also said that the number one priority on the agenda for the board is “to support Leo, to support Leo in forming his leadership, his strategy for the company, so right now to support Leo.” 
http://video.cnbc.com/gallery/?video=1754895708  
Summary: Four Volunteered to leave, New members known to new CEO and Chair, Top Priority of Board: Support CEO 

Issues: Boards are there primarly to oversee rather than support CEO. (Both are important but oversight and independent judgment takes precedence.) Boards should strive for members independent of CEO, Chair and each other so that each may feel as free as possible to exercise independent judgment. 

According to a January 21 Wall Street Journal article, “Lane said that the four departing board members volunteered to leave and that he ‘couldn’t single out someone who should go.’” http://online.wsj.com/article/SB10001424052748704881304576094330799598962.html?KEYWORDS=h-p
Summary: Four Volunteered to Leave, new Chair couldn’t pick 

 

In a January 26 Business Week interview, Lane stated the directors “are not there to support Leo or me…They are there to take independent decisions.” http://www.businessweek.com/news/2011-01-26/hp-reshapes-board-with-directors-linked-to-apotheker.html 
Summary: Board not there to support CEO, there to take independent decisions

Good: Boards are there to take independent decisions. 

In its proxy, filed on February 1, HP’s description of its board nominations process was changed from the prior year to include a role for the Chair and the use of an ad hoc committee which included the CEO. HP did not disclose the other members of the ad hoc committee in the proxy: “The Nominating and Governance Committee uses a variety of methods for identifying and evaluating nominees for director. The Nominating and Governance Committee, with the input of the Chairman, regularly assesses the appropriate size of the Board and whether any vacancies on the Board are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Nominating and Governance Committee considers various potential candidates for director… HP engages a professional search firm on an ongoing basis to identify and assist the Nominating and Governance Committee in identifying, evaluating and conducting due diligence on potential director nominees. Two of the seven directors who joined the Board since the last annual meeting of stockholders, Mr. Apotheker and Mr. Lane, were identified by the professional search firm. The other five directors, Mr. Banerji, Mr. Reiner, Ms. Russo, Ms. Senequier and Ms. Whitman, were identified by an ad hoc committee of directors consisting of the Chief Executive Officer and three non-employee directors, which was formed in November 2010 to assist in the identification of new director candidates and to facilitate the process of evaluating those candidates as potential directors.” http://www.sec.gov/Archives/edgar/data/47217/000104746911000421/a2201545zdef14a.htm

Summary: Chair now involved in work of nominating and goverance committee although not a member. CEO on an adhoc committee that identified and evaluated candidates.

Issues: A properly constituted nominating and governance committee should perform its chartered work with as much independence as possible. If the committee needs to be reconstitued, the full board should reconsitute it properly with independent members assigned to the job.

 

 

In a February 13 report in the San Jose Mercury News, “Lane stressed that Apotheker is responsible for developing and executing HP’s business strategy”. Lane said “the board’s top priority will be supporting Apotheker”… “in developing a strategy for HP to compete around the world”.  “He described a close working relationship with Apotheker, whom he has known since Lane hired Apotheker as an Oracle consultant in the 1990s” and described “his own role as an adviser to the CEO”. Of the board changes, he said: “This was my job. I have to take full responsibility for leading this,” “although he stressed that directors agreed unanimously to bring on a majority of new members.” http://www.mercurynews.com/ci_17378116?IADID=Search-www.mercurynews.com-www.mercurynews.com

Summary: Board there to support CEO. Chair known the CEO for over 10 and up to 20 or more years. Chair sees self as adviser to CEO. Chair sees self as responsible for board changes.

Issues: Boards should be there primarily to oversee the CEO. Oversight takes precedence over support. A CEO and a Chair with close long standing ties create lack of independence and may cause an imbalance: the CEO may be more powerful with a close Chair ally enforcing his will on the board than a CEO without a separate Chair. The nominating and governance committee, not the Chair, should be responsible for board changes. Chair should be appointed to the nominating and governance committee if he is to have a share of the responsiblity for nominations.   

According to a March 10 Business Week article, “Apotheker was a member of an ad hoc committee, appointed by Lane, that recommended candidates who were later considered by the full board,” Lane said. “The new board members ‘aren’t buddies of Apotheker,’ … ‘I knew these people better than Leo.’” http://www.businessweek.com/news/2011-03-10/hp-ceo-apotheker-board-faulted-over-director-appointments.html
Summary: Chair appointed the ad hoc committee on which the CEO sat which identified and evaluated candidates to the board. Chair knew the candidates better than the CEO did.
 

Issues: New board member, the Chair, set up a committee to conduct some of the nominations decisions – including idenfication and evaluation of candidates – and put the CEO on that committee. Chair recommended people he personally knew (as opposed to other candidates who would not have ties to CEO and board — and potentially other candidates who might have served the board as well if not better but were not identified because they were not known to them). 

A report by the San Jose Mercury News on March 10 said that ISS had identified the members of the ad hoc committee and that ISS said the nominating committee had been involved: “According to an ISS report last week, HP told the advisory firm that the prospective new directors were identified by an ‘ad hoc’ committee consisting of Lane, Apotheker and longtime directors Larry Babbio and John Hammergren. HP said the candidates were then vetted by the formal nominating committee and approved by the full board.”  “Charging that the nominating committee failed to carry out its proper role, ISS advised HP shareholders to vote against three committee members [of the nominating and governance committee] who are seeking re-election to the board: Sari Baldauf, G. Kennedy Thompson and Babbio.” “In response, HP defended its governance practices and says the firm known as ISS, or Institutional Shareholder Services, misinterpreted the process that led to the selection of five new directors in January.” http://www.mercurynews.com/breaking-news/ci_17584666?nclick_check=1
Summary: The ad hoc committee was made up of the Chair, CEO and two long standing members. ISS did not recommend against the adhoc committee members. Instead ISS recommended against the members of the nominating and governance committee. 

The ISS advice did seem counterintuitive.

Issues: If the long standing members of the nominating committee, Baldauf, Thompson and Babbio were removed from the board as ISS recommended, wouldn’t that likely give CEO Apotheker and Chair Lane even more input into who sat on the board going forward? How would that correct the issues with the nominations process at HP? Instead, it would likely compound the issues in terms of a board with an even larger majority well known to the Chair and CEO.
 

On March 20, Lane told the Financial Times “that he alone had interviewed his fellow directors and decided who should be asked to leave.” “I was the only one that knew whether this particular board member could work together with the rest or dwell on the past.” “The board unanimously gave me the authority to do what I needed to do.” Regarding the new nominees, he said, “We got some usable names from [Leo], but we only ended up taking one to the committee.” http://www.ft.com/cms/s/2/8a70e850-5328-11e0-86e6-00144feab49a.html#ixzz1HFQ6Ip9m

Summary: Those who left were not volunteers – the Chair picked them out. The CEO only ended up with one of his new picks for the board.

Issues: How did the nominations process work in terms of who exited? Were those who left volunteers or did the Chair pick? 

HP’s Corporate Governance Guidelines effective March 2011, in the “role of the board” section do not mention supporting the CEO as part of the role of the board or supporting the CEO on strategy.  The guidelines do mention oversight and policy guidance. “The Board”…“oversees management”. “The Board also oversees HP’s strategic and business planning process,” the guidelines state. http://h30261.www3.hp.com/phoenix.zhtml?c=71087&p=irol-govguidelines
http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9ODczNDd8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1 Issue: What is the role of the board at HP primarily? To support – or to oversee? 

                                                                                                                                                                                                                  What did shareholders do with this hodge-podge of information? They voted in all members. According to the SEC filing Baldauf, Babbio and Thompson suffered the greatest no votes while Lane’s no votes were the second to the lowest. (Shareholders also voted No on say on pay.) http://www.sec.gov/Archives/edgar/data/47217/000004721711000007/form8-k_032811.htm      

Less than a week after the annual meeting, it was announced that one of the newly nominated directors, Meg Whitman, would be joining Ray Lane’s firm, Kleiner Perkins. http://postcards.blogs.fortune.cnn.com/2011/03/29/meg-whitman-to-join-kleiner-perkins/    

                                                                                                                     
Issue: Why was the announcement made after the meeting? This even stronger relationship between a new nominee and the Chair would have been of interest to investors voting on board members.

It is now April and HP’s governance remains in the headlines with new issues being discussed. See  http://online.barrons.com/article/SB50001424052970203560404576228773519433708.html and HP’s response here. http://online.barrons.com/article/SB50001424052970204261904576242891337382926.html?mod=googlenews_barrons Who on the board voted on a recent acquisition seems to be an open issue.                                                       
 

Lessons for other firms?  Maybe shareholders won’t read the press or the proxy carefully. Even so, why not go above and beyond?    

                                                                                   
Independence and Nominations:  Take the independence of board members, the nominations process and of board oversight seriously. Discuss whether you feel comfortable having the process you use to nominate directors and perform the work of the board fully exposed. Once it passes the so called New York Times test, let shareholders know in plain, transparent English what the process is.                                   
 

Disclosure: Disclose as much as you can before you are engaged in the process and before the proxy is issued. If not known beforehand, disclose fully at the time the proxy is issued.  Don’t wait to disclose important information until after the annual meeting.
 

Chair: Although separation can be beneficial, independence is important as well.            Separation of the CEO and Chair positions is not the Holy Grail, especially if there are long standing ties between the two. Spell out the limits of the separate Chair’s position carefully and clearly. Do this before choosing the Chair. Consider the basis for choosing someone as Chair and whether it makes sense to choose a Chair who has not worked on the board before.
 

All Directors: Make sure all current and prospective members understand what the role of director is. This should be reflected in the Corporate Governance Guidelines of the board.                                                                                                                            
 

Why do all of the above even if shareholders don’t (seem to) care? Lack of trust in companies – and the capital markets – has a corrosive impact on the economy. Anything a board can do to enhance trust benefits everyone in the long run.
(Note: Italics have been added particularly on longer passages for emphasis, in the interest of clarity.)                                                                                                          
 

The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com Eleanor Bloxham www.eleanorbloxham.com
Copyright 2011 The Value Alliance Company. All rights reserved.            

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Earlier today Fortune posted an article I wrote on board information and shareholder oversight.
http://management.fortune.cnn.com/2010/12/21/who-is-minding-the-j-crew-store/?section=magazines_fortune

The imperial CEO is not dead.

According to a study just released today by Korn Ferry (see http://www.kornferryinstitute.com/files/pdf1/Dec_2010_E-Quiz_results.pdf) while almost all (98%) corporate leaders think CEO succession planning is important, 2/3 (65%) say they don’t have a CEO succession plan in place. (And of course, not everyone who says they have a plan will have an effective plan.)

As I noted in my Fortune article, one of the early warning signals was a 65 year old CEO and no mention of a succession plan — or board responsibility for one.

If 2/3 don’t have a CEO succession plan but almost everyone recognizes it is important, who is in charge after all?  (Answer: In 2/3 of the cases, not an effective board.)

How important is the CEO? If the CEO is worth millions, what will you do without him? (If the CEO is not worth millions, why are you paying him so much?)

I was asked today to opine on performance measures of board effectiveness. One measure: Do you have an effective, well thought out CEO succession plan? Another: What have you done to ensure that the CEO is not worth too much i.e. that the company will survive and thrive with or without him?

The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com

Eleanor Bloxham www.eleanorbloxham.com

Copyright 2010 The Value Alliance Company. All rights reserved.

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I remember I gave the opening talk/keynote at a conference in 2004 in which I discussed the important role of the board with respect to corporate culture.

Here David Nadler and I very much disagreed — as on a later panel at the conference he said that corporate culture while critical was not the board’s responsiibility.  He also said that the largest influence on the culture is company leadership. http://www.allbusiness.com/corporate-governance/222157-1.html

But who is responsbile for the largest influence on culture i.e.company leadership? 

Who hires and fires the CEO? The board is responsible, of course.

Who decides if the CEO has done a good job with respect to the culture of the firm and in the choice of the top management team? The board.

How much can boards really do about this influence and thus culture? I think they can actually do a lot.

It’s very easy for boards to turn aside and hope for the best in the face of a CEO turning in results shareholders admire or seemingly turning around a company’s fortunes. In the HP case, the subsequent commentary by HP staffers about the culture is worthy of note.http://blogs.wsj.com/digits/2010/08/06/live-blogging-h-ps-announcement-to-investors/tab/comments/

Can boards be proactive in understanding the culture of the organization and the way in which the CEO views and uses his/her power?  I think a board can do a lot by evaluating the CEO’s context, interactions with staff, etc.

It isn’t that difficult to pick up on issues if you are socially aware. Addressing those issues is what is much more difficult.

CEOs need the board to oversee – and boards need to to ensure the power of the position is not corrupting  the individual in it. They need to also ensure that their own actions do not make it more difficult for the CEO to create a culture that mirrors the values of the firm, as many unwittingly do when they set short-sighted objectives and focus on the short term.

Boards need to provide independent, objective counsel and help the CEO stay grounded and able to make wise choices. Failure to address personality and cultual issues in the executive ranks create huge risks for the entire firm.

Who else but the board can address this?

This is another reason boards must control the agenda. Some of these are issues the CEO is likely not to put on the board agenda. But the board must in strategy sessions, executive session with and without the CEO and in performance review updates with the CEO ensure these issues are addressed.

To do this well requires directors with insight, dipomacy, tact and courage. Sometimes directors have the first three but the fourth is lacking.

Holding executive sessions at every board meeting that are more than perfunctory and cover these topics including ”what could our CEO use coaching on?” and “what is the culture of the organization and how is it evolving?”  and “have we provided the right goal and performance structure including the importance of how?” provide ways for the board to handle these issues early on.

Shared values such as HP espouses at its company including “We work together to create a culture of inclusion built on trust, respect and dignity for all” “each person’s contribution is key to our success” and “We effectively collaborate” if they are to be written must be lived.

It’s the board’s job to determine if these are the right values.

If they are, they must ensure the CEO’s actions reflect them. They do that through oversight of the human resource practices of the firm (including compensation) and oversight of the manner in which the CEO and his/her team go about reaching their goals and objectives.

If it’s not the board’s responsiblity that sees to the CEO’s behavior — and by extension to his management of the culture — whose job would that be?

Footnote: Fortune invitied me to write about HP. You can read the article here. http://money.cnn.com/2010/08/10/technology/HP_post_Hurd_board.fortune/index.htm

The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com

Eleanor Bloxham www.eleanorbloxham.com

Copyright 2010 The Value Alliance Company. All rights reserved.

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Preliminary results in the Massey election show the director election was very close.

According to a Wall Street Journal report by Kris Maher and Joann Lublin this afternoon: ”Michael Garland, a representative of CtW, cited preliminary results from a proxy voting agent and said Massey President Baxter Philips won reelection with 49.6% of votes withheld by shareholders, while outside directors Dan Moore and Richard Gabrys won reelection with 49.8% and 48.5% of votes withheld, respectively.”

In a press release today, Massey said that this was a “show of confidence” from shareholders. Final results will be available in Massey’s 8k filing in the next few days. 

Facing a criminal probe of its directors and officers, there is still much work to be done by the Massey board with respect to safety oversight as I explain in this article I wrote for Fortune which you can read here.

http://money.cnn.com/2010/05/17/news/companies/massey.shareholder.meeting.fortune/

Beyond the issues I cover in that article, there seem to be other issues with oversight.

For example, the proxy shows that Massey has a management risk analysis committee.

From the proxy: “A management risk analysis committee holds regular meetings to identify, discuss and assess enterprise risk from current macro-economic, industry and company-specific perspectives. The management risk analysis committee is comprised of the Chief Financial Officer, Chief Compliance Officer, Corporate Counsel, Sales Companies CFO and a Special Assistant to the Office of the Chairman.”  

Of note, no one wearing a safety or environmental hat sits on this committee.

Further, the interaction the board seems to have with this committee according to the proxy relates to financial risks only. “On a quarterly basis, the Finance Committee receives a report from the management risk analysis committee on our most significant financial risks, including a summary of the risks assessed and risk mitigation strategies.”

No where in the “Board’s Role of Risk Oversight” or elsewhere in the proxy does it state that the Safety, Environmental and Public Policy committee receives a similar report for the risks it oversees. 

Beyond these issues, shareholder relations at the firm need a boost. As an example of what not to do provided in this case, when shareholders are expressing concerns, boards, in their response, should take a deep breath and try to avoid antagonistic phrases such as:

• As I am sure you are aware
• You claim
• This is patently false
• I fundamentally disagree with the substance of your argument and do not subscribe to the formulaic approach you have outlined
• You go on to mention a list of generic corporate governance issues without acknowledging
• Narrow interests

Shareholder “relations” require a “relationship”. Polite discussion and even disagreement are possible but having a relationship is incongruous with a high level of antagonism.

The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com

Eleanor Bloxham www.eleanorbloxham.com

Copyright 2010 The Value Alliance Company. All rights reserved.

 

This is my first post to my new blog, The Bloxham Voice. (We now have a mechanism to provide you with email alerts of posts. To receive email notifications of posts, simply click here. http://www.thevaluealliance.com/bloxham_voice_email_alerts.htm) 

I’ve been reading the coverage of the new SEC fraud case. Clearly, this is a case of importance from a corporate governance and board perspective. 

What I haven’t seen specifically mentioned in the recent press is that this is not the first time Goldman has been sued by the SEC in a matter related to the information provided to investors. This fact could be important to this case — and for the Goldman Sachs board’s deliberations. (It may also be important to other companies if it turns out other cases are brought against them when they have settled previous SEC suits in matters that are broadly related.)

In April 2003 the SEC settled with Goldman over conflict of interest charges. The settlement http://www.sec.gov/litigation/litreleases/lr18113.htm stated that the ”final judgment orders Goldman Sachs to implement structural reforms and provide enhanced disclosure to investors“.

It also stated that Goldman was permanently enjoined “from violations of NASD and NYSE rules pertaining to just and equitable principles of trade (NASD Rule 2110; NYSE Rules 401 and 476), advertising (NASD Rule 2210; NYSE Rule 472), and supervisory procedures (NASD Rule 3010; NYSE Rule 342)”.  

One of the rules Goldman is enjoined from permanently violating is NYSE Rule 472 which begins: “Each advertisement, market letter, sales literature or other similar type of communication which is generally distributed or made available by a member organization to customers or the public must be approved in advance by an allied member, supervisory analyst, or qualified person designated under the provisions of Rule 342(b)(1).”

What was the level of supervision in the most recent example? This is a question the Goldman Sachs board will need to address. 

In a speech in 2005 entitled “Rebuilding Ethics and Compliance in the Securities Industry” http://www.sec.gov/news/speech/spch062305mag.htm Mary Ann Gadziala, Associate Director, Office of Compliance Inspections and Examinations at the US SEC, explains some of the other rules Goldman was permanently enjoined from violating:

“With respect to broker-dealers, NASD Rule 2110 requires members, in the conduct of business, to observe high standards of commercial honor and just and equitable principles of trade.”

“NASD Rule 3010(a) requires member firms to establish and maintain a system to supervise the activities of each registered representative and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations, and with NASD rules.”

“NYSE Rule 401 generally requires NYSE members to adhere to the principles of good business practice in the conduct of their business affairs.”

“NYSE Rule 342 requires that each office, department, or business activity of a member or member organization (including foreign incorporated branch offices) must be under the supervision and control of the member or member organization establishing it and of the personnel delegated such authority and responsibility. NYSE Rule 342.23 requires members and member organizations to develop and maintain adequate internal controls over each of their business activities and to include procedures for independent verification and testing of those controls. And NYSE Rule 342.30 requires member firms to prepare and submit to its top management a report on the organization’s supervision and compliance efforts over the last year.”

She goes on to explain: ”In general, the broad basis for actions involving conflicts of interests is the antifraud laws found in Sections 17(a) of the Securities Act of 1933, 10(b) and 15(c) of the Securities Exchange Act of 1934, 206 of the Investment Advisers Act, and 34(b) of the Investment Company Act of 1940.” 

Sections 17(a) of the Securities Act of 1933 and 10(b)  of the Securities Exchange Act of 1934 are the two rules mentioned in the claims in the case filed last week. 

Her speech also discusses the importance of SEC compliance exams: “The primary purpose of an SEC comprehensive compliance examination is not to identify violations and make enforcement referrals. Rather the primary purpose is to identify control weaknesses and areas where improvements might be made, in order to prevent violations from occurring.”  What control weaknesses have internal reviews and SEC reviews shown? The Goldman Sachs board will want to re-review its internal reviews and the SEC’s reviews, if any, in addition to engaging in any other reviews that may be necessary.

“One set of issues that has in recent times exposed financial firms to compliance and ethics risks are situations where a firm or its employees are faced with conflicts of interests. Conflicts of interests typically involve competing interests or responsibilities,” she states. Two areas where conflicts may arise include “use of nonpublic material information for trading”  and the “firm playing multiple roles in a transaction” (did certain parties to the transaction understand something material about the transaction that customers in general didn’t?; did certain parties engage in multiple roles?).

Also, of note according to a recent story by Joshua Gallu and David Scheer at Bloomberg http://www.bloomberg.com/apps/news?pid=20601087&sid=a52BBUru4.hM, Goldman had information about the SEC matter nine months ago but did not specifically reveal it in its filings.

The board of Goldman Sachs will want to review the supervisory control structure, cultural and disclosure issues related to this case — and issues more generally. The reporters covering the issues today as well as those who have been covering Goldman Sachs diligently over the years from the many articles on disclosures in filings (example: Christine Harper at Bloomberg) and client conflicts (example: Gretchen Morgenson and Louise Story at the New York Times and Greg Zuckerman at the Wall Street Journal) provide another potential source of sign-posts for such a review.

The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com

 Eleanor Bloxham www.eleanorbloxham.com

 Copyright 2010 The Value Alliance Company. All rights reserved.