The federal government’s National Labor Relations Board continues to probe the pitfalls of social media in the workplace.

The limits of workplace rules and of employee behavior are “a ‘hot topic’ among practitioners, human resource professions, the media, and the public,” noted acting general counsel Lafe Solomon in a recent report.

Business Ethics previously examined the NLRB’s social media approach last August.

The NLRB’s new year-end survey of 14 recent unfair labor practice cases cited several instances where employers adopted “overly broad” policies in attempting to police use of social media at work or online, even though, in some cases the discipline or discharge of an employee was legal.

Several cases arose from employee rants and protests posted on Facebook, where disciplinary steps were upheld because the worker’s behavior wasn’t considered “protected concerted conduct,” a common issue in NLRB cases.  Employees, the latest memo noted, have a “right to discuss their wages and other terms and conditions of employment, both among themselves and with non-employees.”

“Overbroad social media policies are high on the NLRB’s current enforcement agenda,” says global law firm Ropes and Gray.  The firm’s analysis said “employers who wish to restrict their employees’ use of social media must take care to specify the precise types of communications that will violate their social media policy, and avoid using broad, generic terms that could be understood to reach protected communication and activity.  This includes such commonplace terms as ‘inappropriate’ or ‘defamatory’ ……”

Just blowing off steam via Facebook doesn’t get much sympathy at the NLRB.  Consider:

--a bartender complained on Facebook that another bartender was “screwing over” customers by substituting a pre-made mix for more expensive premium liquor, and fretted that the practice could lose business.  Eventually, the complainer was discharged for using “unprofessional communication” on Facebook.  The NLRB legal staff didn’t think the behavior was linked closely enough to working conditions for the discharge to be illegal.

--a respiratory therapist at a children’s hospital, riding in an ambulance with a paramedic coworker, posted  via cell phone a Facebook message “indicating that it was driving her nuts that her coworker was sucking her teeth.”  After two Facebook ‘friends’ commiserated online, the therapist said “she was about to beat him with a ventilator,” the NLRB summary said.

The coworker complained to the company, and the therapist was eventually disciplined for that and other behavior.  The NLRB legal staff found labor laws didn’t offer her protection because “it did not concern terms and conditions of employment. She was merely complaining about the sounds her coworker was making, and was not even suggesting that the Employer could do anything about it.”

--a warehouse worker who was feeling ill was told by his supervisor that he could leave but he would be charged an attendance point; the worker completed his shift, but, from his car in the parking lot, posted a Facebook comment saying it was too bad when your boss doesn’t care about your health.  And he told a ‘friend’ who expressed support that he (the worker) thought the company was, in the NLRB’s words, “just trying to give him a reason to be fired because he was about ‘a hair away from setting it off.’ "

He was subsequently suspended without pay and later discharged for inappropriate, threatening, and violent remarks.  An HR manager said she interpreted the ‘setting it off’ remark as a threat to bring a gun to the warehouse and shoot everyone in it.  The NLRB concluded the employee wasn’t trying to initiate group action over sick leave policies and noted he had “characterized his conduct as ‘just venting.’ "

On the other hand, some Facebook discussions do fall under protection of the labor laws:

--workers at a popcorn packaging plant commented on Facebook about the behavior of an operations manager.  One said she hated the place and couldn’t wait to get out of there; eventually, one of the workers was discharged for the comments about the manager.  But the NLRB reviewers said the comments were “part of a discussion of employees’ shared concerns about terms and conditions of employment.”  The memo noted “it is well established that employee complaints and criticism about a supervisor’s attitude and performance may be protected” by the labor laws.

--a nurse at a hospital where a discharged employee had killed one supervisor and critically wounded another posted a series of critical messages online during a seven-month period.  He also criticized the hospital’s “management style” in a local newspaper and in other forums, and made a critical presentation to a borough assembly.  He was terminated. The NLRB staff found that many of the nurse’s remarks amounted to the sort of “rhetorical hyperbole” that is protected under labor laws.

And the NLRB memo criticized a number of rules for 30,000 employees at a large clinical testing laboratory, labeling the provisions “overbroad.”  Among them:

--Language that prohibited prohibited employees from disclosing or communicating sensitive, confidential or non-public information about the company without prior approval of senior management or the law department.

--A provision prohibiting use of the company’s name or service marks outside the course of business without prior approval of the law department.

--A prohibition against publishing any representation about the company without prior approval by senior management and the law department, including statements to the media, ads, weblogs and voice mail.

--A requirement that social networking site communications be made in an honest, professional and appropriate manner.

--A provision saying employees needed approval to identify themselves as the employer’s employees and that that social media comments must expressly be labeled as personal opinions that don’t necessarily reflect the employer’s opinions.

What do you do if in the stress of crisis you make the right decision, but execute it in a way that discounts the human impact -- which only makes the crisis worse?

Joe Paterno in 2006.

If you are a trustee of Pennsylvania State University, you discover that the window of mitigating flawed execution can close well before you are ready.

Although the child sex abuse crisis at Penn State erupted in early November 2011, and some steps have been taken to try and restore trust, a series of blunders persisted into January 2012 that continued to discount the emotional impact of crisis.

On January 20, 2012, Penn State trustees met and elected new leadership – the officers who had fired iconic football coach Joe Paterno by telephone were replaced. The trustees announced a series of actions that begin to address some of the very human issues the crisis has been about, including paying for victims abuse-related health costs, and employee training on reporting abuse.

Whether the trustees’ new chair Karen Peez, vice chairman of the Bank of New York Mellon, would have tried to enlist Paterno’s support in healing the wound of those anguished by his firing became a moot point. On January 22, 2012, Paterno -- considered the “winningest” college coach in football history -- died of lung cancer that was discovered after he was fired. The wound for students and alumni only deepened.

Going forward, re-uniting the Penn State community and rebuilding trust needs to be less about brand building (“We are Penn State”) and more focused on connecting, particularly with student and alumni stakeholders, around the concept of the university as a learning environment – admitting mistakes and what specifically should have been done differently. Statements like “All of us, including the board, with the wisdom of hindsight could have done things differently,” said by Peez at the trustee meeting January 20, miss the point.

There is a rich opportunity for real dialogue in small and large groups and in university-wide forums about what went wrong, beginning with what is obvious now, without waiting for the results of the five investigations underway (federal, state and internal) including:

-- Students and alumni already know that firing anyone by telephone is totally disrespectful; doing it to someone who was the face of Penn State for 46 years, with whom most had a greater emotional connection than with any of Penn State’s presidents, caused outrage. How the trustees own the mistake non- defensively (as opposed to their justification given January 18, 2011) is a teachable moment and a stepping stone to trust.

Penn State Athletics Web Site - January 23, 2012

-- While respecting all Paterno’s accomplishments, part of the teachable moment is his 2002 leadership failure. He didn’t follow up on information he passed on about a young boy potentially being sexually molested. In his only interview following his firing, it was clear Paterno hadn’t come to terms with the impact of what he failed to do. Understanding that even iconic leaders make mistakes and how mistakes can be avoided is an important discussion topic for students.

-- Saying your administration will stand for transparency and communication to move the Penn State community forward raises expectations you will deliver on it. President Rodney Erickson (promoted from provost to president after Graham Spanier was fired with Paterno) hosted “Town Hall” meetings attended by over 1,000 alumni earlier this month. However, their value was severely compromised when, to the irritation of alumni, he deferred the bulk of their questions, which were about Paterno’s firing, to the trustees who weren’t represented at the meeting. One alumnus commented,  "the guy that’s taking the bullets is not the guy that we need to hear from. It’s the trustees. It speaks volumes that he’s up there and they’re not."

To pass through the crisis successfully, it will be essential for the trustees, the administration, students, faculty, staff, and alumni to own the crisis without PR equivocation. During the “Town Hall” meetings, Erickson told alumni that it “grieves”  him when people talk about "the Penn State scandal." He said it should be called, “the Sandusky scandal,” after the former PSU football coach now facing more than 50 charges of child sex abuse.

Like it or not, Penn State has become another learning lab for crisis and its aftermath. It may be a year or more before the findings of all the investigations on what went wrong are concluded. The criminal trials – Sandusky’s for sexually molesting minors and two former Penn State administrators’ for perjury and failure to report child sex abuse - haven’t started yet.

In the meantime, Penn State has the opportunity to wrestle with important questions that can define whether it will become stronger because of the crisis: questions like what priority to place on the human impact (emotional intelligence and how respect and compassion play out); what is meant and expected by ethical behavior and compliance; what was there about the culture that made the crisis possible;  how to measure the football culture’s impact on the rest of the university; and how to tolerate discomfort with unflattering headlines while the focus is on trust building, not brand building.

Photos: Joe Paterno on sidelines in 2006 via Wikimedia Commons; Paterno on GoPSUsports.com.

Gael O’Brien is a Business Ethics Magazine columnist. Gael is a thought leader on building leadership, trust, and reputation and writes The Week in Ethics.

American corporations today are like the great European monarchies of yore: They have the power to control the rules under which they function and to direct the allocation of public resources. This is not a prediction of what’s to come; this is a simple statement of the present state of affairs. Corporations have effectively captured the United States: its judiciary, its political system, and its national wealth, without assuming any of the responsibilities of dominion. Evidence is everywhere.

• The “smoking gun” is CEO pay. Compensation is an expression of concentrated power — of enterprise power concentrated in the chief executive officer and of national power concentrated in corporations. Median US CEO pay for 2010 was up 35 percent in the midst of a lingering recession, while CEO pay over the last decade has doubled as a percentage of pre-tax corporate income. Yet there has been no justification for current levels of CEO pay based on economic value added.

When Lee Raymond retired as CEO of ExxonMobil at the end of 2005, after six years at the helm of the merged firm and another six as head of Exxon before that, he walked away with more than a quarter billion dollars in realizable equity. In his final year alone, Raymond received in excess of $70 million in total compensation — an hourly wage of about $34,500 calculated at 40 hours a week for 50 weeks. No metric can justify such a raid on the corporate treasury and shareholder equity, but Raymond is only a particularly egregious and early example of what has since become common practice. Little wonder that the driving concern of banks receiving TARP “bailout” money was to pay it back so as to escape any restriction on executive pay.

• Retirement risk has been transferred to employees. During the same period that CEOs were doubling their own compensation, the “best” CEOs of the “best” companies abrogated the century-old commitment by employers to provide pensions to their workers. IBM has been the corporate leader in abolishing a “real” pension system for its employees. The 2006 elimination of on-going defined benefit plans will “save [IBM] as much as $3 billion through the next few years and provide it with a more ‘predictable cost structure’,” TK said at the time. Translation: The worker bees are on their own.

This is the essence of “capture” – CEOs are enriched, while all other corporate constituencies, including government, are left with liabilities. A relatively few autocrats have taken control over the policies and wealth allocation of the United States.

• The financial power of American corporations now controls every stage of politics — legislative, executive, and ultimately judicial. With its January 2010 decision in the Citizens United case, the Supreme Court removed all legal restraints on the extent of corporate financial involvement in politics, a grotesque decision that can have only one effect: maximizing corporate – not national — value. Today’s CEOs have been granted the power to direct political payments and organize PAC programs to achieve objectives entirely in their own self-interest, and they have been quick to use it.

More than $300 million was “invested” by corporations in the 2008 Presidential elections. The totals will be vastly higher in 2012 when the full impact of Citizens United is expressed, and the distribution will be politically agnostic. As Bill Moyers recently noted, President Obama “has raised more money from banks, hedge funds and private equity managers than any Republican candidate.”[1]

• Capture has been further implemented through the extensive lobbying power of corporations. Abraham Lincoln’s warning  about “corporations enthroned” and Dwight Eisenhower’s about the “unwarranted influence by the military/industrial complex” have been fully realized in our own time. Reported lobbying expenditures have risen annually, to $3.5 billion in 2010. Half of the Senators and 42 percent of House members who left Congress between 1998 and 2004 became lobbyists, as did 310 former appointees of George W. Bush and 283 of Bill Clinton.

Capture has focused on particular industries. Two powerful Democratic administrations have not been able even to propose a system of “single payer” health insurance.  Meanwhile, business interests have assured that whatever program of “universal coverage” emerges will lock in the interests of the insurance and the pharmaceutical industries.

History has yet to sort out whether the second Iraq War served any national objectives beyond military and industrial ones, but the suspicion that oil interests played a critical role in the rush to battle is enhanced by Vice President Cheney’s refusal to reveal the names of the participants in his energy transition committee. Simultaneously, the inability to force public disclosure of those participants offers a window into how thoroughly the energy industry controls its own agenda, destiny, and information flow. Not only has the industry succeeded in achieving and maintaining special regulatory and tax treatment; in multiple other ways, it functions virtually as an independent state.

• Capture has placed the most powerful CEOs above the reach of the law and beyond its effective enforcement. Extensive evidence of Wall Street’s critical involvement in the financial crisis notwithstanding, not a single senior Wall Street executive has lost his job, and pay levels have been rigorously maintained even when, as noted earlier, TARP payments had to be refinanced in order to remove any possible restrictions.

While several financial firms have paid civil penalties for their abuses, the amounts involved bear little relation to the malfeasance. US District Judge Jed S. Rakoff recently — and rightly — rejected the $285-million settlement agreed to between Citigroup Inc. and the Securities and Exchange Commission as “neither fair, nor reasonable, nor adequate, not in the public interest.”

Worse, such fines as have been imposed on the financial industry are basically being paid by the government itself. At the same time that various regulatory agencies boast of record setting penalties assessed against banks, the Federal Reserve pays banks interest on money that is not being lent, resulting in an “interest margin” realized by U.S. banks in the first six months of this year of $211 billion — more than ample funding for any penalties suffered.

• Finally, capture has been perpetuated through the removal of property “off shore,” where it is neither regulated nor taxed. The social contract between Americans and their corporations was supposed to go roughly as follows: In exchange for limited liability and other privileges, corporations were to be held to a set of obligations that legitimatized the powers they were given. But modern corporations have assumed the right to relocate to different jurisdictions, almost at will, irrespective of where they really do business, and thus avoid the constraints of those obligations.

As Nicholas Shaxson writes in Treasure Islands, “The privileges have been preserved and enhanced, but the obligations have withered.” Meanwhile, the U.S. Treasury is estimated to be losing $100 billion annually from off-shore tax abuses.

Government cannot and will not hold corporations to account. That much is now obvious.  Indeed, the dawning realization of this truth is what has informed the Occupy movement, but only the owners of corporations can create the accountability that will ultimately unwind the knot of government capture.

The essence of the problem is quite straightforward: a failed system of corporate governance. So is the cause: the unwillingness of trustee owners of America’s corporations to assert their responsibility, legal duty, and civic obligation to monitor and oversee the corporations they invest in. Fiduciary institutions own 80 percent of the outstanding shares of corporate America and thus bear at least 80 percent of the responsibility for present circumstances as well as 80 percent of the onus for saving the system itself. And the largest institutional investors — the Bill and Melinda Gates Foundation, Harvard University, and others — must take the lead because (a) they should and (b) all other courses have failed.

Urban park by urban park, campus by campus, the Occupiers are bearing sometimes inchoate witness to America’s capture by corporate interests. Now, men and women of conscience need to reoccupy the boardrooms of America’s corporations. The boardroom is where the takeover began, and it’s where capture can finally be undone and a government of, by, and for the people, not the corporations, restored to the land.

Robert AG Monks is a shareholder activist and corporate governance adviser who has written widely about shareholder rights & responsibility, government capture, corporate impact on society and global corporate issues.

Mr. Monks is an expert on retirement and pension plans and was appointed director of the United States Synthetic Fuels Corporation by President Reagan, who also appointed him one of the founding Trustees of the Federal Employees’ Retirement System.  Mr. Monks served in the Department of Labor as Administrator of the Office of Pension and Welfare Benefit Programs having jurisdiction over the entire U.S. pension system.

Mr. Monks was a founder of Institutional Shareholder Services (ISS), now the leading corporate governance consulting firm.  He also founded Lens Governance Advisers and co-founded The Corporate Library (now Governance Metrics International).  He is a shareholder in and advisor to Trucost, the environmental research company.

The good news is that on-the-job misconduct by American workers may be at an all-time low, and when misconduct is detected it’s likely to be reported by co-workers.

The bad news is that whistle-blowers are being retaliated against for their truth-telling at a “shocking” rate – suggesting a “looming ethics downturn” for U.S. businesses.

Those are the primary conclusions of the seventh National Business Ethics Survey (NBES) conducted by the Ethics Resource Center, a Washington, D.C.-based non-profit organization.  The bi-annual report is based on telephone and web responses from 4,683 employees of for-profit organizations during September 2011.

The percentage of employees who witnessed misconduct at work fell to a new low of 45 percent last year, according to the survey, compared with 49 percent in 2009 and a record high of 55 percent in 2007. The leading types of misconduct cited were misuse of company time (33%), abusive behavior (21%), lying to employees (20%), company resource abuse (20%) and violating company Internet use policies (16%).

And those who reported the bad behavior they saw reached a record high of 65 percent, up from 63 percent two years earlier and 12 percentage points higher than the record low of 53 percent in 2005, according to the survey.

However, while reporting was up, the survey found that retaliation against whistle-blowers hit “alarming levels,” with more than one in five (22 percent) experiencing some form of retaliation in return.  That compares with reported retaliation by 12 percent in 2007and 15 percent in 2009.

According to the survey, these were most common forms of retaliation:

Source: Ethics Resource Center - 2011 National Business Ethics Survey

In addition, the survey found, the percentage of employees “who perceived pressure to compromise standards in order to do their jobs” climbed five points to 13 percent, just shy of the all-time high of 14 percent in 2000.

“While most U.S. workers are currently ‘doing the right thing’ by following company standards and reporting wrongdoing when they see it, we see trouble ahead,” said ERC President Patricia J. Harned, Ph.D. “Retaliation against whistleblowers and pressure on employees to compromise their ethics standards are at or near all-time highs. These are factors that historically indicate that American business may be on the cusp of a large downward shift in ethical conduct.”

“The data make a very clear case that if business leaders will take heed of these findings and make ethics a business priority, they can have a dramatic impact on the conduct of their workforce. Risks noted in this report can be mitigated,” said Dr. Harned and former Congressman Michael Oxley, now chair of the ERC board, in introducing the survey findings.

Economy and Social Media

To help explain the “co-existence of widespread retaliation and pressure with historically low mis­conduct and high reporting,” the NBES cited two factors: the sluggish U.S. economy and employees who use social media while on the job.

“Thirty percent of employees agree that bad actors in their company are laying low because of fears about the recession,” the survey reported. “As the economy gets better – and companies and employees become more optimistic about their financial futures – it seems likely that misconduct will rise and reporting will drop, mirroring the growth in pressure and retaliation that have already taken place and conforming to historic patterns.”

As for social networkers, the Center found that 11% of the respondents identified themselves as “active social networkers”– meaning they spent 30% or more of their workday on social networks, even though that was not part of their job – while another 29% of workers devoted at least 10% to 20% of their workday to social networking. A surprising finding to the survey analysts: more than half (51%) of the social networkers identified themselves as “top or middle management.”

The survey reported: “A surprising and worrisome divide exists within the workplace between employ­ees who spend substantial time on social networks and those who do not. Active social networkers report far more negative experiences in their workplaces. As a group, they are much more likely to experience pressure to compromise ethics standards and to experi­ence retaliation for reporting misconduct than co-workers who are less involved with social networking.”

However, the survey found, active social networkers also “show a higher tolerance for certain activities that could be considered questionable.”  Among active social networkers, for example, 50 percent said it is ac­ceptable to keep copies of confidential work documents in case they need them in their next job, compared to only 15 percent of their colleagues. And 46 percent of social networkers said it is acceptable to take work software home to use on a personal computer, compared to only 7 percent of their colleagues.

by Marian Wang, Pro Publica

It’s an issue we and others have noted again and again: Years after the financial crisis, there have still been no prosecutions of top executives at the major players in the financial crisis.

Why’s that? Well, according to a now-departed Justice Department official who used to be in charge of investigating such matters, the Justice Department has decided that holding top Wall Street executives criminally accountable is too difficult a task.

David Cardona, who recently left the FBI for a job at the Securities and Exchange Commission, told the Wall Street Journal that bringing financial wrongdoing to account is “better left to regulators,” who can bring civil cases. Civil cases, of course, can produce penalties from the banks -- as well as promises to be on better behavior -- but don’t put any executives behind bars.

Here’s the Journal:

While at the FBI, Mr. Cardona oversaw dozens of criminal probes of large financial firms. The FBI's probes haven't led to any successful prosecutions of high-profile executives in relation to the financial crisis, despite demands from some lawmakers and angry Americans. In contrast, the SEC has filed crisis-related civil-fraud cases against 81 firms and individuals, and it has negotiated almost $2 billion in penalties in cases that have been settled.

Cardona told the Journal that the failed first attempt to charge financial players with crisis-related fraud -- the 2009 trial and eventual acquittal of two Bear Stearns Cos. hedge-fund managers -- triggered "a lot of rethinking on how we do things.” After that, he said, the federal government began to question its “ability to convince a jury that criminality has occurred” on complex and technical financial cases.

The lack of prosecutions was also raised in a ‘60 Minutes’ piece Sunday about large-scale mortgage fraud during the bubble. Assistant Attorney General Lanny Breuer told CBS that the Justice Department had not lost confidence and was “bringing every case that we believe can be made.”

“I get it. I find the excessive risk taking to be offensive,” said Breuer. “I may personally share the same frustration that American people all over the country are feeling, that in and of itself doesn’t mean we bring a criminal case.”

However, one question raised by the 60 Minutes segment is why the Justice Department isn’t building criminal cases against companies for violating Sarbanes-Oxley -- a landmark corporate reform law enacted after Enron. From the transcript:

The Sarbanes Oxley Act imposed strict rules for corporate governance, requiring chief executive officers and chief financial officers to certify under oath that their financial statements are accurate and that they have established an effective set of internal controls to insure that all relevant information reaches investors. Knowingly signing a false statement is a criminal offense punishable with up to five years in prison.

Frank Partnoy is a highly regarded securities lawyer, a professor at the University of San Diego Law School and an expert on Sarbanes Oxley.

Frank Partnoy: The idea was to have a criminal statute in place that would make CEOs and CFOs think twice, think three times before they signed their names attesting to the accuracy of financial statements or the viability of internal controls.

Kroft: And this law has not been used at all in the financial crisis.

Partnoy: It hasn't been used to go after Wall Street. It hasn't been used for these kinds of cases at all.

Kroft: Why not?

Partnoy: I don't know.

As Cardona -- the former Justice official -- sees it, financial regulators have been doing a “fine job” building civil cases against big firms.

That might come as a surprise to U.S. District Judge Jed Rakoff, who’s repeatedly rebuked the SEC for striking relatively small agreements to settle civil charges against financial firms.

As we noted last week, Rakoff tore into a recent $285 million settlement with Citigroup, calling the financial penalty “pocket change” for Citi and blasting the SEC’s longstanding practice of allowing firms to settle without admitting wrongdoing.

ProPublica is an independent, non-profit newsroom that produces investigative journalism in the public interest.   This article is republished with permission under a Creative Commons license.

Yesterday (11/28), federal judge Jed Rakoff slammed the Securities and Exchange Commission for making a toothless settlement with Citigroup over financial crisis misdeeds, arguing that it obscured the basic facts of what actually happened. Today (11/29), Bloomberg has an important story by Richard Teitelbaum that, from a very different vantage point, demonstrates the same infuriating point: Despite the economic wreckage we are still trying to repair, we have yet to have an adequate accounting of how the financial crisis happened, what caused it, and who knew what when.

Former U.S. Treasury Secretary Hank Paulson (2006).

According to the story, on July 21, 2008, then-Secretary of the Treasury Hank Paulson met with "a dozen or so hedge-fund managers and other Wall Street executives" and discussed "a possible scenario for placing Fannie [Mae] and Freddie [Mac] into 'conservatorship.'" That's a fancy term for a government seizure that would have allowed the entities to keep operating, but would have caused severe adverse consequences to holders of the Frannies' equity and, possibly, debt. A fund manager told Bloomberg he was "shocked that Paulson would furnish such specific information -- to his mind, leaving little doubt that the Treasury Department would carry out the plan." After the meeting, this manager consulted a lawyer, who told him to cease trading immediately in the Frannies, lest he later be accused of - here's the rub - insider trading.

The Bloomberg story cites law professors to say that Paulson did not break the law. But the story's implicit allegation is that the former head of Goldman Sachs was so clueless - or contemptuous - of his role as Secretary of the Treasury of the United States of America that he engaged in a clubby tête-à-tête with his former peers and handed them what Bloomberg says "amounted to inside information."

It's actually worse, because as Bloomberg also reports, Paulson was publicly playing down the possibility of dramatic government action -- practically the opposite of what he confided behind closed doors to those elite traders.

Paulson didn't comment for the Bloomberg story, and his spokesperson referred questions to his book, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System - which, Bloomberg points out, doesn't mention the meeting.

There are limits to what a reporter can get - starting with whether any of those powerful and canny Wall Street sharks profited on the information. They may have shorted the Frannies, but, as the Bloomberg story points out, "tracking firm-specific short stock sales isn't possible using public documents." We need a more powerful entity - perhaps a Congressional committee? - to find that out. And, here are a few more questions that cry out for answers:

1. What is the justification for such a meeting? Former St. Louis Federal Reserve bank president William Poole suggests that the Treasury needs to be able to prep the market with information.

Fair enough. A Treasury Secretary should talk to smart market participants, and needs to know how the market might react to any given action.

But there's a difference between meeting to receive information and telling a chosen few market-moving plans. Hank Paulson and now Timothy Geithner should receive information from all types of parties. If they want to float a trial balloon, they have to float it in such a way that doesn2019t give select participants market sensitive information.

2. Why did Paulson meet with these people specifically? The Bloomberg piece notes that Eric Mindich, a hedge fund manager who is a former Goldman Sachs employee, hosted the meeting. Several Goldman Sachs executives attended.

If the Treasury secretary is going to hold meetings with market participants, the attendees should be chosen based on - you are going to laugh here - merit, not connections. And they should be transparently disclosed at the time.

3. How many other meetings like this were there? As Felix Salmon recalls, Andrew Ross Sorkin in his book "Too Big To Fail" revealed that Paulson met with the board of Goldman Sachs in June 2008 in Moscow -- a month before the meeting Bloomberg has revealed -- and discussed market conditions, and even contemplated that Lehman Brothers might fail.

Here's how Sorkin wrote about this:

For the nearly two years that Paulson had been Treasury secretary he had not met privately with the board of any company, except for briefly dropping by a cocktail party that Larry Fink's BlackRock was holding for its directors at the Emirates Palace Hotel in Abu Dhabi in June.

Anxious about the prospect of such a meeting, [Paulson Chief of Staff Jim] Wilkinson called to get approval from Treasury's general counsel. Bob Hoyt, who wasn't enamored of the "optics" of such a meeting, said that as long as it remained a "social event," it wouldn't run afoul of the ethics guidelines.

Still, Wilkinson had told Rogers, "Let's keep this quiet," as the two coordinated the details. They agreed that Goldman's directors would join him in his hotel suite following their dinner with Gorbachev. Paulson would not record the "social event" on his official calendar.

One possible defense for Paulson floating government conservatorship of Fannie and Freddie is that by the time of his July meeting with traders and executives, the market was widely anticipating the government would take that action. But what if the market only anticipated this because there were other, previous meetings between Treasury officials and well-connected investors in which such plans were floated?

4. What did this meeting do for the Treasury?

My sense of Paulson's approach - act first, act boldly, move on and dwell no more - is that his actions weren't well thought out at all.

But let's concede, arguendo, that Paulson and the Treasury held this meeting as part of a carefully thought-out strategy to prep the market for the Frannie conservatorship. What did that get the government? If anything, the prepping only would make the investors more likely to extrapolate and short or sell other financial stocks.

If preparation was indeed the rationale and justification, then Paulson and Treasury needed to have a contingency plan for investor reaction. Which they almost certainly didn't, since Lehman then failed and they were forced into a series of desperate actions. Over the next weeks, they scrambled to create the Troubled Asset Relief Program, or TARP, and then remake it into the preferred equity-buying program (rather than the toxic asset purchasing program).

Without a full and convincing accounting, we are left with a picture of a Treasury Secretary who took care of his buddies while allowing the system to blow up. This is the kind of thing that a crony capitalist system - and only such a corrupt system - would allow.

Photo: U.S. Treasury

Jesse Eisinger is a senior reporter at ProPublica, covering Wall Street and finance.  In April 2011, he and Jake Bernstein were awarded the Pulitzer Prize for National Reporting for a series of stories on questionable Wall Street practices that helped make the financial crisis the worst since the Great Depression.

ProPublica is an independent, non-profit newsroom that produces investigative journalism in the public interest.   This article is republished with permission under a Creative Commons license.

When the Securities and Exchange Commission struck a deal with Citigroup over a failed security that the bank sold to investors, we asked whether regulators had handed Citigroup too sweet of a deal .

Today in Manhattan, U.S. District Judge Jed Rakoff appeared to reach that very conclusion: "If the allegations of the Complaint are true, this is a very good deal for Citigroup," Rakoff wrote as he refused to sign off on the $285 million proposed settlement agreement.

While the full opinion is worth a read, here's a summary of the judge's objections:

The allegations brought by the SEC don't match the charges.

The SEC, in its complaint, alleged that Citigroup knowingly misrepresented or failed to disclose to investors key information about the CDO, known as Class V Funding III. We first reported on Class V last year, in our story on CDO self-dealing, noting that the CDO contained risky pieces of other Citigroup CDOs.

Specifically, the SEC charged that Citi put risky assets into the deal, bet against it, and then didn't disclose that to investors. According to SEC, "Citigroup knew it would be difficult" to sell the CDOs if it disclosed all that to investors.

Judge Rakoff concluded, "This would appear to be tantamount to an allegation of knowing and fraudulent intent."

But in the end, the SEC only charged Citigroup - and one low-level exec - with negligence 2013 a lower standard of proof than intentional fraud. Charges were also not filed against other, more senior Citi execs who, according to the SEC, also knew details of the deal.

The boilerplate language in the settlement that forbids future violations by Citigroup is essentially meaningless.

"By the S.E.C.'s own account, Citigroup is a recidivist," wrote Rakoff, who noted that the SEC had not sought to enforce that prohibition for at least a decade.

The context here is more than adequately explained by a recent New York Times article that found that Citigroup had agreed on at least four other occasions not to violate that same anti-fraud statute, only to continually break that promise.

The fine is too modest to have a deterrent effect.

According to Rakoff, the fine in this case is so mild that it's more or less "pocket change to any entity as large as Citigroup" and starts becoming just a cost of doing business.

Rakoff loathes the longstanding tradition of reaching settlements without any admissions of wrongdoing.

Sure, it's standard in these types of settlements, and judges have routinely signed off on such language, but Rakoff has signaled in the past that he has serious qualms about these non-admission, non-denial settlements.

For one, he says the deal with Citi shortchanges investors, who according to the SEC lost more than $700 million: With no mea culpa from Citi, private investors have a much harder time bringing their own lawsuits against the company - which for Citigroup is precisely the point.

Rakoff also argues that the tradition cheapens judicial power, which must be used in conjunction with "cold, hard, solid facts."  A non-admission of guilt but agreement to pay, while in keeping with established tradition, denies the court of established facts on which to decide whether the settlement is reasonable, he said.

The truth should come out

Finally, Rakoff argues that especially when it comes to the financial sector - and especially now - the public deserves to know the truth:  "In any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth."

One thing Rakoff didn't touch on? A discrepancy we raised last month: Citigroup seems to believe this deal with the SEC would have settled all of its potential liability over CDOs - something the agency denied.

The SEC's response

The SEC issued a statement today defending its settlement:  "We believe that the proposed $285 million settlement was fair, adequate, reasonable, in the public interest, and reasonably reflects the scope of relief that would be obtained after a successful trial," said Robert Khuzami, the SEC's head of enforcement.

Khuzami pointed out that Rakoff's objection to the lack of admission of guilt "ignores decades of established practice throughout federal agencies and decisions of the federal courts."

That response is in line with what Khuzami has said in the past - that securing corporate confessions from companies like Citi, while ideal, would slow down the agency's investigations.

"No one disagrees with the sort of abstract notion that you'd like to have admissions in your cases," Khuzami said earlier this month. "One has to make choices between competing demands."

The agency has also argued that taking banks to costly trials would divert scarce resources toward their other securities fraud fighting efforts, and be counterproductive.

What's next?

The case has been scheduled for trial next year - something Citigroup would presumably like to avoid, given the mountains of evidence in the SEC's possession that would become public should the case indeed go to trial.

But a trial is still not a sure thing. Rakoff initially rejected a proposed SEC settlement with Bank of America, but he eventually approved the deal last year after the agency came back with a bigger fine. It's unclear if the SEC will try to do the same this time around.

ProPublica is an independent, non-profit newsroom that produces investigative journalism in the public interest.   This article is republished with permission under a Creative Commons license.

Recent crises at University of California Davis (UCD), Syracuse University and Penn State University - from campus police using pepper spray on peaceful protesters, to sexual molestation allegations, to child sex abuse charges - raise questions about the role of risk management on campuses.

Police pepper spray demonstrators at UC Davis Nov. 18, 2011 (via YouTube)

Not surprisingly, a recent survey by the Association of Governing Boards (AGB) indicates comprehensive risk assessment - a fairly standard practice at large companies - is not an automatic function of university governance. Only about one-third of the boards surveyed had a formal process for risk assessment. AGB says further improvement is needed.

The issue isn’t just how widespread risk management is on campuses but whether the standards for effective programs are adequate to the challenges inherent in their mission. Penn State was early to the party with what was considered a comprehensive risk management function and yet it failed to protect the university’s reputation. It is a failure that impacts every aspect of the institution, the measurable and the unquantifiable. Moody’s has placed Penn State’s revenue bond rating on review for possible downgrade in the midst of its $2 billion campaign.

College leaders are facing an ever-growing list of emerging issues not in their playbook, as well as challenges posed by insular sports departments that are economic drivers in their own right. The more narrowly risk is defined, the greater the likelihood that managing it can ignore or minimize the powerful role an institution’s culture plays in preventing, creating, or escalating crises. Culture risk is organic, given texture by those in power and those being led. And in the viral world in which we live, local missteps take on global footprints in seconds.

The pepper spraying of Occupy Davis protesters November 18, 2011 was immediately captured on YouTube.  Eleven students were treated at the scene or taken to a hospital; 10 were arrested. The president of the University of California system has said he was "appalled" and will do an assessment of law enforcement procedures on all 10 UC campuses.

After seeing the video, UCD Chancellor Linda Katehi, said the use of pepper spray was “chilling” and “raises many questions about how best to handle situations like this.” She announced the creation of a task force to look into encampments. Meanwhile, the UCD Faculty Association has called for her resignation citing “a gross failure of leadership.”

Should university presidents have anticipated that the Occupy Wall Street protests would quickly move to college campuses? For that matter, should university leaders with star power football or basketball programs, TV rights, and wealthy boosters anticipate problems with transparency, fiefdoms, and where loyalty is owed? Even when the problem is anticipated, knowing how to address it to circumvent unintended consequences becomes the key.

AGB, a leading source of information for trustees and presidents, identifies four risks institutions might face: operational (fire, weather, strike, power plant accident), legal and regulatory, (compliance failures), financial, and political and reputational.

In 2007, AGB co-hosted a summit on Enterprise Risk Management (ERM) to begin to develop a sustainable ERM model with roles for presidents and others. UCD and Penn State were among the 40 leaders participating, including several people responsible for Penn State’s risk management and recently-fired President Graham Spanier. In this forum, culture was pegged to one of eight tactical components (like event identification) that should be looked at in its strategic, operational, financial, and compliance aspects.

Culture needs a much bigger focus in university risk management. That point will undoubtedly become clear in the findings of the avalanche of investigations planned at Penn State (from one led by trustees to others by the U.S. Department of Education and the National Collegiate Athletic Association).

Acting President Rodney Erickson made clear he was trying to usher in a culture change, when he announced a commitment to transparency and hiring an ethics officer to report directly to him. In the process, risk management is bound to broaden and perhaps find a new home there. Under Spanier, risk management was housed in the Privacy Office, reporting to the corporate controller, who reported to the former Sr. VP for Business and Finance, now accused of perjury in the scandal.

The more risk management is about compliance and not also about raising the difficult questions when competing values come into play (like issues of perceived safety versus right to dissent), the less a university is protected. The problem is that in juggling 100 balls, leaders often don’t have practice thinking through how their values, and those of the institution, will come into play in a variety of different potential situations.

It is the nature of universities that we expect them to figure out how to handle dissent without pepper spray, engage in dialogue, and create teachable moments that often occur outside classrooms.

What better setting than a learning environment to apply a variation of the Giving Voice to Values approach created by consultant and educator Mary Gentile for teaching business ethics to students – and to use it for administrators? (Over 100 universities from Harvard to Penn State to University of Cape Town use the approach in classrooms.) The approach is easily adapted to leaders – creating a safe environment to practice how to address “what would I say and do if I were to act on my values?”

Answering that question would have the greatest possible impact on risk management and protecting the university.

Gael O’Brien is a Business Ethics Magazine columnist. Gael is a thought leader on building leadership, trust, and reputation and writes The Week in Ethics.

On October 9, 2011, California Governor Jerry Brown signed into law competing bills that create two new corporate forms in California — a “flexible purpose corporation” and a “benefit corporation” — intended to allow entrepreneurs and investors the choice of organizing companies that can pursue both economic and social objectives. The new corporate forms differ from traditional for-profit corporations that are organized to pursue profit (and not social purposes) and non-profit corporations that must be used solely to promote social benefits. These laws will take effect on January 1, 2012.

The flexible purpose corporation is created by California Senate Bill 201 (“SB 201″), which adds Division 1.5 to Title 1 of the California Corporations Code (the “Code”) and amends other related sections of the Code, and the benefit corporation is created by California Assembly Bill 361 (“AB 361″), which adds Part 13 to Division 3 of Title 1 of the Code. State Senator Mark DeSaulnier authored SB 201, and a full copy is available here. AB 361 was authored by Assemblyman Jared Huffman, and a full copy is available here. Both new laws take effect January 1, 2012.

Background

The new laws offer two versions of a solution to an identified gap in the Code and the corporate laws of many states. Existing law in California permits formation of for-profit corporations that operate within a construct that places interests of shareholders, and specifically return to shareholders, as the primary, if not sole, objective of the corporation and its various agents. A corporation might engage in philanthropy, act in an environmentally conscious manner and promote employee- or community-friendly policies, to name a few, but such pursuits ultimately are rationalized in the corporate governance context as being acts taken to promote long-term value growth for shareholders, and directors of a corporation could face exposure if they lean too far in favor of social objectives at the expense of shareholder returns. In contrast, a non-profit corporation in California is mandated to serve public interests and is specifically prohibited from pursuing private gain. A non-profit corporation that strays too far toward profit-producing activities risks action by the State Attorney General and loss of tax-exempt status (if applicable). This has left a gap for some entrepreneurs and investors that desire a business vehicle which can pursue both profits and social objectives.

SB 201 and AB 361 are the result of efforts by two groups working over the last two years to introduce a new “hybrid” corporate form in California. SB 201 originally was written by a group of corporate attorneys from major law firms in California, including this firm, who sought to create a new “flexible” form of corporation in California that would allow shareholders to devise their own mix of economic and social corporate objectives, ensure that future investors would have adequate notice of the purposes pursued, and provide protections to ensure that the new corporate form is not easily foisted upon shareholders of traditional corporations. AB 361 resulted from efforts of B Lab, a non-profit organization that offers certification of corporations as “B corporations” (which B Lab describes as “a new type of corporation which uses the power of business to solve social and environmental purposes”) and promotes adoption of benefit corporation legislation in states across the country. Enactment of AB 361 follows the adoption of similar benefit corporation legislation in Hawaii, Maryland, New Jersey, Vermont and Virginia. The fact that both SB 201 and AB 361 were enacted is likely to create confusion going forward among entrepreneurs, investors and lawyers as they try to understand differences among the new entities and traditional for-profit and non-profit corporations (as well as limited liability companies and limited partnerships). Both of the new entities will be taxed the same as for-profit corporations under current tax law.

Flexible Purpose Corporations

A flexible purpose corporation will be set up much like a traditional for-profit corporation, with shareholders and a board of directors, but its articles of incorporation and share certificates must state that it is organized as a flexible purpose corporation, and its articles must identify a “special purpose” from the following list:

(1) One or more charitable or public purpose activities that a nonprofit public benefit corporation is authorized to carry out; or

(2) The purpose of promoting positive short-term or long-term effects of, or minimizing adverse short-term or long-term effects of, the flexible purpose corporation’s activities upon any of the following:

(a) The flexible purpose corporation’s employees, suppliers, customers, and creditors;
(b) The community and society; or
(c) The environment.

The obvious breadth of potential purposes was intended by the drafters of SB 201 — to allow shareholders to define their desired special purposes without regard to what third parties might deem to be valid or desirable societal objectives.

A flexible purpose corporation can amend its “special purpose” by amending its articles of incorporation. If the amendment would materially alter any special purpose stated in the articles, such amendment must be approved by the affirmative vote of at least two-thirds of the outstanding shares of each class of the corporation’s stock, or a greater vote if required in the articles, regardless of whether a class is entitled to vote, and a majority of the outstanding shares of all classes entitled to vote. A similar vote is required for a flexible purpose corporation to amend its articles to convert into a traditional California corporation (which can be done by amending the articles to eliminate the special purpose provisions). A unanimous vote of all shareholders, regardless of whether shares are entitled to vote, is required to amend a flexible purpose corporation’s articles to convert it into a non-profit corporation.

In discharging his or her duties, a director of a flexible purpose corporation “may consider those factors, and give weight to those factors, as the director deems relevant, including the short-term and long-term prospects of the flexible purpose corporation, the best interests of the flexible purpose corporation and its shareholders, and the purposes of the flexible purpose corporation as set forth in its articles.” SB 201 specifically states that there shall be no private right of action created for members of the public to sue a flexible purpose corporation for failure to pursue or achieve its special purposes, and directors are not responsible to any parties other than the flexible purpose corporation and its shareholders.

A flexible purpose corporation’s board of directors is required to send an annual report to shareholders each year that includes a management discussion and analysis (MD&A) concerning the short-term and long-term objectives of the entity relating to its special purpose or purposes, the material actions taken during such year to achieve such objectives, the impact of such actions, and the causal relationships between the actions and outcomes, future material actions expected to be taken in the short-term and long-term to achieve the entity’s special purpose objectives, the measures used to evaluate the entity’s performance in achieving its special purpose objectives, and any expenditures incurred in achieving these objectives. The entity’s board of directors also must make the annual flexible purpose MD&A publicly available by posting it on the entity’s website or providing it through similar electronic means. Flexible purpose corporations also must send to shareholders and make publicly available current reports summarizing (i) any expenditure or group of expenditures that are likely to have a material adverse impact on the entity’s results of operations or financial condition for a quarterly or annual fiscal period or (ii) any decision by the board or action by management to (a) withhold expenditures that were to have been made in furtherance of the entity’s special purpose where the planned expenditures were likely to have a material positive impact on the entity’s impact in furtherance of its special purpose objectives or (b) determine that the special purpose has been satisfied or should no longer be pursued. The shareholders of a flexible purpose corporation with fewer than 100 shareholders can elect to waive the requirement for the entity to send and publish annual and current reports, and the disclosure requirements are deemed satisfied for any corporation with securities registered under Section 12 of the Securities Exchange Act of 1934 if the corporation includes the required disclosure in its periodic reports.

A flexible purpose corporation can merge with any other California or non-California entity in the same manner as for-profit corporations, except that if the disappearing corporation in a merger is a flexible purpose corporation and the surviving corporation is not, or the surviving corporation in a merger is a flexible purpose corporation with materially different special purposes than a disappearing flexible purpose corporation, then in addition to other approvals typically required the merger must be approved by the affirmative vote of at least two-thirds of the outstanding shares of each class of stock of the disappearing flexible purpose corporation, or a greater vote if required in the articles, regardless of whether a class is entitled to vote. If the disappearing corporation in a merger is a California for-profit corporation and the surviving corporation is a flexible purpose corporation, the merger must be approved by at least two-thirds of the outstanding shares of each class of stock of the disappearing corporation, or a greater vote if required in the articles, and all shareholders of the disappearing corporation not voting in favor of the merger must be afforded the opportunity to sell their shares to the surviving corporation for cash at their fair market value (i.e., exercise dissenters’ rights). Essentially the same requirements apply if a California for-profit corporation chooses to convert to a flexible purpose corporation. If a flexible purpose corporation merges with a non-profit corporation and the surviving entity in the merger is the non-profit corporation, the merger must be approved by all shareholders of the disappearing flexible purpose corporation, regardless of whether shares are entitled to vote.

Benefit Corporations

A benefit corporation also will be set up much like a traditional for-profit corporation, but its articles of incorporation must state that it is a “benefit corporation” and it must be organized to pursue a “general public benefit” and, if it chooses, one or more other “specific public benefits.” A general public benefit is defined as a “material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard.” The optional specific public benefits can include any of the following:

(1) Providing low-income or underserved individuals or communities with beneficial products or services.
(2) Promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business.
(3) Preserving the environment.
(4) Improving human health.
(5) Promoting the arts, sciences, or advancement of knowledge.
(6) Increasing the flow of capital to entities with a public benefit purpose.
(7) The accomplishment of any other particular benefit for society or the environment.

The “third-party standard” utilized by a benefit corporation refers to a “standard for defining, reporting, and assessing overall corporate social and environmental performance to which all” of a long list of requirements apply. B Lab, the original proponent of AB 361, reportedly has developed such a standard and offers its certification services at fees ranging up to $25,000 per corporation per year.

Any traditional for-profit corporation can become a benefit corporation simply by amending its articles to state that the entity is a benefit corporation, and likewise a benefit corporation can terminate its status as a benefit corporation simply by amending its articles to delete such statement. In either case, the amendment requires approval of at least two-thirds of the outstanding shares of each class or series of stock of the corporation, regardless of any limitation stated in the articles or bylaws on the voting rights of any class or series. In addition, the corporation changing its status must provide dissenters’ rights to all shareholders not voting in favor of the proposed change. A benefit corporation may amend, add or delete any additional, specific public benefits identified in its articles by amending its articles with approval of at least two-thirds of the outstanding shares of each class or series of its stock (or higher threshold if specified in its articles).

In discharging their respective duties, the board of directors, committees of the board and individual directors of a benefit corporation are required to “consider the impacts of any action or proposed action upon all of the following”:

(1) The shareholders of the benefit corporation;
(2) The employees and workforce of the benefit corporation and its subsidiaries and suppliers;
(3) The interests of customers of the benefit corporation as beneficiaries of the general or specific public benefit purposes of the benefit corporation;
(4) Community and societal considerations, including those of any community in which offices or facilities of the benefit corporation or its subsidiaries or suppliers are located;
(5) The local and global environment;
(6) The short-term and long-term interests of the benefit corporation, including benefits that may accrue to the benefit corporation from its long-term plans and the possibility that these interests may be best served by retaining control of the benefit corporation rather than selling or transferring control to another entity; and
(7) The ability of the benefit corporation to accomplish its general, and any specific, public benefit purpose.

Having to consider all these factors for every issue that comes before a board of directors may be a tall order. AB 361 specifically provides that directors are not required to give particular weight to these specific factors or interests unless the corporation’s articles of incorporation state a preference for particular factors or interests. While this approach provides much flexibility, the new law does not make clear what standards directors should follow in making decisions, resulting in some commentators expressing concern that directors of benefit corporations may have too much discretion and lack accountability to shareholders.

AB 361 limits directors’ liability for monetary damages for failure of a benefit corporation to create a general or specific public benefit and states that directors shall owe no fiduciary duties to beneficiaries of the benefit corporation’s general or specific public benefit purposes. Nevertheless, AB 361 expressly contemplates that a “benefit enforcement proceeding” may be brought against a benefit corporation or its directors or officers by the corporation itself or derivatively by shareholders, directors, persons who hold more than 5% of the equity of a parent entity or other persons specified in the articles or bylaws of the corporation. AB 361 also specifically requires an officer of a benefit corporation to consider the same interests and factors that board members must consider (as described above) whenever an officer has discretion to act and an action may materially impact such interests or factors, and the officer shall be deemed not to have violated his duties when he or she so acts.

Similar to the reporting regime required for flexible purpose corporations, a benefit corporation is required to deliver to each shareholder and make publicly available on its website (if it has one) an annual benefit report that (i) details for the applicable year the process and rationale for selecting a third-party standard used to prepare the report, the ways in which it pursued a general public benefit and any specific public benefits and any circumstances that have hindered the creation of such public benefit purposes, (ii) assesses the social and environmental performance of the benefit corporation according to the third-party standard, (iii) identifies any person that owns five percent or more of the corporation, (iv) includes a statement of the corporation’s board of directors regarding whether the corporation failed to pursue its public benefit purposes in all material respects during such year, and (v) identifies any connections between the corporation (or its directors, officers or material owners) and the entity (or its directors, officers or material owners) that created the third-party standard used by the corporation to assess its pursuit of its benefit purposes, in any case that might “materially affect the credibility of the objective assessment of the third-party standard.” There is no mechanism for a benefit corporation or its shareholders to opt out of these annual reporting and disclosure requirements.

Anticipated Usage

It remains to be seen whether entrepreneurs and investors will embrace these new forms of corporate entity in California. Organizing a flexible purpose corporation or benefit corporation will require more initial thought and work than forming a traditional for-profit corporation, particularly in 2012 as practitioners come up to speed on the requirements for the new entities. As between the two forms, the flexible purpose corporation offers greater flexibility in terms of defining the special purposes to be pursued by the corporation and less onerous governance requirements, while the benefit corporation offers the advantage of being used and recognized in a handful of other states.

David Hernand, Stewart McDowell and Colin Richard are attorneys with the law firm of Gibson, Dunn & Crutcher LLP.

The economic crisis, increased rules and regulations, and heightened scrutiny of boards’ roles have corporate directors feeling pressure to be more effective in the boardroom. PwC’s 2011 Annual Corporate Director Survey (the Survey) of 834 corporate directors offers insight into the biggest corporate governance issues facing directors today. Because 67% of respondents represent companies with more than $1 billion in annual revenue, the Survey illustrates the current boardroom thinking of many of the largest companies in the world.

The corporate governance landscape has changed over the past few years, and as it continues to evolve, directors are working to adapt. Their responses to the Survey indicate that executive compensation, risk management, strategy and succession planning are key areas of future focus. They are also concerned about information technology security and fraud.

"Say on pay” was one of the big stories from the past year, according to the Survey, as it was the first year shareholders had an advisory vote on executive compensation, thanks to the Dodd-Frank Act and the Securities and Exchange Commission’s say on pay rule. Nearly all companies passed their say on pay votes, but directors are still paying attention to shareholder concerns about executive compensation — 72% said they would reconsider executive compensation, even if shareholders voted in favour of their company’s compensation plan. Directors are trying to be more open about executive pay, as well. Nearly half said they changed their Compensation Discussion and Analysis (CD&A) to be more “plain English” so shareholders could better understand the details of the compensation plans. Fewer directors said boards are having trouble controlling CEO compensation — 44% this year compared to 58% in 2010.

Directors also seem to recognize the importance of transparency in general, as they increased communications with employees, major shareholders, analysts, proxy advisory firms, and the media over the past 12 months.

Risk management was an area of particular concern for the directors in the Survey. While more than 83% of directors said there is a clear allocation of responsibility for overseeing major risks on the board, only 19% said their board is very effective at monitoring a risk management plan that mitigates corporate exposure. Even fewer (11%) said their board is very effective at overseeing the company’s strategic use of technology and related risks. More than 40% of directors said it is difficult to add directors with risk management expertise, while more than 52% said the same about adding directors with technology expertise. Fifty-seven percent of directors want to increase their focus on risk management issues in the coming year, and nearly 38% want to devote more time to information technology issues.

Board members themselves are becoming tech savvy. More than 36% said they are using tablets in the boardroom, and 38% said they wished their boards would use them.

Strategy and succession planning are issues directors want to spend more time discussing in the boardroom — 59% want to focus on strategy this year, the same as 2010. The frequency of strategy discussions is also notable. More than half of directors are talking about their company’s strategic plan every six months, while 44% discuss it at least once a year. Regarding CEO succession, more than one-third (36%) of directors said they are not satisfied with their company’s CEO succession plan. And 59% of directors want to spend more time on the issue this year, up from 50% a year ago.

Diversity continues to be a challenge for boards, as more than half of directors say it’s difficult to add gender diversity. More than 65% say it’s difficult to add racial diversity.

In summary, directors are responding to stakeholder concerns, but they know they have more work to do. They recognize the continued need to adapt as the governance landscape evolves in order to enhance their effectiveness as overseers.

Don Keller is a partner in PwC's Center for Board Governance which provides thought leadership, points of view on contemporary governance issues, and training to boards of directors and the governance community.

This article was first published on the Harvard Law School Forum on Corporate Governance and Financial Regulation and is re-published with the author's permission.