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Would you be ticketed for speeding while your mayor escaped penalty? The extent to which the powerful, especially Wall Street firms, influence their own legal outcomes at enforcement agencies like the SEC and the Justice Department is causing alarm among the U.S. public. An appeals court is set to rule soon on whether a judge has the right to answers or must simply acquiesce to an agreement made between the SEC and Citigroup.  Here’s why the case should go to trial.

The issues began when the SEC accused Citi of “substantial securities fraud” related to “dump[ing] some dubious assets on misinformed investors,” according to a filing in the case. The securities regulator and the financial behemoth then worked out an agreement that the penalty would be $285 million of corporate funds, with no requirement that Citi admit wrongdoing.

Judge Jed Rakoff wanted more information on the settlement before making a judgment that it should go forward. Writing on November 28, 2011, he said “there is little real doubt that Citigroup contests the [SEC’s] factual allegations.” So he ordered the case to trial – and the SEC appealed.

When I spoke with former SEC chair Arthur Levitt in 2012 about the case, he referred me to his statements on Bloomberg TV: “The public is infuriated. They see executives going scot free.” “For Citigroup with the history they’ve had, the repeated number of cases in the past two or three years, I can understand Rakoff’s reaction to this,” he said.

Today, it’s not just regular folks that feel apprehensive about the state of financial regulation and enforcement. Besides Levitt, other former SEC top dogs also fear our regulatory system is failing us.

Last year, former SEC Chief Accountant Lynn Turner expressed his concerns to me about “the level of regulatory capture and close ties to the securities industry at the current SEC.”

In a wide ranging conversation last week, former SEC chair Harold Williams told me, “There is a feeling generally that the SEC is not being as aggressive as it ought to be, as enforcement minded, and that’s an unfortunate impression. If it’s erroneous, the SEC must dispute it. But I’m not sure they can.” The SEC did not respond to a request for comment for this article.

There are also concerns that regulators like the SEC have become a revolving door for professionals who move to private firms and then use their influence on behalf of those companies at the agency. “We’re concerned that the constant movement of SEC employees to and from powerhouse firms, such as Citi can shape the mindset of employees throughout the agency in a way that benefits SEC-regulated businesses,” says Michael Smallberg, an investigator with The Project On Government Oversight (POGO).

POGO has been studying the SEC’s revolving door for some time and their files include cases of individuals who left the SEC, went to work at Citi and then appeared before the SEC representing Citi. Two such cases include Scot Draeger, former counsel to then-Commissioner Roel Campos and Joshua Levine, former senior attorney in the SEC’s Enforcement Division.

Other situations are more opaque and the SEC redacts information in the disclosures. For example, there are filings related to Andrew Lawrence, former senior counsel in the SEC’s Enforcement Division, and Tammy Bieber, former attorney-advisor in the SEC’s Office of the Chief Accountant. Both went to work at private law firms and worked on the “Matter of Trading in the Securities of Citigroup, Inc. (HO-09548).” An SEC spokesperson would not provide a response regarding what HO-09548 was about.

Of course, not all those who move from the SEC to private industry take advantage of their ties to encourage special leniency for their new employers. Some SEC alumni use their experience to encourage their new bosses to meet high standards.

“The door at the SEC has revolved for a long time, but when you tie that to a sense that the Commission is not aggressive in enforcing its mandate, that’s serious. It reinforces the idea that the SEC is not aggressive,” Williams says.

The appeals court is expected to rule soon. Given the revolving door between the SEC and banks like Citi and the lack of public faith in enforcement, it’s important that the trial proceed. If not, maybe it’s time to just hang up a sign that says, “For Sale: Justice, Seldom Used.”

Separately, there are other SEC issues worthy of note, in particular, problems with President Obama’s SEC nominee.

http://management.fortune.cnn.com/2013/01/30/mary-jo-white-sec-obama/

Her ties to JP Morgan may make it difficult to address the disclosure issues there. The bank board’s report provides a cautionary tale for corporate board members.

http://management.fortune.cnn.com/2013/01/22/jp-morgan-london-whale/

Political spending should be on the radar of every corproate board.

http://management.fortune.cnn.com/2013/01/09/corporations-dark-money-qualcomm/

I welcome your comments at ebloxham@thevaluealliance.com

The Value Alliance and Corporate Governance Alliance http://www.thevaluealliance.com/
Copyright 2013 The Value Alliance Company. All rights reserved.

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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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Over a dozen large banks have been implicated in the Libor scandal. And the harm created by the manipulations has impacted communities across the US in the billions of dollars.

Boards at the companies involved in Libor manipulation have already paid out bonuses based on inflated earnings. Will these bonuses be clawed back?

At the same time, there are those who continue to advocate the use of bonds or interest rate swaps as a way to pay bankers. It doesn’t make sense.  The prices of those instruments can be altered by manipulating interest rates. Should we provide additional incentive for manipulations given the Libor mess?

Clearly, large banks are not fully disclosing the risks in their compensation schemes.

It’s also difficult to see how paying for fraud and harm comports with reasonable business judgment.

Here’s the article. 

http://management.fortune.cnn.com/2012/12/13/libor-and-banker-pay-an-unfortunate-marriage/

 

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Copyright 2012 The Value Alliance Company. All rights reserved.

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If public company investors or other stakeholders wanted to find out the good, the bad and the ugly, would they have to go to one place to find the good – and other places to find the bad and the ugly? Is good news given prominence and bad news downplayed or even hidden? What are the impacts of corporate communications policies on corporate trust?

Part of what struck me in researching my recent article on Olympus published by Fortune.com was the openness with which Olympus is now providing information about the scandal, front and center on their global website’s home page.

That kind of openness, along with other actions Olympus has taken in recent months, builds trust.

Yet how many boards have fully considered how the company might best handle communications with stakeholders in a crisis and what mediums they’d use? It’s an important decision that can impact survival, one that is preferably not put off until the company is in the midst of crisis trying to juggle all the decisions requiring immediate attention.

And what about run-of-the-mill ups and downs? How to handle communications during a huge crisis like Olympus’ isn’t the only question directors need to be concerned with. What is the company’s policy more generally on where, when and how it reveals good news versus bad or ugly news? Every company has hiccups. How does the company use its communications to build trust?

HP has been a company that has seen more than its share of governance woes and faltering trust (which I discussed most recently in this article published by Fortune.com). And taking a look at how HP has handled boardroom turnover as just one example provides food for thought.

This time last year, Ray Lane, HP’s current executive chair, directed the process that resulted in the removal of four directors and the addition of five others. HP issued a press release to mark the event. The changing of the guard caused quite a hullabaloo and ISS, a proxy advisory firm, objected to the process which did not follow HP’s disclosed procedures for independent nominations.

Last June, the board announced with a press release, that a company executive, Ann Livermore, would become its newest member. Presumably to calm investors as well as to garner his expertise, shareholder activist Ralph Whitworth was appointed to HP’s board in November and HP again issued a press release to explain the appointment.

But in September, following approval of a controversial HP strategy and just two weeks before Whitman’s appointment as CEO, Dominique Senequier, one of the January 2011 appointees, notified the board she would not stand for election for a second year. In this case, HP did not an issue a press release to explain her decision, instead burying the announcement in an SEC filing.

Just last month prior to the filing of the annual proxy, two directors decided to join Senequier and not stand for re-election. Those directors included Sari Baldauf who notified the board on January 18 and Larry Babbio who did so less than one week later according to SEC filings. The company issued no press releases to explain the departures.

Several years before she took the top spot at the SEC, Mary Schapiro and I discussed the importance of corporate transparency. The following is an excerpt from that conversation.

Schapiro: I think companies do well in the marketplace when they’re honest, and the analysts and the business community, Wall Street, know that they can rely on what that company is saying, either in its filings with the SEC, or in its comments to the analyst community, or in its press releases. And, so, for board members, I think it’s absolutely essential that companies have an ethos and a culture to be fulsome in their disclosure.

Bloxham: And to be forthcoming.

Schapiro: Absolutely.

Bloxham: Good news and bad news.

Schapiro: Good news and bad news. If it’s only good news, when the bad news comes, it will be reflected very rapidly in your stock pricing and people will be skeptical of what comes out in the future. So, it’s absolutely critical that companies be as forthright with the bad news as they are with the good news.

Bloxham: Well, and I guess that goes also to the relationship between the board and management, too. That the board welcomes bad news in hearing it earlier rather than later.

Schapiro: You might not like what you’re hearing, but you absolutely want to hear it, there’s no question about it. Nothing more important, frankly, as a director, in having confidence in management, in knowing that they will tell you everything that’s going on, whether it’s good or bad.

Bloxham: Right. And then for the board to react appropriately, and recognize that things won’t always go well.

Schapiro: That’s right. Nothing goes well all the time. We’re only human. Companies make mistakes, individuals make mistakes. The real crime, in my view, is covering it up or not being honest about it.

Bloxham: Right. And I think, you know, that goes to transparency in the capital markets, too, because the more that companies are forthcoming with the good and the bad, the more investors will understand that’s part of natural cycles that businesses go through.

Schapiro: That’s exactly right. And if we’ve learned anything in the last five years of corporate scandals, it’s that the markets are very unforgiving if you’ve been dishonest about your financial results or anything else that’s going on in the corporation.

Recent cases and the impacts of poor communication invite us to explore a number of questions that deserve thoughtful answers: How do we as board members prefer to find out the bad and the ugly – by having to dig for answers or by having management let us know about problems early on? How would shareholders prefer to learn about problems? What are the current approaches to communications at our company? How do we want important board and company communications handled? And how can we use our communications processes to build trust?

A note below says comments are closed but if you have comments, please email them to ebloxham@thevaluealliance.com

The Value Alliance and Corporate Governance Alliance www.thevaluealliance.com
Eleanor Bloxham www.eleanorbloxham.com
Copyright 2012 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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Insider trading has been at the forefront in the wake of the recent FBI investigations. The investigations should provide caution to board members and others priivy to confidential information on a regular basis.
See my article for Fortune http://finance.fortune.cnn.com/2010/11/29/why-the-stock-market-isnt-fair/ and Nin-Hai Tseng’s article for Fortune here http://finance.fortune.cnn.com/2010/12/01/who-is-an-insider-anyway/

It can be difficult to discern whether or not information – private or public – will result in trades. Enron is a case in point. In Jeff Skilling’s run up to the presidency of Enron, he beat the drums for Enron’s move into the trading businesses. One reason he gave the media? Trading didn’t require capital. This was an immediate red flag to me that Enron was in for trouble and anyone who read his words and understood the trading business should have known that Enron was sailing into dangerous waters. Some may have traded on that information. It was public. Yet, that information never moved the Enron stock. I think it was material – it was my tip off. But it wasn’t one for the market as a whole.

Bottom line, fairness in the capital markets is important — and it requires great care to ensure that they are. Now is a good time for boards and consulting firms to ensure that the rules and their spirit are well understood.

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 have been working on some case studies related to board practices, corporate governance, and disclosure using this year’s proxies at financial services firms as examples.  (Case studies are a useful vehicle with the recognition that for the vast majority of the population – and in my experience that includes board members - fact based information and examples are what lead to insight; theories and concepts, alone, do not resonant. Nor in fact do examples without the names, dates, etc.)

The idea for the studies first began when I was meeting with a retired CEO who was a shareholder in one of the financial services firms that received TARP funds and I agreed to take a look at the proxy for the company he was invested in to see what I might find. It turns out that I found quite a lot. (Not just on that proxy, but as my process continued, on others too.) 

What kinds of things should you, as a board member or interested party, be looking for in your review of the proxy and what might you find?  To see a draft study of what I found in the PNC proxy, click here http://www.thevaluealliance.com/PDF/pnc_proxy_analysis_excerpt.pdf

Disclosure Review Practices Tell You a Lot About the Board. The level of careful review and questioning of disclosures is one way to distinguish a “rubber stamp” board from an engaged, participatory one. As a matter of practice, does each member of your board consistently review all important disclosures with care?

Evaluating Your Board’s Practices thru the Lens of Disclosure Review. The level of disclosure review not only tells you a lot about the board; so too, do other practices that are related to the process itself.

With respect to evaluating your board’s level of engagement, you may wish to address the following questions for proxies: 

(1) Practice of disclosure review: Did each member of the board review the proxy word by word and cover to cover? Were questions raised and issues handled in-depth?

(2) Oversight of management and outside advisors: Out of that review, did the board make some assessment of the competence of internal and external legal counsel and any management staff or other outside advisors responsible for reviewing or putting the proxy materials together? 

(3) Board independence, competence and organizational culture assessment: Did board members find, in their review, that they are independent-minded and analytical enough to get a “succinct read” on the board from the proxy? Were they able to get a picture of the culture of the organization and see the organization through others’ eyes?

These are some of the general areas that the board should assess in the annual evaluation process anyway: (1) disclosure practices, (2) robust dialogue, (3) evaluation of management, (4) evaluation of advisors, (5) board independence, (6)board competence, and (7) oversight of culture/cultural assessment. The board’s disclosure practices simply provide a handy lens — and in the case of the proxies, a fact based example — for such a review.

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

 Eleanor Bloxham www.eleanorbloxham.com

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