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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I welcome your comments at ebloxham@thevaluealliance.com

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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. http://thevaluealliance.com/Blog/?p=60

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 http://thevaluealliance.com/Blog/?p=56) 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: http://management.fortune.cnn.com/2012/12/19/newtown-business-leadership/?section=magazines_fortune

I welcome your comments at ebloxham@thevaluealliance.com

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

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

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

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

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

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

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

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

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

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

Here’s the article. 

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

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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: ebloxham@thevaluealliance.com

http://management.fortune.cnn.com/2012/12/06/2013-a-year-of-investor-class-warfare/

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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 ebloxham@thevaluealliance.com

http://management.fortune.cnn.com/2012/12/04/treasury-sec-leadership-choices/

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

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

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

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

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

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

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

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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?

http://management.fortune.cnn.com/2012/11/26/fiscal-cliff-ceo-pay/

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

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Copyright 2012 The Value Alliance Company. All rights reserved.

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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. http://www.unpri.org/principles/  Today, the signatories to the principles represent nearly 1000 asset owners and investment managers across the globe.  See the list here. http://www.unpri.org/signatories/

(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. http://management.fortune.cnn.com/2012/11/16/hershey-child-labor-suit/

(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.  http://management.fortune.cnn.com/2012/10/29/citigroup-pandit/

(3) Bloomberg news last week had a story on Morgan Stanley hiring a Goldman trader accused in a US suit.  http://www.bloomberg.com/news/2012-11-09/morgan-stanley-hired-goldman-trader-accused-of-hiding-position.html

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.  http://management.fortune.cnn.com/2012/09/25/goldman-sachs-cfo-board/

(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. http://www.brookings.edu/events/2012/09/27-executive-compensation

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

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Copyright 2012 The Value Alliance Company. All rights reserved.

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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 Fortune.com.

http://management.fortune.cnn.com/2012/06/14/j-p-morgans-debacle-its-time-to-talk-exec-pay/

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 http://www.thevaluealliance.com/publications.htm.)

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.

http://management.fortune.cnn.com/2012/04/16/the-terrible-cost-the-u-s-pays-for-derivatives/

http://management.fortune.cnn.com/2012/01/30/ceo-pay-us-economy/

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 ebloxham@thevaluealliance.com

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