(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 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

 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.