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Eleanor Bloxham on 18 Feb 2013

SEC and Citi: Justice for Sale?

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.

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.

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

I welcome your comments at

The Value Alliance and Corporate Governance Alliance
Copyright 2013 The Value Alliance Company. All rights reserved.


Eleanor Bloxham on 20 Dec 2012

Newtown: The role of corporations and investors

There is a sea change happening in the way in which pension funds are re-examining fiduciary duty. I wrote about the changes on the IPO front here.

But there are larger changes happening that provide hope as well.

Over the course of 2012, it’s become evident that social policies are receiving increasing attention by boards and by investors who care about responsible investing.

Tragedies seem to be driving some of the change. Newtown represents the most recent in this scrutiny of corporate social issues but the momentum this year was already growing. Think Apple/Foxconn, Hershey — and more recently, the Wal-Mart supply chain disaster responsible for the deaths of 112 people trapped in a Bangledesh factory fire last month.

In the wake of the Newtown massacre, CalSTRS received some press for its Cerebus’ investments in a gun manufacturer.

Chief Investment Officer, Chris Ailman, through his press office wrote me that “CalSTRS has been screening investments through its ESG [environmental social governance]standards and the 21 Risk Factors since their passage in 2008. CalSTRS has also developed an ESG committee with representatives from all the asset classes. They vet all our investments for compliance with CalSTRS’ ESG standards.  Since 1978, CalSTRS has used a written policy, the Statement of Investment Responsibility (SIR), to navigate the complex landscape of ESG issues. The long history of this document is testimony to the national leadership of CalSTRS among pension funds in addressing ESG matters through a written policy.”

Many pension funds, like CalSTRS, are still in the race in clearly defining what the S means (as well as the E and G in some cases) and in establishing strong monitoring systems. But today there are many more pension funds working toward that goal than in the past.  (See also Members of ICCR are among those leading the pack.

In 2010, Geoffrey Mazullo, Principal at Emerging Markets ESG, and I attempted to conduct research on pension fund monitoring of socially responsible investing for the Journal of Environmental Investing. We came away with the distinct impression that there was more emphasis and discipline needed.

Both boards and investors of other peoples’ money need to recognize the standards to which they should be holding companies.

The second pillar of the UN guidance on human rights addresses “corporate responsibility to respect human rights, which means that business enterprises should act with due diligence to avoid infringing on the rights of others and to address adverse impacts with which they are involved.”

How many boards and investors make a standard practice of holding companies accountable to addressing the adverse impacts with which they are involved? For example, layoffs in a town or pollution in a corner of it?  Or other adverse effects that they haven’t caused but are involved with?

More on what is being done is here:

I welcome your comments at

The Value Alliance and Corporate Governance Alliance
Copyright 2012 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 17 Dec 2012

Insider Trading and Selective Disclosure: $5 million fine today

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

The Value Alliance and Corporate Governance Alliance
Copyright 2012 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 13 Dec 2012

Incentives that Encourage Fraud

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.

The Value Alliance and Corporate Governance Alliance
Copyright 2012 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 07 Dec 2012

Progress on Fiduciary Duty

Some good things are happening.

Initiatives led by Anne Simpson (CalPERS) and Ann Yerger (Council of Institutional Investors) are blazing a path to address stocks that should not be in investment management portfolios - and that as a fiduciary, investment managers should not purchase with other people’s money.

The first stop on this journey is addressing IPOs.

Some issuers too are recognizing that a race to the bottom governance-wise will not serve them.

This article represents an update on these initiatives and the current landscape. I welcome your thoughts:

The Value Alliance and Corporate Governance Alliance
Copyright 2012 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 05 Dec 2012

Treasury and the SEC

Who heads the Treasury and SEC going forward will matter. The decisions on “who” will impact not only our economy and the capital markets but also public perception of government’s value.

Here is an article with my criteria and some possible picks. I would welcome your thoughts at



The Value Alliance and Corporate Governance Alliance
Copyright 2012 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 30 Nov 2012

HP’s Due Diligence Lesson

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.

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
Copyright 2012 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 26 Nov 2012

CEO Pay and the Fiscal Cliff

Is looking behind the numbers a lost art? M&A transactions might be more accretive if the reviews were more rigorous. So too, it’s easy to accept earnings as is when paying CEOs. But boards need to look beyond that. We need incentives that work to increase the size of the pie and make our country more prosperous.

Here’s an article on the fiscal cliff based on a recent Institute for Policy Studies report. Should CEOs be paid bonuses for changes in the tax code?

If you have comments on this blog post email me directly at


The Value Alliance and Corporate Governance Alliance
Copyright 2012 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 18 Nov 2012

The S and G in ESG

ESG stands for Environmental, Social, Governance. It’s a catchy way in three letters to sum up some of the issues that concern responsible owners and overseers (i.e. board members).

Today, the number of long term investors that care about all three letters (ESG) is growing. The U.N. Principles for Responsible Investment outline some of the ways long term investors use ESG.  Today, the signatories to the principles represent nearly 1000 asset owners and investment managers across the globe.  See the list here.

(1) From time to time, I like to take the temperature of board members on these topics.  My latest article suggests that while many board members today are savvy on environmental concerns - and more aware on governance, directors’ awareness around social concerns is highly variable. The lack of awareness on S (as it does on E and G) pushes the locus of ethical leadership outside the organization.

The article posted on Friday is here.

(2) On the governance front, special deals between management and companies should be avoided (think Enron and Chesapeake) and if undertaken, deserve full transparency. This article discusses the lack of disclosure of such a deal at Citi.

(3) Bloomberg news last week had a story on Morgan Stanley hiring a Goldman trader accused in a US suit.

Vetting executives and key personnel is imperative.

This article discusses Goldman’s decision to promote to CFO a sales person who was involved in Timberwolf, passing up two women who by all accounts were well qualified for the job.

(4) Board effectiveness can, in part, be evaluated based on compensation practices. Here’s a link to a panel discussion at the Brookings last month discussing compensation governance.

If you have comments on this blog post, please ignore the comments are closed notice below and just email me directly at

The Value Alliance and Corporate Governance Alliance
Copyright 2012 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 14 Jun 2012

Top Bank Executive Pay: Did it contribute to the J.P. Morgan trades?

The JP Morgan trading issues reflected a lapse in governance. But beyond risk oversight, they also called into question the way in which top executives at the largest banks are paid. Here’s a link to my article on


I had the opportunity to design incentive programs using risk based measures in the mid-90s. Implemented properly, these kinds of pay programs can work very effectively to focus executives and managers on the right measures of success. I have written on this topic over the last 15 years, including further information on the regulatory requirements of the sound compensation guidance.  (See

Related to the New York Fed Staff report, the issues raised in the article today include issues on pay I have elaborated on in more detail in these recent articles.

The implications for our economy are clear. The solutions may not come easily, but it is important that we work together to find them.

If you have comments on this blog post, please ignore the comments are closed notice below and just email me directly at

The Value Alliance and Corporate Governance Alliance
Copyright 2012 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 20 Feb 2012

The Good, the Bad and the Ugly: Communications that Work

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 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 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 apress 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 whonotified 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?

If you have comments, please email them to

The Value Alliance and Corporate Governance Alliance 
Eleanor Bloxham
Copyright 2012 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 23 Aug 2011

We Can Be a Nation of Solvers, not Whiners

It is time, as a nation of business leaders, to roll up our sleeves and get to work on the very real economic problems the U.S. is facing – to finally move the needle on the economy, wages for our workers and jobs for the un- and under-employed.

We need to address our issues as a nation of business leaders and stop what has been termed “economic development”, a zero sum game of regions pulling jobs from each other with expensive, unproductive tax incentives, instead of working to maximize the U.S. economy as a whole.

As a nation of business leaders, we need an approach to our problems that involves real expertise, where success can be measured, cross-fertilized and replicated from one location to another.  And we need an approach that is agile, productive and cost effective. In short, we need a solution that makes sense.

A new plan, right in front of us, will roll out soon. An “enterprise development and market competitiveness project” is being launched with specific goals in mind.

“The project is designed to raise incomes and employment…. Focusing on the role of small and medium-sized enterprises … the [project] will facilitate the development of competitive enterprises … by stimulating innovation, enhancing workforce skills, accelerating new enterprise formation, improving access to finance, and addressing shortcomings in the business environment. The [project] will provide technical assistance, training, and grants to … [expand] sales in new and existing markets. The [project manager] and [the U.S. government] will mobilize additional resources from other sources to accelerate growth.”

The manager for this project has been chosen. And work will begin soon.
In Armenia.

Armenia (in rough figures) has a population one-hundredth the size of the U.S. (3.2 million people versus approximately 311 million here). The workforce is roughly 7.1% unemployed versus our July figure of 9.1%.

As all experienced leaders know, one way to solve big problems is to break them down into smaller ones. Another way to solve problems is to copy concepts that work in one arena and apply them, with some adjustments, to other situations.
If we can define a project like this for Armenia with a population one hundredth the size of ours, why not define 100 regional projects of this type for the U.S.?

Of course, to move on such an undertaking requires agility, expertise, funding and a minimum of bureaucracy. The projected cost for those running the project in Armenia is $17 million. The U.S. would need 100 Armenia-type projects; $17 million times 100 is $1.7 billion.

As a benchmark, similar projects have been done in the U.S. for $10 - $15 million in the past. One such example is the Oklahoma City miracle which noted economic development expert Ed Morrison, now Economic Policy Advisor at the Purdue Center for Regional Development, spearheaded with the involvement of business leadership — in particular, Charles Van Rysselberge, who headed the Oklahoma City Chamber at that time.

Where could we get $1.7 billion?

Just as Van Rysselberge did in Oklahoma City, the initial cash could come from business leaders. If CEOs of the Fortune 500 each pledged $1 million per year over the next five years, that would amount to $2.5 billion , more than enough to take on the task. Then, any infrastructure spending could come, just as it did by the efforts of Van Rysselberge in Oklahoma City, from passing local sales taxes to fund those programs. (If you think sales taxes can’t be raised for the right efforts, think again. Van Rysselberge, who moved to Charleston to head up the Chamber there, says that Charleston just this last November passed a one cent sales tax to build new schools and create jobs there.)

Before Oklahoma City, Van Rysselberge had used Morrison to help turn around Shreveport, La, when he was CEO of the Chamber there, and the plan Morrison built was “recognized as the most creative economic development plan in the U.S., for which Morrison won a national award” says Van Rysselberge.

Following his experience at Oklahoma City, Morrison, a Yale graduate and former strategy consultant for Telesis, a spinoff from the Boston Consulting Group, sat down to figure out what had made Oklahoma City and his other successes possible.

He recognized that there was a methodology and, if he could teach it to others, his work could be replicated. (His approach is called “Strategic Doing”.) Strategic Doing is a “lean and agile approach to strategy development”, Morrison says. The process is “open source” and Morrison has established a certification program in “strategic doing” at Purdue University. The idea is to have a way to guide complex adaptive systems, like open networks of people, to take action along the lines of the rules that guide software development in open source environments.

Morrison recognizes that what makes real progress possible in the knowledge economy is not hierarchies nor specific institutions. What makes it possible are networks of passionate individuals supported by passionate leaders. “In a knowledge based economy, networks are the curators of wealth, not hierarchal systems,” he says. “We need collaborative investments, horizontal networks. Entrepreneurs get it,” he says. “Strategic doing” helps these collaborations of individuals “quickly move to co-create value and measurable outcomes” he says.

Strategic doing has now been adopted by an entire network of universities interested in economic development. The initial brainchild for meetings between the universities came from Tim Franklin, director of the Office of Public Partnerships and Engagement at Pennsylvania State University and his wife Nancy, director of Outreach sustainability initiatives and assistant director of Penn State Institutes of Energy and the Environment (PSIEE). They set out to create a national model and make it replicable. Tim Franklin, who is passionate about regional economic development and whose own work in Virginia has won recognition, worked with Morrison to “not just focus on policy” but build a network of universities focused on economic development called TRE Networks, “a system with capacities”, Franklin says. “Now the network provides a neutral space where collaboration can occur and a set of resources for anyone wishing to tap into it”, Morrison says. “The Presidents of the Universities participating have been key. They are the passionate leaders supporting these efforts.”

Several weeks ago a solar summit was held in the football stadium at Arizona State University using the strategic doing approach under the leadership of Todd Hardy, Arizona State’s Associate VP of Economic Affairs in the Office of Knowledge Enterprise Development. “Using the approach, facilitated by Morrison, a group of 120 people met and 40 have signed on to help move forward an agenda to develop Arizona’s leadership and expand its business opportunities in solar energy development”, Hardy says. Hardy was impressed that so much could be accomplished in such a short time. It provided Morrison “a reaffirmation of his approach” Hardy says. “We made a great deal of progress in just a day and a half”.

While the capability exists, funding remains an issue. And that’s where business leaders need to step up, as they did in Oklahoma City.

In 1927, the Shreveport Chamber of Commerce set out a plan for renavigation of the Red River. They held firm to that goal. 68 years later, persistence paid off and it was accomplished, Van Ryssellberge says.

Holding fast and being nimble. As a nation of business leaders, we need both to confidently meet our future and contribute to our future prosperity. Some university leaders have stepped forward. Where will the next crop of Van Rysselberges, from the business community, come from to support these important efforts?

Another version of this article is published here.

The Value Alliance and Corporate Governance Alliance

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 02 Aug 2011

Risk, Reputation and Economics

Privacy issues. Directors need to understand the privacy concerns of consumers and potential long term hits to reputation. How is management weighing the risks of aggressive short term access to consumer information?
Wired (Ryan Singel): Researchers Expose Cunning Online Tracking Service That Can’t Be Dodged
“Researchers at U.C. Berkeley have discovered that some of the net’s most popular sites are using a tracking service that can’t be evaded — even when users block cookies, turn off storage in Flash, or use browsers’ “incognito” functions.”

The economy.
MarketWatch (Steve Goldstein): ISM manufacturing gauge falls to two-year low
“U.S. manufacturing activity barely grew in July, according to a key index released Monday in a demonstration of an economy struggling to expand.”

The economics of directorship. At the largest companies, directors get paid over $1,000 per hour.
WSJ (Joann Lublin): Directors see Uptick in Compensation

Steep decline in the market today. Are market prices indicative of CEO value creation?  (No.)

The Value Alliance and Corporate Governance Alliance
 Eleanor Bloxham
 Copyright 2010 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 31 Jul 2011

Leadership, Ideas, Economics and Jobs

Time to eliminate stock based compensation?
FT (Diane Coyle): A couple of remedies for pay excess
 ”I would … like to see investors call time on share incentive schemes altogether.”

NYT (Floyd Norris): Usual Growth Leaders Absent From Recovery
“WHY has the job picture been so bleak in the current recovery? A large part of the problem can be traced to unusual weakness in two categories: construction jobs and government jobs.”

NYT (Paul Krugman): The Centrist Cop-Out
“I joked long ago that if one party declared that the earth was flat, the headlines would read ‘Views Differ on Shape of Planet.’”

Krugman’s commentary is a commentary on the practice of journalism. Of course, what should happen is for the reporter, whenever possible, to go the extra step — get a picture of the earth taken from above the earth and use it in the article too or put it in front of the leaders of the flat earth party and ask the flat earth party to explain why in the face of the picture they say the earth is flat.                Of course many reporters do this - analyze the statements of respondents not just take them down. This takes time and requires the reporter to eschew the short-sightedness and/or pressures of his/her “bosses” (i.e. whoever they are trying to please or follow).

Psych Today (Nassir Ghaemi): Where are the new ideas?
“One of my Harvard teachers …Leston Havens… used to say: ‘Be careful about institutions. Between your boss’s needs and your eagerness to please, you can create a prison stronger than Alcatraz.’”

When the focus is on satisfing one institution or one person rather than a larger purpose and higher values, neither ethics nor true innovation will flourish.

The “Where are the new ideas?” article discusses the weaknesses in the current state of academic research.  So does Paul Smalera’s article which focuses on economists.

Reuters (Paul Smalera) Krugman says Thoma’s right, except when he’s wrong
“Thoma rightly argues that too many of their academic colleagues don’t risk engaging at all — they are the ones that need to be coaxed out into the conversation, to shed some light on the dark corners of the economy before some other solid-seeming sector (technology, anyone?) implodes and nearly sinks the ship, yet again.”

I was invited early last decade as the only non-academic and non-FDIC executive to an FDIC conference to speak on market signals that might provide warnings of a run up in default at banking institutions. In my speech, I offered/encouraged the pure academics to reach out to practioners (like me) to select their research topics and make them relevant. (After all, that was part of the reason I was invited to speak.) No one called.

Regarding techology - technology is one of the only sectors looking to create jobs which makes technology an even more important sector to watch.

Reuters (Felix Salmon): Chart of the day:Techs vs Industrials, Why Tech Stocks Deserve to be Cheaper than Industrials     “in an area where change is unlikely to massively disrupt your business, income streams are more predictable and therefore more valuable.”  

Besides the obvious difference in business models between industrials and tech companies, another explanation of lower P/Es at tech firms may be the governance at tech vs industrial firms. Good governance can act as a buffer and prevent issues spiraling out of control. The market places a premium on this stability. (The issue of governance which Buffett doesn’t mention is something he faced earlier this year.);range=1y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

WSJ (Nassir Ghaemi):Depression in Command
“the sanest of CEOs may be just right during prosperous times, allowing the past to predict the future. But during a period of change, a different kind of leader—quirky, odd, even mentally ill—is more likely to see business opportunities that others cannot imagine.”                “As for Churchill, during his severely depressed years in the political wilderness, he saw the Nazi menace long before others did.”              “Depression … has been found to correlate with high degrees of empathy, a greater concern for how others think and feel.”

I highly recommend this novel in which Churchill (and the black dog of depression) are featured protoganists. Mr. Chartwell : a novel by Rebecca Hunt.

The Value Alliance and Corporate Governance Alliance
 Eleanor Bloxham
 Copyright 2010 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 28 Jul 2011

Compensation, Public Policy and the Economy

Does  CEO compensation in the form of stock and stock options create alignment with company value creation? No.

Current case: The debt ceiling gymnastics.
As the stock market drops, is that reflective of less value creation by a particular CEO? (No.)
Should a CEO receive less income because the stock market is being held hostage by certain members of Congress? (No.)
Conclusion: CEO compensation in the form of stock and stock options does not create alignment with company value creation.

Does enforcement matter? Regarding highway speeds, it does, and one attorney says yes it does matter with companies too.
FT (Richard Waters): Google faces fresh fire over web reviews         “Without proper sanctions, ‘no big company would ever obey the laws, they would do whatever they could get away with until they were caught’, said” Gary Reback, a Silicon Valley lawyer.

Just like they predicted in the Weekly Reader in elementary school, fewer work hours are needed today …but then it was just supposed to mean more leisure time not millions unemployed.
FT (John Gapper): America’s turbulent jobs flight           “US manufacturing has a good story to tell but that story is about technology and productivity rather than jobs for the millions of people out of work”

Civility in America 2011 (See link)
The economics of incivility.
The percentage of people who didn’t buy from a company because of incivility rose 13 percentage points over last year to 69%. The percentage who changed their opinion about a company due to incivility rose 14% (also to 69%). 1 in 5 employees have quit a company due to incivility in the workplace. Company leadership and employees themselves are primarily to blame for incivility according to those surveyed.

The Value Alliance and Corporate Governance Alliance
 Eleanor Bloxham
 Copyright 2010 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 27 Jul 2011

Jobs, the Economy and Governance

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?”

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.”

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.”

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?”

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.”

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.”

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.”

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.

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.”

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.”

The Value Alliance and Corporate Governance Alliance
Eleanor Bloxham
Copyright 2010 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 01 Jun 2011

Regulators and Equity Redux

The comment period for a multi-agency proposal on compensation at financial institutions ended yesterday, leaving a gaping hole in the rules proposal.

Although a large portion of CEO compensation is paid in stock or options, the impact of incentive pay which is paid in equity, rather than cash, is entirely missing in the proposal.

But research by Professors Rüdiger Fahlenbrach and René M. Stulz in 2010, following the crisis, demonstrated why equity as its own component should not be ignored. While the knee jerk reaction is that if equity is held by executives, it will create alignment with shareholders, the research didn’t demonstrate any such benefits.

According to the research, “banks where CEOs had better incentives in terms of the dollar value of their stake [in the company] performed significantly worse than banks where CEOs had poorer incentives.” “The top … equity positions at the end of fiscal year 2006 [were] held by James Cayne (Bear Stearns, $1,062 million), Richard Fuld (Lehman Brothers, $911.5 million), Stan O’Neal (Merrill Lynch, $349 million)[and] Angelo Mozilo (Countrywide Financial, $320.9 million).”   All of those firms fared poorly in the crisis: sold in distress or in the case of Lehman, went bankrupt.

This finding indicates that the banks of CEOs with poorer equity ownership stakes did better — and that perhaps equity ownership exacerbates rather than ameliorates risk taking on the part of CEOs. Certainly, it is well recognized that high equity stakes would logically tend to dampen full negative disclosures.

A strong negative correlation between equity stakes and bank performance such as the research finds would seem to be a compensation mechanism that the regulators should be curious to understand in setting policy, given the apparent risk to bank performance and the huge consequences to stakeholders.

So why don’t the regulators examine the issue more closely or address it in their rules proposal?

This isn’t the first time I’ve written on the topic. Here’s what I wrote to the SEC on this in September 2009 and to the Federal Reserve on this in November 2009

And it’s not as if equity is a miniscule part of CEO pay. A quick review of the summary compensation tables in the latest proxies shows that the current CEOs of JP Morgan, Bank of America, Citigroup and Wells Fargo, through the crisis (over the last three years) received $127 million in equity and option awards, on average 80% of their total pay. It would appear the 80/20 rule would clearly apply warranting a look at the impact of equity.

To address compensation at financial institutions, regulators need to re-examine all the reasons equity may create these perverse effects including the fact that payments in equity may exacerbate the tendency to overpay (because of the false notion that equity and options are funny money and not real cash to the corporation). It may also encourage managers to take risks, increase the volatility of returns, extract potential windfall benefits from timed sales, and manipulate stock prices. And equity pay may do all this while diluting other shareholders and diminishing accountability to them and distracting managers from the real business of managing the business.

If regulators examine the issue carefully and reflect the impact in the rules proposal, maybe history won’t repeat itself. If they don’t, there is no reason to expect we won’t see the same movie once more.

The Value Alliance and Corporate Governance Alliance

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 08 May 2011

Regulation and Public Policy

Why do regulation and public policy and legislative efforts too often fail to do their intended job?

For some time, I’ve argued that one reason is that the inputs are flawed and that there needs to be more inclusiveness in the decision making pool for legislation and regulatory initiatives.

In this article for Fortune I discussed the issue in a particular case related to control frameworks in the Sarbanes-Oxley implementation.

I have also written directly to the regulators at the FDIC and SEC about my concerns in this arena, encouraging them to draw in and expand the pool of resources they consult with — in order to combat regulatory capture and make better regulations.

Legislators need to do this also. When I attended a meeting at the Academy of Sciences a few years ago, a congresswomen told the green energy industry members in attendance there that if they hoped to succeed they would need to hire more lobbyists. Clearly, that is the antithesis of a free and open democracy.

In my letters to the regulators I have recommended making greater use of independent experts to supplement industry lobbying. I was pleased therefore to run across this recent working paper on regulatory capture by Professor Lawrence Baxter whcih advocates these ideas.

The issue of how laws and rules are made is not a small issue and it should be of interest to everyone. Let’s hope when Baxter’s work is published, it will make a difference in encouraging more inclusiveness and as a result better legislation and regulation for all.

The Value Alliance and Corporate Governance Alliance

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserved.


Eleanor Bloxham on 08 May 2011

Corporate Valuation

Corporate Valuation is a topic of importance to not only shareholders but all stakeholders: managers, employees, creditors, communities, customers and suppliers, etc.

Jim McRitchie, publisher of, recently reviewed Alex Lajoux and Bob Monks’ new book on Corporate Valuation which should be in your library if valuation topics matter to you (and they should).

Please see Jim’s excellent post and review here:

The book Corporate Valuation provides a view on all the major methodologies of valuation. Here’s a link to Monks and Lajoux’s book if you don’t have it:

One of the surprises for Jim in the book was to find that I was credited with the development of one of the valuation methodologies featured in the book, a relatively new valuation methodology (which I wrote about and documented in the book Economic Value Management published in 2002

In case you are also unfamiliar with my work in this area, the valuation methodology I developed  takes into account the two-way value exchanges between the corporation and all its stakeholders as well as the valuation of the separate entities themselves, something I describe as the three-way mirror.

My methodology can be used by anyone and all stakeholders because unlike other approaches, it is much more comprehenisive in its thinking - and provides a toolset for a variety of stakeholders to assess the corporation from their own and multiple perspectives.

The methodology and approach go into enough detail that it can be especially useful for managers who already are close to the issues but need a framework to ensure they aren’t ignoring very important, relevant factors in the valuation process.

Recently I wrote for the inaugural edition of the Journal of Sustainable Finance (a peer reviewed journal) showing how the valuaton approach I had developed early in the last decade was essential for approaching corporate sustainability in a comprehensive and holistic way.;jsessionid=5d3nlijhk67dq.alice

Historically speaking, Alex Lajoux and Bob Monk’s reference to my work in their book on Corporate Valuation highlights the fact that my work pre-dates more recent shared value concepts and provides greater depth in laying out a specific valuation framework. Of course, I am very grateful  to Lajoux and Monks for recognizing my work in modeling the corporation and valuation in this way.

If you haven’t yet read it, I know the book Corporate Valuation will surprise you as it did Jim in numerous ways - with information on valuation approaches, insights and methodologies with which you may not yet be familiar.

Certainly, it will get you to rethink what you may have thought you knew on this very important topic.

The Value Alliance and Corporate Governance Alliance

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserved.

2 Responses to “Corporate Valuation”

  1. on 08 May 2011 at 8:32 pm1.Alexandra R. Lajoux said …


    Dear Eleanor:
    It’s high time that you got the recognition you deserve from your pioneering work in corporate valuation. Bob Monks and I, along with Jim McRitchie, salute you!
    Alexandra R. Lajoux
    PS: Thank you for mentioning our book.


  2. on 06 Jul 2011 at 9:24 am2.Dave Guerra said …


    I just read your new Fortune Money article How to Get Paid Like a CEO and it is truly astonishing. Greed and Selfish Leadership is super-alive and well at the top of especially U.S. companies. We need servant leadership more than ever. I would have to concur with Alexandra - great job!

    Dave Guerra


Eleanor Bloxham on 10 Apr 2011

Independent Board Oversight

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.

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, 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. 

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.”

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.”  
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.’”
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.” 
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 waschanged 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.”

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.”

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.’”
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.”
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.”

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. 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.)     

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.    

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 HP’s response here. 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 Eleanor Bloxham
Copyright 2011 The Value Alliance Company. All rights reserved.            

Eleanor Bloxham on 22 Dec 2010

Who’s in Charge?

Earlier today Fortune posted an article I wrote on board information and shareholder oversight.

The imperial CEO is not dead.

According to a study just released today by Korn Ferry (see 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

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserved.

One Response to “Who’s in Charge?”

  1. on 30 Dec 2010 at 8:09 am1.Melinda M. Sorensson said …


    I read the article a while back. It is very important and wonderfully written.

    My son asks me about stocks and corporate leaderships as part of his business education. It brings to mind Steve Jobs and Larry Ellison. I don’t see Steve Jobs having a clear heir apparent. The value of the stocks of his company are completely dependent on him.

    This is not a very sound practice, however I assume that someone like him would have someone in mind already.

    And then Larry Ellison. I am a great admirer of both Ellison and Jobs and follow their companies, because of them.

    The one thing I will always consider brilliant is Ellison’s choice of Safra Katz. It is fantastic, on all levels.

    By that choice alone, he has insured the long term stability of his company.


Eleanor Bloxham on 14 Dec 2010

How We Make Judgments - We’re Only Human

I have an interest in human thought processes — particularly those that drive  decision-making and behavior. Why? Part of it is because of the ramifications those unconcious processes can have beyond what we may see i.e. the butterfly’s wings.  I think it’s also because we often see decisions we can’t understand - how was that decision arrived at? - and we want to know what drove them.

This weekend I was doing some research and came across a variety of interesting connections between what we think — and our physical being. The kinds of judgments we make apparently about people and our reaction to ideas relates to our own physicality - we are human after all. It isn’t something most of us are aware of (I don’t think) yet it does reinforce the importance of suspending disbelief and belief in our daily encounters and decision making — and being aware.

ABC news reported on several of these studies a couple of years ago. (Read their report here:

For example, according to their report, a study out of Yale found those who held a cold beverage “gave more negative or ‘cold’ attributes like selfishness” to a person they were meeting, while those who held a warm beverage “rated the same person with ‘warm’ attributes like generosity.” “In a second study,they gave 53 test subjects hot or cold packs to evaluate under the guise of a product study…Afterward, the group touching the cold packs were more likely to act ‘cold-hearted’ by choosing a small giveaway prize for themselves, while the group touching the hot pack was more likely to choose a giveaway gift certificate for a friend.”  Even minor changes in movement can impact perception.

Another study “has found that whether a person is asked to push off from a desk with their hands on top, or pull in with their hands below, will influence whether they make positive or negative judgments.” (Kareem Johnson, a professor of psychology at Temple University in Philadelphia who studies human behavior is cited as the author of this work in the ABC report but that is incorrect. ABC may have been referring to the work of Joseph Priester according to Professor Johnson.)

And whether you feel socially excluded or included can impact your guess of room temperature with individual estimates ranging from 54 to 104 degrees depending on whether you feel excluded (cold) or accepted (warm) according to research at the University of Toronto published in the journal Psychological Science. (

Research out in May by University of Michigan professors Lee and Schwarz (Please read here: cites earlier studies that found “Hand-washing removes more than dirt—it also removes the guilt of past misdeeds, weakens the urge to engage in compensatory behavior” (Zhong, Liljenquist 2006), “and attenuates the impact of disgust on moral judgment” (Schnall, Benton, Harvey 2008)

It also cites past and more recent research that shows to avoid buyers remorse “People reduce dissonance by perceiving the chosen alternative as more attractive, and the rejected alternative as less attractive, after choice, thereby justifying their decision.” (Festinger 1957 and Cooper 2007).  They tested whether hand-washing had an impact and found that it does “suggesting that hand-washing psychologically removes traces of the past, including concerns about past decisions.” “Much as washing can cleanse us from traces of past immoral behavior, it can also cleanse us from traces of past decisions, reducing the need to justify them.”

The New York Times had a Freakonomics article summarizing literature on similar topics in September.

And David Pizarro at Cornell has done an impressive amount of research in the area of judgment and influences on judgment. Please see

I think we are in early stages of understanding how our bodies impact our minds and decisions — but it is an important topic for our judicial system to consider - both in terms of influences on criminality and judgments of criminals.

See this article published last year by Inbar and Pizarro.

As boards make important decisions and listen to the conclusions of others and evaluate their own decision making outcomes, it’s important to keep in mind how being merely human (in live bodies and physical environments) can impact our judgments, after all.

The Value Alliance and Corporate Governance Alliance

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserved.

One Response to “How We Make Judgments - We’re Only Human”

  1. on 14 Dec 2010 at 6:58 pm1.Melinda M. Sorensson said …


    I was thinking this today in the context of any large corporation doing and holding preferences of loyal clients, where they should have a website where people simply report a concern, an observation, a thought for future product.

    All decisions/preferences/habits are emotion based. It does not matter what it is. That emotion is a programmed response. An implant, if you will.

    Only a self determined individual will be able to separate objective observation from the emotion evoked by anything.

    The vast majority will respond according to patterns of behaviour they are accustomed to and it can’t simply be traced to childhood experiences either.


Eleanor Bloxham on 10 Dec 2010

Board Issue: Health Care

Gary Strauss shone a spotlight on executive and worker health programs in an article for USA Today published today. (Please read and comment on it here.

With say on pay universal for public companies in the US for the upcoming proxy season, perks will be in the spotlight — including health care packages for top executives which differ from the rank and file.

Clearly, as the board considers corporate compensation programs, health care is an issue that should be part of the boardroom conversation. 

The Value Alliance and Corporate Governance Alliance

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 07 Dec 2010

Your Shareholder Vote

I recently wrote an article for Fortune on shareholder voting and how battles over shareholder votes may intensify next year.

The article stemmed from reviewing a number of papers including a recent report published by IRRC Institute and the Rock Center for Corporate Governance last month entitled Identifying the Legal Contours of the Separation of Economic Rights and Voting Rights in Publicly Held Corporations, which reviewed the legal literature on shareholder voting.

The report referenced a number of papers, including one by Marcel Kahan and Edward Rock entitled The Hanging Chads of Corporate Voting published in the Georgetown Law Journal in 2008 which I reference in the article along with
Management Wins the Close Ones in which Yair Listokin reviews empirical evidence which shows management is overwhelmingly more likely to win votes by a small margin than to lose by a small margin.

From the background work I did for the article, it appears there could be increasing private litigation in this area.

So it is important that boards and companies push for reform. As Thomas Berkemeyer, Assistant Secretary and Associate General Counsel, of AEP writes in his comment: “The SEC should require brokers and other financial intermediaries to produce an eligible-voters list as of the record date for each shareholder meeting” and “The reconciliation methodology should be standardized.”

As Carol Hansell, an attorney with Davies Ward Phillips and Vineberg and a co-author of an important 184 page paper entitled The Quality of the Shareholder Vote in Canada puts it: will we continue to have a situation where we just don’t know if a shareholder’s vote has been counted or not, a situation that “resembles a party game in which a guest must name an object in a box by asking questions about what it might be rather than just looking into the box.” Will there be transparency and assured accuracy?

I think the question will be how long this issue will go on and whether we’ll wait until we are in crisis-mode. It’s not that this is a new issue, but it is one reaching a critical juncture.

The Value Alliance and Corporate Governance Alliance

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 07 Dec 2010

CEO Fatigue

The recent story of CEO stress and fatigue at Pfizer was well highlighted by Joann Lublin here and Joann Lublin and Jonathan Rockoff here

Clearly, the role of the CEO is changing and for succession and other reasons, boards need to rethink how the CEO role operates. I made a proposal to start the thinking process here. 

What changes do you think companies should make in this regard?

The Value Alliance and Corporate Governance Alliance

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserved.


Eleanor Bloxham on 07 Dec 2010

Insider Trading

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 and Nin-Hai Tseng’s article for Fortune here

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

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 18 Oct 2010

Creating Prosperity = Providing Opportunity

Real incentives inside corporations for better work and ideas are created when there is a belief in a future that is tied to one’s effort.

Can meritocracy, a dead idea, in Matt Miller’s A Tyranny of Dead Ideas — be revived?

On October 6, Fortune published an article I wrote on joblessness and solving the skilled worker gap — the idea that we need to stop hiring for specifics — and the idea that we need to give people an opportunity to fully use their skills and talents.

It discussed the need to re-evaluate current recruiting. And the need for boards to understand how critically important this is to our economic prosperity.

On October 15, the New York Times, ran an article that dovetailed with this theme and talked about some interesting research: 

“D. Michael Lindsay, assistant professor of sociology at Rice University, said his research showed that many of the people now considered elite in America did not start out that way. He is conducting what he described as the largest study ever of top leaders in America, having talked to over 500 so far across business, nonprofits and academia.  He said he had found that a privileged upbringing did not matter as much as generally thought. Nor, he said, did many of the top leaders inherit large sums of money. While many went to top colleges and a large number attended Harvard Business School, the biggest determining factor of whether someone moved into the elite was an early career opportunity. Being able to look beyond their specialty early — as opposed to being highly specialized their entire career and then thrust into a leadership role — distinguished great leaders more than any inherent advantage in their upbringing, he said.  ‘These people had a chance to be a generalist early on, as opposed to being specialists their whole career,’ Mr. Lindsay said. ‘They had that experience in their early 30s or 40s.’”

It’s time to reboot our thinking — and we don’t even have to re-invent the wheel to do so - we had a model that was working — we just need to revive it.

The Value Alliance and Corporate Governance Alliance

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 13 Sep 2010

Sexual Harassment — and the Board

As I mentioned in an earlier blog post, the board has an oversight role, a critical one, with respect to corporate culture.

One issue in the news of late with respect to culture is sexual harassment.

Did you know that if current statistics remain static, the likelihood your daughter will be sexually harassed at work is 1 in 4 (and your son slightly less than 1 in 10) according to a Vanity Fair poll in its October 2010 issue - p. 92.

Unless as a board member, you are focused on the culture in your firm, you might not realize the statistics could be so high — because not everyone reports the issue.

While 50% of sons will report the abuse, only slightly more than 1/3 of daughters will according to the poll. Considering all the negatives that such dysfunctional work environments can create, isn’t it time to deal with this issue and eradicate sexual harassment from our workplaces?

The Value Alliance and Corporate Governance Alliance

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserved.

2 Responses to “Sexual Harassment — and the Board”

  1. on 14 Sep 2010 at 1:46 pm1.Melinda M. Sorensson said …


    It is an important statistic that you cited. I do not have a daughter but I think the mothers should really emphasize the importance of telling them what goes on, especially something of this magnitude. I think it is because the girls tend to brush it off as “harmless flirtation” and that appears funny at first, but not so.


  2. on 23 Sep 2010 at 11:04 » CorpGov Bites said …


    […] The SEC and Diversity in the Boardroom: Commissioner Aguilar Speaks (theRacetotheBottom) Jay Brown offers additional insight in a multipart series. “Directors are nominated and vetted by the board. They typically run unopposed. Unsuprisingly, boards tend to self perpetuate, with little shift or change in diversity or background. This is, in short, an example of market failure.” […]



Eleanor Bloxham on 15 Aug 2010

Legality and Morality

In one of the many tapings I did about five years ago, one stuck out. It was a director who sits on several boards and made statements along the lines of – we figure out what is legal — and then we know the sphere of action — everything else is fair game.

I was shocked — but was so much so that I was speechless -  and didn’t  respond verbally as such on camera.

What caused this to come to mind was a group email I received with a similar theme this weekend — morality is defined by legality. It read “What ought to be is compliance with the law.”

Of course, if you have considered this idea before you recognize that requiring legality to define morality requires many laws. Ever since that incident about five years ago, I have wondered: is that what directors really want - enough laws and their sufficient enforcement to ensure that directors know what the moral lines are?

What happened to the idea of moral principles which go beyond the law? And law that was circumscribed to the fewest number possible that allow for a civil society and the preservation of rights?

I think we have entered a difficult passage if we are to accept that the law can proscribe all that is right and wrong. I think that we have lost our bearings if this is what we believe.

I like the idea of the fewest laws necessary — but if we insist that the law define our morality — we will need many more indeed.

The Value Alliance and Corporate Governance Alliance

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserved.

One Response to “Legality and Morality”

  1. on 17 Aug 2010 at 3:42 pm1.Evelynn Brown, J.D.,LL.M said …


    I understand your shock when the director articulated the “sphere” of action is defined including legal advice on what is “fair game.” A paradox exists between Legality v. Morality which I have titled; The Moral Integrity of the American Identity; How Avarice and Egocentrism Destroyed the U.S.

    There exists an extreme crisis of consciousness in this country. A total unawareness of the consequences of mindful decision making. A continual rippling of negative outcomes from high risk management behavior. U.S. leaders, executives and government officials believe they will be legally protected.

    Sometimes we must root around in the dark crevices to find our way to the light. There is lesson here and if we don’t learn it, we are destined to repeat it.



Eleanor Bloxham on 15 Aug 2010

Culture and Risk

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.

But who is responsbile for the largest influence on culture 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.

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.

The Value Alliance and Corporate Governance Alliance

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserved.


Eleanor Bloxham on 18 Jul 2010

Pressure for Conformity leads to Lack of Innovation

We always like to think that conformity and pressure to conform is externally driven. Of course, it isn’t. The pressure is internal — a desire to fit in, to be accepted and a fear of taking on this adventure called life. Maybe it was shaped in childhood but the choice to conform is one each adult must make.

Pressure for conformity does indeed lead to lack of innovation.

Jim McRitchie at has an interesting story on his website about the reluctance of boards to participate in innovative programs despite the fact that there is a feeling that something more and different would be beneficial.

Paul Hodgson had an entry in May on The Corporate Library Blog on the lack of conformity in governance thinking

Despite this, much of what companies actually do is quite uniform. See and  on pay.

The uniformity of pracitce is so pervasie that it makes new ideas all the more appealing. It’s why I applaud Bebchuk and others for thinking about new approaches even though in any particular example I may think they aren’t the right solution.

I had a refreshing conversation with a director a few weeks ago who put it this way: benchmarking is anti-American — it’s the antithesis of innovation.

I agree with this sentiment and even said so when I spoke for the Best Practices Institute a couple of years ago. (So called best practices are often used by firms to “benchmark” their own actions.) I told the BPI audience much of what I described on that subject in this Digest i.e. it is important  to innovate beyond benchmarks and so called best practice.

Benchmarking in compensation has been taken to an extreme. Last week Fortune published this article I wrote on an IRRC and Proxy Governance study.

The study showed that quite a few compensaiton committees in their benchmarking pick outsized peers — and quite a few pay markedlly more to their own CEO than the CEOs receive in the peer group selected.

Is this the veneer of conformity? Do the boards recognize that it’s veneer?

Of course, we also often have the reverse issue — the veneer of innovation, the veneer of considering new ideas.

In this article Fortune published on Friday, I talk about the situation of Tim Leech trying to take on that veneer and the conformity he has faced.  It is an important story because it goes to the heart of what is plaguing us, mired in conventional wisdom and failing to access the talent which could provide us solutions. It is also important because it gets at some of what caused the “Great Recession”. If you are wondering “why SOX didn’t work”  – and what could make a big difference — the specifics as well as the processes that need to be fixed are told in this tale.

Still the question remains: Will the Great Recession be motivation enough?

The Value Alliance and Corporate Governance Alliance

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserved. 


Eleanor Bloxham on 10 Jul 2010

SEC’s Next Steps

On November 16, 2009, I sent in comments to the SEC in response to their request for comments on their strategic plan.

One section of my comments was entitled: “Issue: Conflicts in the Mission” and stated “In articulating its strategy, SEC articulation of how it intends to reconcile the competing elements in its mission statement is key. ‘The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.’  How does the SEC reconcile and evaluate its responsibilities (actions or inactions) when the different elements of the mission come into conflict. For example, when facilitating capital formation conflicts with investor protection – what trumps? How does the SEC reconcile this? A pinch of this and a pinch of that?  What in other words are the governing principles?

When the SEC asks for issuer comments on the difficulty in complying with a new investor protection, the conflict between issuer requirement and investor protection comes into focus. What is not clear is how the SEC in each instance thinks strategically about how it is reconciling the different parts of its mission to the actual decision and activities it undertakes.  A similar conflict occurs when the SEC makes determinations about what may or may not be included on the proxy. How in these instances is the SEC choosing ‘protect investors’ vs. ‘maintain fair, orderly, and efficient markets’ vs. ‘facilitate capital formation’ or something else.

Clear articulation of this decision-making process would be very helpful in evaluating the SEC’s proposals and strategic objectives and in strengthening and building a bridge of trust between the SEC and the public related to its own transparency and integrity.”

In her speech to the Society of Corporate Secretaries and Governance Professionals July 9, 2010, Mary Schapiro addressed some of these issues in her remarks. “The SEC has a three-pronged mission: protecting investors; maintaining fair, orderly and efficient markets; and facilitating capital formation. Obviously, each of these mandates is intertwined with the others—investors are better protected when markets are fair and orderly; markets are more orderly and efficient when investors have access to honest brokers and accurate information; and capital formation is more efficient when markets are functioning smoothly and investors are confident.But if there were to be a conflict between, for example, investor protection and efficient markets, the debate would be settled by asking the question I have posted on the door to my office: ‘How does it help investors?’ And so, investors are the focus of our agenda.”

This statement is a step in the right direction in terms of articulation of purpose — and it  will help to flesh this out further.

What helps investors more? The definitons of “helping” and “investors” become the issue. That’s why in my November 16, 2009 comment letter, I also suggested that SEC define what the SEC means by investor and what is encompassed in protection.

Issue: Who is Being Protected?  – In articulating its strategy, the SEC’s definition of investor is key.

One issue in the current dialogue on proxy access and other matters relates to the mission of the SEC in protecting ‘investors’. While the document, ‘The Investor’s Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation’ provides valuable information about the mission and objectives of the SEC, it does not address the issue of whom the SEC is protecting.  This definition is critical. Are flippers and traders the subject of protection? Are retirees? Are institutional investors?  What about small versus large holders?  What is meant by protection for each kind of investor? And if the protection of the different categories of investors creates a conflict, how will the Commission resolve that conflict between the different categories?

I believe that the SEC should strive to address this vital issue in writing with clarity before providing guidance on significant issues.

For example, in the area of proxy access, by clearly articulating the meaning of the mission statement with respect to this matter and addressing the SEC’s responsibilities and protections of the different investor classes, a roadmap would be in place which would make it simpler to understand the outcome of proxy access related to: who and why them?

In this strategic plan, the issue is raised also in Outcome 2.1, the first performance metric where ‘the SEC plans to conduct a survey of financial analysts and institutional investors to elicit feedback on the quality of disclosures and the Commission’s disclosures requirements’.  This raises the clear questions of:  why them and not individual investors? Why would the input of short term financial analysts and institutional investors trump that of long term individual holders?

The Values of the SEC state that ‘the SEC treats investors … fairly’. Clarity and clear articulation of the implicit assumptions around who is ‘the investor’ i.e. the assumptions which represent the SEC’s operating model of decision-making would be very helpful in evaluating the SEC’s proposals and strategic objectives and in strengthening and building a bridge of trust between the SEC and the public related to its own transparency and integrity.

Issue: Protection  — In articulating its strategy, the SEC’s definition of ‘protection’ is key.

The Values of the SEC state that ‘the SEC treats investors … fairly’. Whom and what are investors being protected from? (This list could include bad disclosure, unfair solicitation practices, poor governance; it could also name the possible actors who might be involved.) Is it the same for every class of ‘investor’? Being explicit, here as well, will help to resolve seemingly intractable issues like proxy access more deliberately and thoughtfully. It will also help validate (or not) specific objectives in the strategic plan and the recommendations related to future disclosure requirements.”

In her speech, Mary Schapiro referred to the pending review of proxy access this way: “we will be looking at ways to improve the voting process; we will be looking at communications and shareholder participation; and we will be looking at the role of proxy advisors, among other subjects.”

To do this carefully and critically, I believe the SEC needs to carefully consider the issues of “who is to be protected” and “what protection means”.

The Value Alliance and Corporate Governance Alliance

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserved. 

Eleanor Bloxham on 03 Jul 2010

Risk Transparency and the Purpose of Incentives

Yesterday Fortune published this article which I had written on incentive compensation design.

Later in the day I submitted comments due into the FDIC (12 CFR Part 327  RIN 3064–AD57) on their new proposed assessment scheme and I realized the two had been related. 

In the FDIC’s proposal, they stated: “The FDIC has found that debt issuer ratings, particularly for the largest institutions, do not respond quickly to an institution’s changing risk profile.”  In saying that, they had made one of the points I had made in the article, and actually it would have been quite useful to have realized they had said it and quoted them.

I believe the purpose of incentive compensation is to shape and mold behavior. If you simply wanted to retain someone and felt more money was necessary, just up the salary.

Incentives really are about creating an incentive to behave in a certain way. What is key is the impact that the incentive has on the behavior of the recipient. And that is why performance metrics are key (a point the Federal Reserve makes in their guidelines to banks).

For this reason in the article for Fortune I set out two tests that should be applied to any incentive scheme  – (1) can managers control the outcome of the measure? and (2) if they can control it, is it an outcome we really want managers focused on? If they can’t control the outcome, the purpose of having an incentive is missing. So that’s either a waste of a good incentive or a distraction — neither good. If managers can control the outcome but it isn’t a proper area of focus, why dilute their actions? Again, a waste of a good incentive and a distraction - or worse, it may cause them to take actions that are not in the best interests of the company, all shareholders and stakeholders.

The failure of incentives was clear in this last crisis. As I wrote to someone who had sent me a message about the article yesterday, my interest in the incentives is from the perspective of the behaviors of  executives and shaping that behaior in advance of the markets’ understanding/catching on to the full picture. My interest is in ensuring executives are motivated from the beginning to manage risk before markets catch on. I am interested in changing behavior as much as pay.

And as I note in the article, internal views of risk will always be more robust than what any market player without inside information can glean. In this BP article for Fortune  I quoted Michael Griffin’s thoughts on reflecting on the Challenger accident - which is applicable to the financial crisis too:”When we investigate, we always find that there were people who did see the flaw, who had concerns which, had they been heard and heeded, could have averted tragedy. But in each case the necessary communication — hearing and heeding — failed to take place.” There were people who understood. They either did not speak or were not listened to.

Financial institutions manage risk and know much more about those risks than the markets ever will. If executives were paid based on properly designed risk based metrics, incentives could act in advance of the catch up markets do in understanding.  

While I have always felt strongly about these issues, I feel even more strongly post-crisis. Before the crisis and the markets had recognized what was happening, on December 6, 2006 on CNBC, I was asked about executive pay at investment banks and I questioned the huge bonuses from the standpoint that it did not seem to me that the performance results for the banks were long term sustainable. The stock price was the argument used against what I said. (Therefore I have  issues with equity based pay as my article outlines.) At the time, the CDS spreads, had someone used that argument, would have gone against me too. (They spread later according to this paper by Bolton, Mehran and Shapiro.

I believe we need to fix incentives properly. I’d like to stop the (gravy) train before it ever leaves the station and support the aims to get bankers focused as they should be — and the behaviors aligned.

It’s a tough task. And I think regulators have a very important role in encouraging this tough work to prevent what happened from happening again. Every day I see what not doing the tough work has cost so many people and I do not like what I feel inside as I think about it.

We can do this. Happy July 4th.

The Value Alliance and Corporate Governance Alliance

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 29 Jun 2010

The Butterfly’s Wings: Choices and their Risks

My latest Digest publication available at weaves a number of themes from current news into a picture.

Some of those themes and their meaning may be more apparent than others.

One term I coined in the discussion was “invisible features”. The use of the term ”invisible features” was used to convey the idea that consumers and capital providers are looking beyond what they used to. They are looking beyond what immediately impacts them to “how” something is made. They are looking beyond what immediately impacts them to “how” a company generates its returns. For example, is the environment being polluted? Are human rights being violated? Are stakeholders being harmed?

They are looking at  a whole set of criteria unrelated to the narrow performance criteria that individuals used to use in the past when deciding to purchase an item or buy a stock.

The narrow decision making of the past focused on the performance of the item in relation solely to the individual - does the product perform for me; does the stock perform for me. “Invisible features” mattered less — and when they mattered it usually related to notions of consumer protection in the narrow sense — of the performance features of the item for me. (For example, does the manufactured food contain a harmful ingredient or the toy a feature that may harm the child.)

As a world, we still have a foot in both places — the narrow decision making and the broader one — but the broader one exemplified by the broader “invisible features” contingent is growing larger and more vocal yearly, monthly.

I used the term “invisible features” rather than refer to governance or human rights or the environment or other related descriptions of how products are produced, services are conducted, or companies are run — because using those words creates certain connotations. And more than that, using those words tends to make people think of the ideas as separated concepts, distinct concepts — different from the process of making and selling a product or building a company and selling a stock.

Separate, however, is not the way  those who care about these matters view them — they see them as integral albeit “invisible features” — invisible features to the products and services they fund through purchases and invisible features to the companies they fund through purchases or through stock ownership. So I was hoping this use of the phrase would convey that.

Why is this important? As an example of “separated” thinking, there are directors who sit on boards who will say we don’t care about govenance — we are here to create value for the shareholder. Their statements are presupposing that the ideas of governance and shareholder value are separate and distinct.  I believe that is because the separate naming of the thing “governance” or “shareholder value”, along with the narrow way these things are described in common parlance, create an illusion of “otherness” — as if the concepts are not related. The separateness of the language contributes to a “separate camp” mentality i.e. “We are in the shareholder value camp, not the governance camp”. To my mind, in the long run, this “separate camp” thought process only produces lack of understanding not more.

So the usage of “invisible features” was there to try to bridge the chasm. We can all relate to these ideas from that standpoint I think — a feature creates a reaction in the mind of the customer. Nothing very controversial about that.

This edition of the digest was also seeking to present the conundrum of the choices we collectively make toward stability and instability — and how these are not either/or decisions. Humans exist with a need for both — and there are long term consequences that occur related to our choices. In the short run transfering risk to others could seem good in a very narrow sense, for example, but it has boomerang effects to those that transfer risks elsewhere that often are overlooked.

The digest also hoped to portray (without using the words) the concept of the butterfly effect, the sense that small motions like the flapping of a butterfly’s wings can set in motion impacts that are large — and unimaginable. For example, the digest explores the idea of the impacts of the movement over the last 30 years toward defined contribution plans. The digest also explores the idea of the impacts of the commonplace use of layoffs. Both were adopted as mechanisms to promote corporate flexibility. Both transfer risk from the corporation to the individual. But have they produced the intended consequences? (This is a question the digest explores.)

The idea of layoffs has not always been commonplace but has been adopted in a somewhat “me too” fashion over the years similar to the idea of “offshoring”.

With respect to layoffs I was witness to a dramatic event in the life of corporations which occurred when I was attending a disaster recovery seminar in New York City. I don’t recall the exact date though a New York Times article seems to indicate it was February 16, 1993. That’s the day “I.B.M. ended its no-layoff policy” according to the article. I remember that day because as you can imagine there were a lot of IBM’ers at this seminar, given the subject matter. They were in shock. This was a reversal of the tradition of a 100 year old company.There was a sense of betrayal that day that IBM’ers felt that was palpable even if they were not the ones impacted. It represented a change in a social contract not required or instituted by government but a social contract honored by a highly regarded corporation, one that had been in place for many, many years.

When we think about the causes for any event, we often think of the immediate causes. It’s human nature — but we think less often about other causes and conditions that created consequences but are not immediately near to what we are exploring.

Take, for example, the financial crisis. All the reasons given for the crisis are part of the equation and I’ve written about them and discussed them elsewhere.

But all our dialogue hasn’t really addressed the intentions which we must address. There has been talk of greed, of course, but this has been in a narrow context.

Our dialogue hasn’t yet sufficiently addressed some root issues and our intentions with respect to them which we must address if we are to move forward in a non-knee-jerk way. 

What I haven’t seen discussed is the series of choices we have made collectively, over the last decades, related to risk and instability which influenced the crisis we have faced. Of risk transfers which exacerbated the financial follies.

Coming out of the great depression, a decision was made that stability in employment was a worthwhile social goal as was retirement security. Since then, that resolve has been forgotten in corporate life.

That choice has consequences to financial markets and political systems. Obviously there are elements of society that can make money because of risk and instability — they can turn it to their advantage. What is more difficult, however, is for us all to not suffer the consequences of that short term choice.

The digest ends on a note of hope — that we can take stock and make other choices, recognizing that what we thought might generate flexibility actually may stand in its way –  something to consider as we make our way through the new complexities we have created in a world of butterfly wings and interdependency.

The Value Alliance and Corporate Governance Alliance

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 15 Jun 2010

The Risks in Budgets and Plans

Early in my career I ran a strategy and financial planning area — and designed and coordinated the budget process for thousands of employees. I gave up at least a couple of summers to this work which at that time was all consuming.

First hand I had the oppportunity to reflect on the downsides (that went beyond the long hours I put in) of traditional approaches to corporate financial planning, of budgeting processes, and tying bonuses to meeting or exceeding financial plans.

I’ve spoken about these downsides at conferences and written about them in my bookEconomic Value Management: Applications and Techniques and in published articles. 

Now those downsides have been writ large in the story that is emerging about BP.

Yesterday, the House Energy and Commerce Committee released a letter to Tony Hayward explaining five instances in which BP’s employees had chosen to take cost saving rather than safety enhancing measures in the construction of the well.

References in the emails released by the Committee suggest that individuals at BP were highly cognizant of cost over-runs — and justification to “a plan” not necessarily explicitly discussed in-depth but ever “present in the room”.

In my book, I discuss some of the reasons traditional planning processes have become so popular. And despite that, what a small role (compared to the one they do play) they should play in corporate management. If nothing else, BP serves as an example of the harm they can do and the havoc they can wreck writ large across the Gulf of Mexico.

If we are to take heart that there is a lesson, beyond the event itself, one can be found in this. As a director, consider carefully the regularity with which plans are faulty and evaluate how good any company really is at planning (did your company forsee the breadth and depth of the financial crisis?). Consider this carefully before you consider tying peoples’ performance, reputation, promotion and pay to “plans”.

Consider carefully also the harm, as BP has shown, of doing so.

The Value Alliance and Corporate Governance Alliance

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserve.

One Response to “The Risks in Budgets and Plans”

  1. on 23 Jun 2010 at 11:03 » CorpGov Bites said …


    […] Eleanor Bloxham (The Risks in Budgets and Plans, 6/15/10) reflects on BP and offers “As a director, consider carefully the regularity with which plans are faulty and evaluate how good any company really is at planning (did your company forsee the breadth and depth of the financial crisis?). Consider this carefully before you consider tying peoples’ performance, reputation, promotion and pay to “plans”.” […]



Eleanor Bloxham on 03 Jun 2010

Models of Thinking: Risks and Strategic Considerations; Ethics and Competence

As I was perusing the Financial Crisis Inquiry Commission website, I ran across an exhibit  “Moody’s Correlated Binomial Default Distribution”.

It made me think about a conversation I had with someone at Moody’s about issues in capital attribution models using the binomial, in which I pointed out that the binomial modleling wasn’t an accurate way to model capital requirements.  

The math was easier to do using the binomial, I was told. (And everyone agreed that it was and did it that way.)

I talk about the fix to using the binomial for risk capital calculations and why it is important, in my book, Economic Value Managment: Applications and Techniques The book shows an example of how the binomial consistently understates the risk/the amounts of capital required.

It also reminded me of a conversation I had yesterday with a group of directors in which I was discussing the importance of considering risk costs when making decisions.

One of the directors present asked me to relate an example where I’d used this so I picked one which impacted the financial crisis.

I told them about the securitization analyses I’d been involved with related to the risk of securitizing sub-prime and credit card portfolios.

If one ignored risk costs, securitizing these assets might make sense. Securitization provided a pop to earnings, which  managers liked. It had a downside though that has been likened to cocaine — a merry go round once started it is difficult to get off - once you had that pop to earnings it was difficult to resist replenishing it.

In contrast, I explained that if you included the risk costs of securization in the decision making model, securitzing these portfolios was “non-economic” i.e. non-value creating for the bank originators — all the advantage went to the investment banks who earned fees for putting them together.

The point of my story was that including risk costs in decisions can make a big difference and should be a regular part of financial and strategic decision-making — but it’s not often done. (I talk about this too in my book - i.e. how to include risk cost in decision making — and I outline the securitization example/analysis.)

Maybe of interest, I also told them this personal story related to the selling of securitizations by investment banks early in the life of my firm, which I founded in 1999.

I was approached by a person from an investment bank and another from a credit rating agency because they wanted to work together to sell securitizations and they wanted my assistance, to bring my “value cache’” as a sort of imprimateur in recommending securitizations to the banks.

I remember saying to them that every analysis I’d seen showed it was not in the best interests of the originating banks — it was non-economic for them –    Did they still want me to do it?

And the answer I received was yes.

I didn’t, of course.

For me, this is an example not just of risk modeling and making of strategic decisions but also how ethics and competency can get all muddled up.

Ethics and competence in a situation — Which is the chicken and which is the egg?

Guessing you have stories you have lived like this too where ethics and competence seem to intersect and become tangled.

The Value Alliance and Corporate Governance Alliance

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserved.


Eleanor Bloxham on 26 May 2010

Short-termism and Performance Criteria

Short-termism is often lamented for a time and then the issue fades to be revived again in fits of passion.

It is a subject I have written about for years and put into practice in the design of performance criteria for compensation plans.

The Corporate Governance Alliance Digest discussed the CFA (chartered financial analyst) community and the Business Roundtable coming together to plea to “Break the Short Term Cycle” in 2006.

With the financial crisis, calls were renewed to address the issue in the banking community. Regulators, including the Federal Reserve and FDIC, have sought to describe in guidelines for the banking community the importance of longer term thinking in setting performance criteria. See  or listen to for discussions of the Federal Reserve’s recommendations.

Despite the discussions, issues exist. Fast forward to yesterday when the the Wall Street Journal’s “Best on the Street” survey for 2010 was published. The “Best on the Street” singles out analysts who have performed better than their peers.

So what is the performance criteria for analysts to be considered best on the street? I checked with Factset to get my facts straight. Performance returns used in determining the best on the street are based on one year or less of performance. Specifically, the returns attributed to an analyst are calculated as of the date of a recommendation (sometime in 2009) and last through the time of change of that recommendation (sometime in 2009) — or the end of year (2009), whichever comes sooner.

The awards of best on the street are therefore based on the ability to call short-term movements in stock price. The performance criteria are constrained within the  prior year i.e. an ancient astonomical measurement of the time it takes for the earth to revolve around the sun.

I think a different and longer time horizon is warranted, one suited to the long term investor.

It may seem a minor thing but performance criteria and time horizons matter even for non-cash payoffs. I have known people who go to what I consider extreme lengths to win awards.

With say on pay coming as a result of the recent financial reform measures passed by the House and Senate last week, performance critieria — and pay for performance will come into the spotlight even more.  Here’s an article I wrote for Fortune on that yesterday.

The Value Alliance and Corporate Governance Alliance

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 18 May 2010

The Massey Board Crisis, Risk Management and Shareholder Relations

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.

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

Eleanor Bloxham

Copyright 2010 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 11 May 2010

Living Wills: A Risk Management and Communications Tool for Board Leadership

 According to Reuters and the Wall Street Journal today, the FDIC is proposing that forty of the largest depository institutions under its jurisdiction write living wills.

One thing I haven’t seen mentioned in those articles is the origin of the living wills concept. In November, the Financial Stability Board identified 30 institutions world-wide which it asked to prepare living wills by this summer.

I think the living wills concept has a great deal of merit as a risk managment and communications tool not just for banks but for other corporate boards as well.

Our world needs active leadership in the boardroom. For more on the living wills concept and other boardroom leadership issues, please see this article which was published in January. 

The Value Alliance and Corporate Governance Alliance

 Eleanor Bloxham

 Copyright 2010 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 03 May 2010

Goldman Sachs Underwriting Guidelines: The Future of Capitalism is up to Capitalists

 When I was interviewed by Morgen Witzel on “The Future of Capitalism” for the March/April 2010 Corporate Finance Review, one of the issues I discussed was the recent history of capitalism which has included changes to the standards that firms on Wall Street employ. 

As an example, I pointed to a conversation I had with John Whitehead, retired co-Chairman of Goldman Sachs. In that conversation, he and I discussed how he viewed underwriting standards at Goldman and how, as a result, Goldman turned down business that it thought would hurt capital market participants.

Here is a link to take you to that conversation. (It may load a bit slowly so please be patient.)

It demonstrates the degree to which players like Goldman Sachs can shape the nature of capital markets by the decisions they make. It provides a standard for all current participants on Wall Street to live up to.The Value Alliance and Corporate Governance Alliance

 Eleanor Bloxham

 Copyright 2010 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 26 Apr 2010

Disclosure and Board Evaluation Practices

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

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

 Eleanor Bloxham

 Copyright 2010 The Value Alliance Company. All rights reserved.

Eleanor Bloxham on 19 Apr 2010

The Goldman Sachs Board and the SEC History

 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 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 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, 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

 Eleanor Bloxham

 Copyright 2010 The Value Alliance Company. All rights reserved.

2 Responses to “The Goldman Sachs Board and the SEC History”

  1. on 19 Apr 2010 at 4:28 » What Should Boards Learn From Goldman Sachs? said …


    […] There’s been a raft of coverage. One of the best summaries I’ve seen is Goldman Sachs vs. SEC: All You Need To Know (Latest UPDATES) on the Huffington Post. However, boardmembers of Goldman Sachs and other vulnerable banks are advised to read Wall Street beware: the lawyers are coming, by Frank Partnoy,, 4/19/10 and  The Goldman Sachs Board and the SEC History at The Bloxham Voice, 4/19/2010. […]


  2. on 25 Apr 2010 at 4:55 pm2.Catherine Finamore Henry said …


    Interestingly, one of Goldman’s Business Principles reads “Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most difficult to restore. We are dedicated to complying fully with the letter and the spirit of the laws, rules and ethical principles that govern us. Our continued success depends upon unswerving adherence to this standard.” or not the recent SEC fraud charges and subsequent shareholder lawsuits of lax oversight prove to have merit, these words may prove to be eerily prescient for Goldman.

    Regarding the cultural issues, the Goldman Sachs board should determine if executive management has taken adequate steps to ensure that the actual culture of the organization “encourages ethical conduct and a commitment to compliance with the law” (U.S. Sentencing Guideline §8B2.1(a)(2)), and in reality, aligns with and supports behavior that is consistent with the well-written aspirational Business Principles. A history of SEC suits against Goldman as identified by Bloxham may be relevant here.

    At the same time, unfortunately, the board, as defendants in the associated shareholder lawsuits, should be under scrutiny to determine if it has exercised “reasonable oversight with respect to the implementation and effectiveness of the compliance and ethics program.” (U.S. Sentencing Guideline §8B2.1(b)(2)(A))

    This brings to light an inherent challenge associated with responsibilities for effective organizational ethics and compliance programs. The board has oversight responsibility with respect to implementation and effectiveness of the ethics and compliance program, while executives and other high-level personnel have responsibility for the development and implementation of the program. What happens to the checks and balances when, as in the case with Goldman Sachs, the Chairman of the Board and Chief Executive Officer is one and the same? I am reminded of the popular banking commercials about the right thing to do in business, even kids would know better.

    Catherine Finamore Henry, CIA, CCEP,


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