Tag Archives | ethics

Insider Trading: Two Perspectives

Contrasting opinions from Marty Robins, attorney and adjunct law professor at Northwestern University School of Law and DePaul University College of Law, as well as a frequent commentator on Corpgov.net.

As a retail investor, I’m told that I should be happy about the Rajaratnam conviction on various charges related to insider trading activity. The prosecutor in the case tells the world that this behavior “cheats the ordinary investor.” I’m also told that the insider trading crackdown which we are now seeing ‘levels the playing field’ between professional and ‘ordinary’ investors. “In scoring their biggest insider-trading victory in a generation, regulators have a message for a nation of nervous individual investors: When it comes to information about stocks, the playing field is getting a little more level.”

I don’t follow this logic and am concerned that this crackdown is misguided and perhaps counterproductive… To actually benefit retail investors, and the economy as a whole, we need governmental efforts which focus on causing companies to be better run and avoid the sort of debacles which have plunged our economy into recession twice during the last ten years… Until such matters are front and center, stopping insider trading will be nothing but an economic sideshow.  (Marty Robins: Tell Me Why I Should Care About Ending Insider Trading, Huffington Post, 5/13/2011)

And this from Mort Zuckerman, magazine editor, publisher, and real estate billionaire.

As one of the trial witnesses put it: “Research is sort of like doing your homework ahead of time. Getting the number is more like cheating on the test.”…

The playing field may never be truly level on Wall Street, but the government is now in a position to patrol more aggressively the grey line between financial research and financial crimes. The courts will be more willing and able to make wiretaps available to the Securities and Exchange Commission. Concern that federal agents are listening should be an effective deterrent and reinforce the idea that people need to be very careful about how they deal with information that has financial value. As the prosecutor put it in the press conference announcing the original arrest: “Greed sometimes is not good.” (Timely strictures on the audacity of greed, FT., 5/16/2011)

Personally, I’m all for fairness. Insider trading may be a “sideshow” compared to better corporate governance but it is still wrong.

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Is The Market Rigged?… Yes, According to World Survey

47% of respondents in a survey of 400 investors from across the world found one-on-one meetings with companies regularly lead to price sensitive information being divulged, according to the Rotterdam School of Management.

Surveys like this, along with the Rajaratnam trial, the saga over David Sokol’s Lubrizoil trades and a overwhelming sense the market is stacked against them helps explain why mom & pop haven’t piled back into stocks even after a more-than 2-year bull market.

See video and post at Is The Market Rigged? Survey Says … ‘Yes!’ – Yahoo! Finance, 5/5/2011.

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The Psychology of Cheating

Paradoxically, it’s often an obsession with fairness that leads people to begin cutting corners in the first place.

“Cheating is especially easy to justify when you frame situations to cast yourself as a victim of some kind of unfairness,” said Dr. Anjan Chatterjee, a neurologist at the University of Pennsylvania who has studied the use of prescription drugs to improve intellectual performance. “Then it becomes a matter of evening the score; you’re not cheating, you’re restoring fairness.”

… people subconsciously seek shortcuts more than they realize — and make a deliberate decision when they begin to cheat in earnest.

… Low-level cheating may be natural and even productive in some situations; the brain naturally seeks useful shortcuts. But most people tend to follow rules they Continue Reading →

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The Board’s Role in Safeguarding Reputation

There is a good reason why Warren Buffett wrote in a recent memo to Berkshire Hathaway managers,

The priority is that all of us continue to zealously guard Berkshire’s reputation. We can afford to lose money – even a lot of money. But we can’t afford to lose reputation – even a shred of reputation.

At a recent Arizona Chapter meeting of the National Association of Corporate Directors, a panel of experts including Professor Charles M. Elson and Professor Robert E. Mittelstaedt expressed concern about the recent spate of insider trading scandals making headlines in national publications and what these ethical breaches may say about the core values of our society.

Management mischief and lax corporate cultures can lead to reputational damage, loss of revenues, higher legal fees, and possible fines and sanctions. As is typical in large organizations, senior leadership does not want to accept bad news. Small problems can be ignored and eventually lead to bigger problems that appear on the front page of a national newspaper.

In 2010, Johnson & Johnson was involved in at least 11 major recalls. Chief Executive Officer William Weldon maintains the company’s quality control issues have been “overshadowed by one company” (McNeil), and maintains “this is not a systemic problem.” At Johnson & Johnson, each division has its own culture. Weldon’s problem could be one of not having actionable intelligence at his fingertips to oversee J&J’s more than 250 companies operating in 60 countries.

The California Public Employees’ Retirement System (CalPERS) has also taken a hit to its reputation as a result of scandals involving Board members and placement agents. Recent efforts to prevent future scandals have yet to restore trust and confidence in the system.

How can the Board proactively safeguard the organization’s reputation? On an ongoing basis, the Board must independently verify that the organization’s performance is legal, ethical and sustainable by extending its inquiries beyond the senior leadership team and deep into the employee population of the organization.

The Board has fiduciary responsibilities best met by engaging an independent party to assess the efficacy of structures, policies, and systems on an ongoing basis to substantiate to external stakeholders that the organization is committed to the core values of integrity, transparency, accountability, and risk oversight.

To safeguard the organization’s reputation, the Board can no longer rely on internal stakeholders alone and must trust, but verify. The Board can accomplish this by engaging an independent party to survey and solicit input from every employee to identify material weaknesses in internal control, compliance and reporting systems that can go undetected by traditional internal audit, risk, and compliance programs.

Finally, the Board should engage an independent party to rapidly elevate risk and operational intelligence to the C-Suite and Board to ensure senior leadership is willing to accept bad news from subordinates and address problems by initiating appropriate actions.

Failure of the Board to independently verify that the organization’s performance is legal, ethical and sustainable may easily have significant consequences in light of the proposed rules for implementing the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934. As Mark Twain said,

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.

Why risk paying a whistleblower millions when, with very little time and effort, you can create and maintain a culture where that doesn’t happen?


Guest post from Mark Rome of zEthics, Inc.. The Business Integrity Alliance is a joint venture between zEthics and Boundless, LLC, which provides organizations an independent assessment of corporate culture on an ongoing basis to safeguard an organization’s reputation.

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Video Friday: Joseph Stiglitz Discusses Elite 1% & U.S. Free-Fall

Of the 1%, by the 1%, for the 1%, Joseph E. Stiglitz in May Vanity Fair, discusses the fact that the top 1% now control 40% of our wealth.

The corporate executives who helped bring on the recession of the past three years—whose contribution to our society, and to their own companies, has been massively negative—went on to receive large bonuses. In some cases, companies were so embarrassed about calling such rewards “performance bonuses” that they felt compelled to change the name to “retention bonuses” (even if the only thing being retained was bad performance)…

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Take Action: Sixty Years of ShareOwner Rights at Risk

Your right to file a proxy without being hauled into court or having your proposal ignored is at risk.  I urge readers to raise the profile of the SEC’s failure to act by sending e-mails to the Office of Chief Counsel at [email protected] and the Chairman at [email protected]. I also recommend you fill out the complaint form at https://tts.sec.gov/oiea/QuestionsAndComments.html, since this will go to the Division of Enforcement, the office that could take action.

As I said in a recent post (Texas Secession Led by Apache, KRB and Kinetic Concepts), Lewis Gilbert was instrumental in winning a formal SEC rule in 1943 that shareowner proposals be included in the proxy. After many challenges, the SEC’s powers were finally sustained in the 1947 case, SEC vTransamerica, when judge John J. Biggs Jr. ruled, “a corporation is run for the benefit of its stockholders and not for that of its managers.”

It took until 1988 for a shareowner proposal by Richard Foley to finally get a majority vote. Rights, which have taken many decades to win could be gone very quickly if we simply do nothing to defend them. The SEC’s rules are not self-enforcing but depend on shareowner vigilance. “All that is necessary for evil to triumph is for good men to do nothing.” While we aren’t sure who said it first, Edmund Burke or Leo Tolstoy, we all know it to be true. Here’s the e-mail I sent:

Dear Chairman Mary Schapiro and Mr. Greg Belliston:

I understand Apache and Kinetic Concepts informed the SEC they would exclude shareowner proposals from Mr. John Chevedden and further that they are going doing so without the SEC issuing letters indicating it would take no-action on such an omission. In fact, Kinetic’s request for a no-action letter was actually denied. These companies have not met the burden of 14a-8(g). They have not demonstrated they are entitled to exclude these proposals. In fact the SEC said as much in letters issued to Hain Celestial, Union Pacific, Devon Energy, Prudential, News Corp and Kinetic Concepts.

I believe taking action against Apache and Kinetic Concepts should be a high priority for the SEC. Otherwise, a growing number of companies will simply believe they can ignore shareowner resolutions, which form an important cornerstone of corporate governance.

Attached is the April 5 letter from Kinetic Concepts putting the SEC on notice that it will mail its proxy without Mr. Chevedden’s proposal on April 15th, despite the previous refusal of the SEC to grant their no-action request.  Apache has already done so. I understand the SEC has a lot of high priority action items but if the SEC doesn’t go after these companies we could see a flood of copycats, with shareowner rights that have been in place since 1947 placed at risk.

I’m surprised the SEC hasn’t at least posted Kinetic’s letter at http://www.sec.gov/divisions/corpfin/cf-noaction/14a-8-incoming.shtml but I guess the letter isn’t a no-action request. Instead, it is a notification of Kinetic’s intent to test the SEC’s willingness to follow-up on staff’s decision not to grant a no-action letter. Does such a decision by SEC staff mean anything or is the SEC too busy to really take shareowner proposals seriously?

Both companies are relying on an flawed court decision from a suit brought against Mr. Chevedden by KBR. Even a quick glance at page 6 (2011-04-04 KBR Chevedden Docket 24 – Memorandum and Order https://www.corpgov.net/wp-content/uploads/2011/04/2011-04-04-KBR-Chevedden-Docket-24-Memorandum-and-Order.pdf) reveals the judge didn’t base her decision on what is required in order to show evidence of ownership for a 14a-8 proposal. Instead, she bases her decision on evidence of ownership requirements adopted in 14a-11, the provisions for placing shareowner director nominees on the proxy. Aside from being on a completely different subject, these rules are not even in effect, but as you know have been stayed.

I urge the SEC to take action immediately or we will all be facing a very messy situation.

Thank you for your consideration.

Your own e-mail and paste to the Division of Enforcement complaint form could be very simple:

I understand Apache and Kinetic Concepts informed the SEC they would exclude shareowner proposals from John Chevedden and further they will do so without the SEC issuing letters indicating it would take no action on such an omission. In fact, the SEC rejected such a request from Kinetic Concepts on March 21. These companies have not met the burden of 14a-8(g). They have not demonstrated they are entitled to exclude these proposals. In fact, the SEC said as much in letters issued to Hain Celestial, Union Pacific, Devon Energy, Prudential, News Corp. and Kinetic Concepts.

I believe taking action against Apache and Kinetic Concepts should be a high priority for the SEC. Otherwise, a growing number of companies will simply believe they can ignore shareowner resolutions, which form an important cornerstone of corporate governance.

For you historians, more information on CorpGov.net by searching cloud tag Apache. Also, there was this great post yesterday from Ted Allen of RiskMetrics, Will the SEC Stop the ‘Texas Secession’? Allen notes, “Corporation Finance staff planned to issue a legal bulletin on proof of ownership before the 2011 proxy season, but reportedly was unable to obtain a consensus among the five commissioners.”

Ted Allen concludes his post with a precautionary note: new guidance from the SEC may not prevent some companies from bypassing the no-action process. “Even if the staff puts out something black and white in a bulletin, companies may continue to delete the proposals and basically dare the commission to take action,” said J. Robert Brown, a securities law professor at the University of Denver.

Brown is right. Only vigilance by shareowners, like the brief e-mails I’m requesting from you today, will help shape SEC priorities so that shareowner proposals don’t become a thing of the past.

Alyce Lomax with the Motley Fool (A Shareholder Battles Rage On, 4/13/2011) writes on these legal challenges and other issues, concluding:

Whatever good might come of this situation, investors should still think twice about buying into any company willing to sue its own investors to keep them from presenting their concerns for a shareholder vote. Management-centric businesses that relegate all other stakeholders to second-class status won’t do your portfolio any favors in the long run, and likely don’t deserve your investing dollars at all. Heck, if they work so hard to shut down shareholder dissent, perhaps they shouldn’t have gone public in the first place.

Shareholders incensed by corporate crackdowns on their rights have many ways to issue a resounding “no.” Vote against outsized executive compensation, sell your stake, or screen out such offenders when searching for stock ideas. Whatever action you take, your rights are always worth fighting for — especially when corporations actively try to make that fight less fair.

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California to Allow Corporations to Blend Mission and Profit

A California bill, SB 201, authored by state senator Mark DeSaulnier, proposes a new corporate form that blends money and mission.

The idea is to allow social enterprises, which are often organized as either non-profits or for-profit/non-profit hybrids, to access capital from mainstream investors. As a Flexible Purpose Corporation (Flexible Corp.), a company could make profits while pursuing at least one do-good purpose akin to the charitable missions traditionally pursued by nonprofits, or promote the interests of employees, suppliers, customers, creditors, community or public interests like the environment.

via Responsible Investor, March 6, 2011.

One basic idea is to relieve directors of the obligation to maximize long-term Continue Reading →

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Transocean: Now, the Rest of the Story

I get hundreds of e-mails every day and often delete before even glancing if I am especially busy. Fortunately, Timothy Smith of Walden Asset Management also sent out an e-mail on a post by Theo Francis, of footnoted*, that had already hit my trash. We’ve all heard about Transocean’s bonuses for “the best year in safety performance in our Company’s history.”

The bonus incident speaks volumes about Transocean and the tone set at the top of the company. But so do two other details in the filings. First, the company’s board created a Health Safety and Environment Committee in August last year, some four months after the spill. Guess how often it met during the four months between then and the end of the year? Once.

Agenda Item 2 in the proxy is even more eye-opening. To hear the company tell it, the provision is an attempt to “discharge the members of the Board of Directors and our executive management from liability for their activities during fiscal year 2010,” explicitly including the rig explosion and oil spill. It would, Transocean says, not only prevent many shareholders from suing directors and officers entirely — whether by taking part in existing lawsuits or future ones — it would give other shareholders a narrow window of just six months to sue.

Those who vote for the measure give up their right to sue altogether, Transocean says. Those who vote against the measure, assuming they fail to stop it, will have just six months to sue, the company says:

“After the expiration of this six-month period, such shareholders will generally no longer have the right to bring, as a plaintiff, claims in shareholder derivative suits against our directors and executive management.”

And there’s more at Transocean’s quiet risk panel & push for immunity | footnoted.com, 4/6/2011. (apologies to Paul Harvey)

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Buffett Needs to Tighten Up

What is galling about Buffett’s stance is not the recitation of facts, but the way they were spun to make Sokol’s actions look benign. “Dave’s purchases were made before he had discussed Lubrizol with me and with no knowledge of how I might react to his idea,” he writes. “In addition, of course, he did not know what Lubrizol’s reaction would be if I developed an interest.”

I’m sorry, but that’s ridiculous. Since when do companies turn their backs on Buffett? Besides, Sokol knew that his idea would get a serious hearing; he was so esteemed by Buffett that he was rumored to be the Great Man’s successor. When you strip away the Buffett gloss, the facts are harsh. Sokol (a) brought the deal to Buffett, (b) brokered between Buffett and Hambrick, and (c) persuaded Buffett to pull the trigger. All while owning 96,000 shares he’d bought a few weeks earlier.  (From Buffett, Excuses, Excuses, Excuses – NYTimes.com, 4/2/2011)

I’m with Joe Nocera, the SEC should investigate Sokol for insider trading. I’m glad Sokol out of Berkshire Hathaway, one of the stocks in my portfolio. Buffett shouldn’t be making excuses; he should be tightening up his corporate governance standards and clarifying when staff can and cannot make stock purchases on their own.

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CalPERS Airs Dirty Laundry: Reforms Promise New Day

Could CalPERS have avoided the current corruption scandal if, like CalSTRS, it had adopted a staff recommendation in 2007 requiring private equity firms to disclose fees paid to “placement agents” like Alfred Villalobos?

A member of a small group that formed lasting relationships while serving with Villalobos on the CalPERS board during the 1990s, Kurato Shimada, chaired a committee that bottled up the staff recommendation, never bringing it up for a vote.  (CalPERS corruption: the cabal and the culture « Calpensions)

Things might have gone differently had CalPERS acted on my my petition dated September 18, 2006. Back then I asked for amendments to California Code of Regulations, Title 2, and any statutes necessary, to place strict limits on campaign contributions, fromthe types of firms doing business with CalPERS, of no more than $250 and meals and gifts valued at no more than $50 as I had done earlier on February 21, 1998.

Additionally, I asked that CalPERS require through regulations that members of the board of administration must comply with the same governance standards CalPERS attempts to impose on corporate boards. The old guard has passed from CalPERS. The current board commissioned a Report of the CalPERS Special Review that reveals systematic abuse of the public trust by a few board members over many years, as well as by the former CEO.

CalPERS is now endorsing legislation to severely limit gifts and to place further restrictions on post-employment opportunities of civil service money managers. CalPERS board member J.J. Jelincic, who I consider a good friend, has expressed Continue Reading →

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SHARE to Develop Best Practices on Human Rights

The Shareholder Association for Research & Education (SHARE) is launching a two-year project aimed at developing tools to assist investors in ensuring their pension investments uphold the highest standards of human and labour rights. The Investing in Decent Work project will focus the challenges investors face in identifying and addressing issues related to the use of forced labour, precarious employment and occupational health and safety…

SHARE will also identify best practices to enable companies to meet and exceed widely-accepted international labour standards and improved disclosure to help investors manage risks and identify opportunities related to workplace issues. (SHARE project will examine role of workplace issues for investors)

I’m delighted to see this development to assist Canadian institutional investors. Many US funds I am familiar with, like CalPERS, have endorsed the United Nations Global Compact, Sullivan Principles, etc. Although I sure they attempt to be conscientious in implementing such principles, I’m sure most would welcome the development of best practices to ensure intentions are carried out.

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Are High Paid CEO$ Looking for Acceptance?

People who feel more secure in receiving love and acceptance from others place less monetary value on their possessions, according to new research from Edward Lemay, assistant professor of psychology at UNH, and colleagues at Yale University.

Lemay and his colleagues found that people who had heightened feelings of interpersonal security — a sense of being loved and accepted by others — placed a lower monetary value on their possession than people who did not.

In their experiments, the researchers measured how much people valued specific items, such as a blanket and a pen. In some instances, people who did not feel secure placed a value on an item that was five times greater than the value placed on the same item by more secure people.

“People value possessions, in part, because they afford a sense of protection, insurance, and comfort,” Lemay says. “But what we found was that if people already have a feeling of being loved and accepted by others, which also can provide a sense of protection, insurance, and comfort, those possessions decrease in value.”

“These findings seem particularly relevant to understanding why people may hang onto goods that are no longer useful,” Lemay says. (The more secure you feel, the less you value your stuff, ScienceDaily, Mar. 3, 2011) Could they also be relevant to understanding why many CEOs seek pay way beyond what they can meaningfully use for their own needs?

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The Appearance of Legitimacy: Board Elections

Robert A. G. Monks is asking some fundamental questions on his blog and, at least so far, is responding to comments. That’s a rare phenomenon in the blogosphere. I urge readers to get involved in this dialogue (The Appearance of Reality: Shareholders & Ownership):

The process by which directors are chosen is described as an election. And yet, virtually no one would describe the reality of how individuals accede to board membership as an election in the sense that word is generally understood by political scientists. Without pausing overlong to describe the actualities, it is at least clear that no individual appears on the company’s proxy statement for election to a vacancy except with the approval of the chief executive officer and the incumbent board members. It is equally clear that there are only as many individuals enumerated on the proxy card as there are vacancies.

All of this compels the conclusion that the election is a ritual without meaning in the corporate world. Why then do we insist on using a word that plainly does not describe what actually happens? This evokes the marvelous novels describing “double think” – 1984 and Brave New World –

“This was where “doublethink” came into play, minds were trained to hold Continue Reading →

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CalPERS & the Press

Self dealing. Conflicts of interest. Actions that are quite possibly criminal.

These are the kinds of malfeasance a lawyer hired by the California Public Employee Retirement System has documented in a review that sheds new light on the bribery scandal that has rocked CalPERS.

Some of the details have previously been reported by The Bee and other media. But the scale of the alleged gross malfeasance and potential criminality laid out by lawyer Philip Khinda – involving members and former members of the CalPERS board of directors, a senior investment officer and CalPERS’ former chief executive officer – is stunning, and disturbing.

The current board and administrators at CalPERS are given credit for pursuing this review. Yet many of those serving on the board today or holding top staff positions at CalPERS served alongside those now implicated in criminal acts. That raises questions about their diligence as well. Editorial: CalPERS must hold overseers accountable – Sacramento Bee, 3/19/2011.

Where was the Sacramento Bee when I ran against Valdez, head of the CalPERS Investment Committee, who had already declared bankruptcy twice and had a history of accepting gifts? Where was the Bee when I ran against Bill Crist, President of the CalPERS Board, who was allowed to flagrantly violate CalPERS’ own election rules? The Bee and other papers sat on the sidelines.

When the Board tried to enact regulations that would prohibit candidates from criticizing others (Board members) in their ballot statements, the Bee finally wrote an editorial objecting. According to the Bee, “the vote by CalPERs incumbents muzzles challengers in ways that risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it.” See my testimony on that issue.

We can see that involvement by the press certainly has an impact. After the Bee ran their Continue Reading →

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Ethics Under Fire at SEC

The Securities and Exchange Commission took a beating two years ago for failing to detect Bernard L. Madoff’s multibillion-dollar Ponzi scheme during the decades that he ran it.

Now, its chairwoman is coming under Congressional fire for hiring as the S.E.C.’s general counsel someone with a Madoff financial interest — David M. Becker, who participated in matters involving how the scheme’s victims would be compensated.

The revelations about Mr. Becker’s role have raised fresh questions about ethical standards and practices at the agency, where Mary L. Schapiro was brought in as chairwoman two years ago with a mandate to strengthen its enforcement unit. Ms. Schapiro will appear before Congress on Thursday to discuss the matter…

Mr. Becker argued that the commission should change its stance to allow victims to keep some of the gains their investments had generated, since the investment would have grown somewhat over time even in a low-interest account. The Becker family would benefit from this approach.

via S.E.C. Chairwoman’s Ethics Under Fire – NYTimes.com, 3/8/2011.

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Star Power Economy May Lead U.S. to Ruin

You want to win elections, you bang on the jailable class. You build prisons and fill them with people for selling dime bags and stealing CD players. But for stealing a billion dollars? For fraud that puts a million people into foreclosure? Pass…  make them pay a fine instead. But don’t make them pay it out of their own pockets, and don’t ask them to give back the money they stole. In fact, let them profit from their collective crimes, to the tune of a record $135 billion in pay and benefits last year. What’s next? Taxpayer-funded massages for every Wall Street executive guilty of fraud?

The mental stumbling block, for most Americans, is that financial crimes don’t feel real; you don’t see the culprits waving guns in liquor stores or dragging coeds into bushes. But these frauds are worse than common robberies. They’re crimes of intellectual choice, made by people who are already rich and who have every conceivable social advantage, acting on a simple, cynical calculation: Let’s steal whatever we can, then dare the victims to find the juice to reclaim their money through a captive bureaucracy. They’re attacking the very definition of property — which, after all, depends in part on a legal system that defends everyone’s claims of ownership equally…  — this whole American Dream thing recedes even further from reality.

(Why Isn’t Wall Street in Jail? | Rolling Stone Politics, Mat Taibbi, 2/16/2011) Between 2007 and 2009, Wall Street profits were up 720%, unemployment was up 102% and the value of home equity in American went down by 35%. According to the Congressional Budget Office, average household income for the top1% has risen from about $500,000 to almost $2 million. For most of us, it has been relatively flat.

According to Jacob Hacker and Paul Pierson, politicians don’t respond to the concerns of voters, they respond to the relative power of the organizations that represent them. Labor has been on the decline, while the power of the Business Roundtable and the Chamber of Commerce has surged.

An article published by The Economist titled The psychology of power: Absolutely looked at a series of experiments that confirm Lord Acton’s dictum that “Power tends to corrupt, and absolute power corrupts absolutely.” “The powerful do indeed behave hypocritically, condemning the transgressions of others more than they condemn their own… It is not just that they abuse the system; they also seem to feel entitled to abuse it.”

Researchers conclude that “people with power that they think is justified break rules not only because they can get away with it, but also because they feel at some intuitive level that they are entitled to take what they want.”

Alan Downs 1997 book describing corporate narcissism (Beyond the Looking Glass: Overcoming the Seductive Culture of Corporate Narcissism) found that high-profile corporate leaders such as “Chainsaw” Al Dunlap literally have only one thing on their minds: profits. According to Downs, such narrow focus may bring short-term benefits, but it ultimately drags down employees and companies… as well as entire countries, at least that would be my take.

Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs by Rakesh Khurana pointed to another thread in the same cloth of American capitalism, charisma and reputation have begun replacing management experience and industry expertise as the primary qualities we search for in a CEO. Succession planning at many corporations is weak. Boards often only take any real action after deterioration has begun to set in. When the the recruiting process begins, they are pressured to take decisive action, seeking an outside savior.

Investors may have contributed to the problem. By insisting on “independent” outside directors (I prefer my directors “dependent” on shareowners through nomination and election), we now have boards with little knowledge specific to the business itself. Recruiting has changed from getting a real fit between the companies needs and the CEO’s talents to one of attracting a high class celebrity with charisma, generally one with plenty of bargaining power to match.

Yet, we know corporate saviors are few in number. Steady progress, building from the inside without all the glamor is much more likely to pay off and is the more prudent model, as documented in Good to Great by Jim Collins. Companies that far outperformed their competitors were generally those where CEOs weren’t charismatic and were recruited from within based on their known capabilities.

We seem to be betting the farm on charismatic bankers and CEOs who offer the promise of easy money. What happened to hard work and middle class values? They’re disappearing, along with the middle class itself.

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Video Friday: How to expose the corrupt

As a director of the World Bank in Nairobi, Peter Eigen saw firsthand how devastating corruption can be. Some of the world’s most baffling social problems, says Eigen, can be traced to systematic, pervasive government corruption, hand-in-glove with global companies. At TEDxBerlin, Eigen describes the thrilling counter-attack led by his organization Transparency International.

via Simoleon Sense » Blog Archive » Video: Ted Talk – How to expose the corrupt: A talk by a director of the world bank.

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Harrington Asks Banks to Stem Illicit Transactions

Harrington Investments, Inc. (HII), a socially responsible investment advisory firm filed shareholder resolutions at Citigroup, Bank of America and JP Morgan Chase, calling for the adoption of principles to stem illicit financial transactions which is the result of government corruption and bribery, tax evasion, money laundering, illegal arms deals and the movement of money by drug cartels. (download resolution in pdf)

The resolutions also request that the banks support broad public policies aimed at creating greater accountability for the identification of criminal money by significant non-bank actors in the financial system.

“According to Global Financial Integrity (GFI), the U.S. financial sector, especially international bankers, are under increasing pressure from government regulators to respond to the growing illicit movement of money throughout the financial system,” said Harrington.  “Shareholders, as principals, need to make sure that our agents, corporate executives and bank boards of directors, respond as responsible fiduciaries to protect our banks’ integrity and reputation by developing industry-wide standards.”

Heather Lowe, Legal Counsel and Director of Government Affairs for Washington, D.C. non-profit advocacy group Global Financial Integrity, commented that “These resolutions are all about reducing the risk that illicit funds even get to the banks, and if they do, making it easier for banks to identify the bad actors.  They are based on recommendations put forward Continue Reading →

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CalPERS Boosts Transparency: Will Post Travel Expense Claims

Taking another step to increase transparency, the CalPERS Board has approved publishing on the CalPERS website all travel expense claims and statements of economic interests submitted by Board Members and key staff personnel. The travel information will be posted online within one month of the date of reimbursement. The statements of economic interest – known as Form 700s – will be posted by the end of the month following the month in which the filing is received by CalPERS. The new policy takes effect January 1, 2011.

For someone who frequently criticized the CalPERS Board and staff about this issue for many years (not in the last few years), this is a huge development. CalPERS sets a new, much higher, ethical standard with this move. CalPERS seems to be taking to heart the idea of leading by example.

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Incumbent Wins CalPERS Race: But…

The following is a table with the unofficial results of the most recent CalPERS election. No real surprise; with an incredibly low turnout, the incumbent won by a large margin.

George Diehr 21,988 votes
Inderjit Kallirai 6,360 votes

Board candidate uses CalPERS address, phone writes Ed Mendel in his post to CalPensions. CalPERS board member running for re-election, George Diehr, listed the CalPERS headquarters address in Sacramento and a CalPERS-funded home telephone as the contact information on a campaign brochure and website.

Dr. Diehr is head of the Investment Committee and Vice President of the Board but appears to be somewhat oblivious as to the laws governing campaigns. According to the post:

Diehr, preferring not to list his home address, said he thought the CalPERS address was acceptable because he had used it in filing documents, drawing no objections.

Of course using his address at CalPERS to disclose his potential financial conflicts of interest is much different than potentially soliciting campaign funds to a state office. Most funds in CalPERS campaigns come from unions, so he may not have received any contributions to a state building. Additionally, he has apparently agreed to pay any cost to CalPERS. However, the law doesn’t appear to be predicated on the actual expenditure of moneys by public agencies.

Government Code section 8314 states,

It is unlawful for any elected state or local officer, including any state or local appointee, employee, or consultant, to use or permit others to use public resources for a campaign activity, or personal or other purposes which are not authorized by law.

I’m relatively sure Diehr knows the use of state property is prohibited. In fact, a related legal opinion written by Legislative Counsel at my request was sent to CalPERS in 2007. (download pdf)

As far as I can tell, Diehr is doing a good job at CalPERS. Unfortunately, this latest action demonstrates continued inattention by a long line of board members to ethics laws. Whether or not use of the state address and/or phone number constituted an actual violation of law deserving of a fine of up to $1,000 a day is up to others to decide. However, it is clear that CalPERS and its board members are too frequently in the news for questionable activities. Why would Diehr be so careless?

There is little question it has resulted another black mark on the reputation of CalPERS, however small. CalPERS finally instituted a hot-line for people to disclose ethical violations and took several additional measure.  That’s great but, of course, both board members and staff need a fundamental understanding of ethics laws to be able to recognize violations.

When I was the Ethics Officer for the Department of Toxic Substances Control. my duties and those of my staff included the following:

  • Determine which DTSC staff would be required to file the form 700 and amend regulations as appropriate, working with the various unions and the interested public.
  • Ensure that everyone required to file did file. Reports of laggards went directly to executive staff and were briefly discussed weekly until corrected. If necessary, the Director or Chief Deputy Director would call the laggards. (CalPERS board member Priya Mathur would have faced constant warnings if she had been at DTSC. It is highly unlikely that she would have missed three filing deadlines.)
  • Develop and hold ethics classes at HQs and throughout our regional offices, supplementing the required online AG/FPPC class with material covering state and federal laws specific to DTSC.
  • Ensure that every member of staff required to file a form 700, which was the vast majority of staff, also took the required AG/FPPC class and the supplemental class (which I usually conducted along with an attorney). CalPERS is now requiring attendance at a new “Working Values class” hosted by their legal office, diversity office and enterprise compliance office.
  • Made frequent determinations concerning requests by DTSC employees (as well as those of CalEPA) to engage in outside employment, to accept gifts, to accept speaking engagements and to provide advice concerning potential conflicts of interest. (I presume this is done at CalPERS by their legal office but board and staff may feel slightly less comfortable asking for a legal opinion on what may seem to be small issues.)

Recently, after a yearlong scandal involving alleged influence peddling and corruption, Gov. Arnold Schwarzenegger signed a bill that will regulate the activities of outside deal-makers who help investment managers secure government pension fund money. (Schwarzenegger signs pension fund transparency bill, LATimes, 10/1/10)

While CalPERS is certainly making progress, their ethics is still not beyond reproach. I’m confident they will get closer but in the meantime, these little slips are embarrassing to those of us associated with the system. It is much easier to advocate for good corporate governance if your own pension fund and its board members follow only the highest ethical practices. CalPERS recently added a risk officer. They should give serious consideration to adding an ethics officer.

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Move Ethics from Classroom

In her article Big Business Matters (SSI Review, Fall 2010) Judith Samuelson argues global businesses are the most capable agents to solve our problems but they need a makeover:

First, we must revisit our narrative about the purpose of the business corporation. “Maximizing profits” may be an accepted mantra on Wall Street, but it is not enshrined in either law or practice. Realigning business purpose with the public good is a critical first step in integrating social impact or environmental sustainability as business strategy.

Second, we need to unleash social intrapreneurs—change agents already working deep within business—and encourage the next generation of managers to find business opportunity in our most daunting challenges.

Third, let’s move values from the ethics classroom to the core of business education, and let’s enable students to raise their voices in times of moral conflict. The end game: Future managers will have the will and the skill to treat ethical issues as strategically and effectively as they do business issues.

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CalPERS Gets Hotline

CalPERS announced two significant reforms designed to restore confidence in CalPERS and ethical conduct – the establishment of a Senior Level Enterprise Risk Management Office and  the launch of a new Ethics Helpline to identify fraud and waste.

The CalPERS Board of Administration approved the new Office of Enterprise Risk Management to identify risks in the pension industry. The Helpline will enable the pension fund to receive tips, concerns, and information regarding possible instances of wrongdoing – including possible allegations of fraud, waste, abuse, conflicts of interests, safety violations, harassment, or other misdeeds. According to Board member George Diehr:

Recent events on Wall Street, pension fraud in this state, and even allegations of wrongdoing at CalPERS have taught us that managing risk and ensuring accountability across the enterprise are critical to our effectiveness today and tomorrow. It’s a new day at CalPERS, and these additional tools for managing CalPERS are being added to a very important list of efforts we have undertaken in the last 12 months to restore confidence, integrity, and accountability to all that we do.

Other improvements include:

  • Co-sponsorship of legislation (AB 1743) that will require placement agents to be subject to strict gift limits, campaign contribution prohibitions, and be prohibited from receiving compensation contingent upon any CalPERS investment decision;
  • Tough rules for communication between Board Members and staff about investment proposals;
  • Authority to discipline Board Members who violate policy;
  • The pursuit of information and a special review to ensure CalPERS has not been victimized by placements agents; and
  • A ban on gifts to employees from business partners and potential business partners

The Ethics Helpline is designed to open the doors widely to those who might have information about possible instances of wrongdoing.  It will operate 24 hours a day, online and on the phone. It will be operated by Ethics Point, a specialized company with a strong track record for managing similar hotlines. It has more than 2,300 clients in 300 industries and its specially trained staff handles reports from 120 countries in more than 150 languages. The Helpline number is toll-free (866) 513-4216 or TTY (866) 294-9572. Service is also available on the Web at http://calpers.ethicspoint.com.

Clearly steps in the right direction so that CalPERS can better practice the good corporate governance it preaches.

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In Search of the Good Corporate Citizen

Winner of a 2010 Telly Award as an outstanding video production and the winner of a 2010 WorldFest-Houston Award, this outstanding video takes viewers beyond the pressures involved in hitting the numbers to show how the best business leaders steer companies through tough ethical challenges.

The show weaves together expert panel discussions, personal accounts from real-life white-collar criminals and whistleblowers, and “person-on-the-street” perspectives from the financial centers of New York and London. 28 public television stations in 20 states have picked up the program and counting.  The DVD is available to colleges and companies for a modest licensing fee.

Here’s a few lines from the DVD regarding the need for involvement by institutional investors:

Tom: How about the institutional investors? Do they have a role?

Win: I think they need to play a role too.  I think at this point we have socially responsible investment funds but really the investment community does not understand much about ethics management of the companies they are investing in.  I think they should for a couple reasons.  One it’s going to protect the investments they are making to understand that risk profile.  Secondly, if they do that I think it will send a very important message to the management of these companies that how they manage ethics matters to the bottom line.  And I think if society in general gets in line behind these companies that are trying to do this well I think we will have much more success in this search for the good corporate citizen.

Denny Swenson, Executive Producer, brought together a panel with years of experience, including: Bill George, former Chairman and Chief Executive Officer of Medtronic; Ben Heineman, former General Counsel of General Electric; Donna Boehme, former Chief Compliance and Ethics Officer for BP and BOC Group; Bill Prachar, former CEO of American Ecology, and Chief Ethics Officer for Waste Management and Teledyne.

The show compares comments from business people to a survey of over five thousand employees from various companies across the country. The survey showed:

  • 27% of sales and marketing personnel have observed colleagues engaging in deceptive sales practices— so one might say that even sales people don’t fully trust sales people!
  • 52 % of respondents believe they will be rewarded for results, not how they achieved them.
  • Less than half the employees surveyed believe that senior management knows what kind of behavior really goes on inside their companies.

Preview the show. Read the press release and the transcripts. Visit the website to tune into local broadcasts, buy the videos and learn how you can become a sponsor of future productions. As a former ethics officer, I highly recommend the series and wish I had such tools available for discussion when I was in the business.

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A Primer for Boards

Cornelis A. de Kluyver, an academic and practitioner with global experience, has written A Primer on Corporate Governance published by Business Expert Press. While not nearly as extensive as recent textbooks by Bob Tricker or Monks and Minow, this is a quick read that provides most of the basics for future directors and those who work with them.

He very briefly reviews the history of corporations, rise of fiduciary capitalism, recent moves to federalize corporate governance, various conflicts of interest, and provides a thumbnail international sketch. However, his short explanations sometimes over simplify. For example, in reviewing director duties he states, "the primacy of shareholder value maximization wa affirmed in a ruling by the Michigan State Supreme Court in Dodge vs. Ford Motor Company.

Unfortunately, he’s not alone in perpetuating this myth. In Why We Should Stop Teaching Dodge v. Ford (pdf, Virginia Law & Business Review, spring 2008), Lynn Stout argues more convincingly that credit for the concept that corporations exist only to make money for shareholders should go to law professors, not the courts. Dodge v. Ford is best viewed as a case that deals not with directors’ duties to maximize shareholder wealth, but with enforcing the fiduciary duty of controlling shareholders to minority shareholders. Because different shareowners have different investment time frames, tax concerns, attitudes toward risk, etc. it is impossible to discern a single, uniform measure of shareholder wealth to be maximized. Additionally:

  • Articles of incorporation typically don’t say they are organized primarily to profit shareholders but, instead, for anything lawful.
  • Similarly, state corporation codes typically provide their purpose is "to conduct or promote any lawful business or purpose" and many authorize corporate boards to consider other stakeholders.
  • Judges routinely refuse to impose any legal obligation on directors to maximize shareowner wealth.

De Kluyver does explore stakeholder theory but concludes shareholder value maximization "will continue to dominate the U.S. approach to corporate law for the foreseeable future," with the courts giving boards increasing latitude.

Elsewhere, he discusses governance reforms and concludes, "There is real danger, however, that the rise in shareholder activism, the new regulatory environment, and related social factors are pushing boards towards micromanagement and meddling." Many of us wish there had been a lot more "meddling" by boards prior to the current financial crisis, but de Kluyver is writing for board members, not shareowners.

Although he appears to reject recent moves to require specific subsets of directors to be independent, he appears to agree they should be more allied with shareowners than with management and that separating the roles of chairman and CEO "gives boards a structural basis for acting independently."

In discussing stock options, de Kluyver notes, "Until recently, many U.S. companies were not very diligent in assessing the cost and value of options and treated options as being cost-free." He says nothing about the Business Roundtable’s campaign to undermine the Financial Accounting Standards Board. An uninformed reader could be left with the impression that CEO’s had no role in this effort to hide costs. Likewise, he says "most of the pressure on boards on the last 25 years has come from shareholders." Hasn’t more pressure come from CEOs who are there providing direction at every board meeting? Even with recent steps empowering shareowners, CEOs still hold more sway over boards, including who is nominated.

In discussing shareowner proposals, de Kluyver says, "One of the most popular shareholder proposals today demands that shareholder be allowed to directly nominate and elected directors rather than work with the slate recommended by the board’s nominating committee." Popular in what sense?

The SEC allowed such proposals for many years until it looked like the proposals would obtain majority votes. Then the SEC, without changing the governing regulations, decided such resolutions violated the rules. That position stood for many years until challenged by AFSCME. When the underground regulations were overturned by the court only about three such proposals were introduced before the SEC, under Cox, banned them through new regulations. Now, under Schapiro, such proposals will again be legal, probably in 2010. To describe "proxy access" proposals in 2009 to be "the most popular shareholder proposals today," without much explanation, seems misleading.

In the book’s epilogue de Kluyver revisits the issue of "proxy access." However, rather than clarifying the issue he informs readers that the SEC considered proposed rules to allow it, but rejected them. Of course this is true, but de Kluyver gives the impression the issue is dead, whereas everyone following this issue has known for years that "proxy access" would be back on the table under a new administration. It would be important to note that majority voting requirements, the end to "broker voting" and proxy access will require boards to cooperate more closely with shareowners.

The book is at its best in borrowing liberally from thought leaders and consensus shaping organizations by providing various lists of best practices: Succession Planning is an Ongoing Process; CEO Selection: Common Board Mistakes; Succession Planning: Best Practices; Red Flags in Management Culture, Strategies, and Practices; 10 Questions About Ethics and Compliance for the Board; Five Questions About Hedging; Enterprise Risk Management: The Board’s New Tool; Executive Compensation: Best Practices, What Defines Best In-Class Boards?,; etc.

Regardless of my nitpicking, de Kluyver gets the big picture right. "The tug of war between individual freedom and institutional power is a continuing theme of history. Early on, the focus was on the church; more recently, it was on the civil state. Today, the debate is about making corporate power compatible with the needs of a democratic society." De Kluyver offers readers information that can help them to become better directors and better corporate citizens.

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CalPERS muzzles critics: Ballot rules protect board, keep others in the dark

CalPERS“Self-serving” is what one critic called the vote last week to sharply limit what candidates for the California Public Employees Retirement System board can include in their ballot statements. Certainly, “self-serving” is one word that characterizes that vote. “Anti-democratic,” “chilling” and “wrong” are among the others.

In a decision sweeping in its arrogance and disregard for First Amendment speech rights, the CalPERS board voted 9-4 to restrict ballot statements to “a recitation of the candidate’s personal background and qualifications” — and nothing more. Incredibly, board members even voted to delete a proposal by their staff that would have allowed ballot statements to include “candidates’ opinion or positions on issues of general concern to the system’s membership.” Continue Reading →

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