Corporate America is pulling out all the stops to challenge the Securities and Exchange Commission’s proposed whistleblower regulations.

The regulations implement the whistleblower program established in the 2010 Dodd-Frank Wall Street Reform Act.

The “Securities Whistleblower Incentives and Protection” section requires the SEC to pay a cash award to whistleblowers who voluntarily provide original information about violations of federal securities laws that lead to a successful enforcement action.  It also prohibits retaliation by employers against individuals who provide information to the SEC.

A particularly divisive issue: the proposed rules don’t require a whistleblower to first use internal compliance procedures. “What’s at stake?” asks Susan Hackett, senior vice president and general counsel of the Association of Corporate Counsel. “If you’re a company that relies on your employees to assure that work is done legally and responsibly, the answer is pretty much everything,” she writes at the group’s website.

The SEC proposals, she says, “essentially kick the legs out from under the carefully constructed compliance and reporting systems emanating from federal and state mandates, the U.S. Sentencing Guidelines, and growing public expectations of corporate self-policing.”

She adds:  “Basically, regulators have moved from an interest in protecting whistleblowers and facilitating their reports toward a system that establishes huge potential rewards for bounty hunters who don’t have interest or investment in making sure their company is doing the right thing, but rather are rewarded only when the company can be shown to do the wrong thing.”

The ACC on Dec. 15 spelled out those concerns in a comment letter signed by more than 260 in-house legal executives.  The group argued that the SEC proposal encourages employees “to find way to profit from corporate wrongdoing,” invites employees “to focus on timing their report so as to maximize the bounty they’ll receive, potentially allowing misconduct to fester…,”  and promotes “less effective responses to serious problems” by inviting an “end-run” to internal investigations.  (A footnote observes: “From our perspective and based on the traditional understanding of the term, an individual who merely learns of a problem and heads for Door Number 1 to recover a large award is not a whistleblower.”)

There is, of course, another point of view. Critics assert the SEC has failed to follow-up on tips about corporate financial scandals – see Bernard Madoff – and hope the new whistleblower law will provide better procedures and more incentives to trigger investigations.  The SEC has estimated that it may get as many as 30,000 tips a year under the new regulations, although budget and staffing restrictions raise questions about whether the agency will be able to handle the deluge.

The SEC has received more than 800 letters or petitions declaring “more whistleblowing about corporate malfeasance could have made the foreclosure crisis and economic meltdown less severe.  Whistleblowers should never be forced or encouraged to take their concerns to their potentially corrupt bosses first.”  And another 100 or so express similar concerns in more detail along these lines:  “The SEC proposed rules completely undermine efforts to protect employees who risk their careers to expose fraud.”

And whistleblowers still take tremendous personal risks, observes Houston attorney Wayne Isaacks, in a comment on the Harvard Law School Forum on Corporate Governance and Financial Regulation.

“In the 5th Circuit,” he writes,  “whistleblowers act in their peril, unless they have already quit their jobs or have been fired. Even so, they may be subject to effective civil suit, injunction and criminal charges, depending on what they know, how they know it, and if they have confidential documents and records.”  (He was commenting on a posting from the Wachtell, Lipton, Rosen & Katz law firm arguing the SEC proposed rules “do not go far enough to avoid undermining corporate compliance systems.”)

(Coincidentally, Congress is moving forward on amending whistleblower procedures involving federal employees and agencies – S. 372, the Whistleblower Protection Enhancement Act, a measure which has pro-whistleblower groups split.  The issues are even more muddled with the recent Wikileaks situation, which has prompted legislative efforts to clamp down on leaks of sensitive government information.

(Shanna Devine, legislative officer for the Government Accountability Project, a whistleblower protection organization based in Washington, D.C., declares “we will never be safe until national security whistleblowers can tell the truth. That cannot happen until Congress gives them normal rights against retaliation, a reform stalled since last year by secret procedural holds that haven’t even been challenged. It is time for the politicians to get serious about protecting those who protect us.”

(On the other hand, the National Whistleblowers Center argues that S. 372 “threatens to significantly undermine the ability of federal employees to report fraud in taxpayer spending.”)

The Senate and House in 2010 each passed versions of the act, but differences weren’t resolved.  Rep. Darrell Issa, who will head the Commission on Oversight & Government Reform in the 2011 Congress, has said he intends “to continue the discussion about providing appropriate protections for federal employees who expose wrongdoing through legal and responsible channels.”  The committee’s website includes a “Blow the Whistle” form intnded “to alert the Republican Staff … to fraud and abuse in your agency or other organization.”

The Ethics Resource Center, which conducts an annual National Business Ethics Survey, found in 2009 that more than six out of ten employees said they reported workplace misconduct when they saw it.

When employees report misconduct, “the company hotline is one of the lasts places they go,” the survey found, with only three of 100 reports about internal misconduct coming to hotlines.  (And only four percent reported misconduct to someone outside the company.)  There are hazards to whistleblowing, the report indicated -- 15% of employees who reported misconduct “perceive retaliation as a result – most commonly a cold shoulder or verbal abuse from colleagues or a supervisor.”  More than four in ten said they almost lost their job or were denied a raise because of reporting misconduct.

It appears, the ERC study said, that “employees in weak cultures tend to report to higher management rather than direct supervisors because they aren’t confident that lower level managers are fully committed to strong ethics.”

The ERC has told the SEC that its whistleblowing rules should be “actively encouraging employees to initially work through their own institutions’ processes.”  And, it noted, most reported misconduct doesn’t involve securities violations.  “It would be unpardonable if a program designed to address the single area of securities law violations was to reduce the effectiveness of (Ethics and Compliance) efforts aimed at a wider range of issues.”

Regulators and rulemakers led the list of 100 most influential people affecting corporate governance in America’s board rooms in 2010, according to the National Association of Corporate Directors.

Administration officials on the list include President Barack Obama, David Axelrod, Rahm Emanuel and Valerie B. Jarrett.  Re-elected to the list were Sen. Christopher Dodd and Rep. Barney Frank, authors of the Wall Street Reform and Consumer Protection Law, and Securities and Exchange Commission Chairman Mary L. Schapiro.

The list, published in Directorship Magazine, is based on a survey of 15,000 public company directors and executives. The magazine doesn’t rank the 100 but instead selects several people each from a number of categories including regulators, directors, CEOs, governance policy makers, attorneys and professors.

Corporate directors in the top 100 include Dina Dublin (serving on the boards of Microsoft, Accenture, Pepsico); J. Michael Cook (Comcast, Burt’s Bees,  International Flavors and Fragrances);  Raymond J. Groves (Boston Scientific);  Bonnie G. Hill (Home Depot, AK Steel Holding, California Water Service Group, Yum! Brands); and Mellody Hobson (DreamWorks Animation, Estée Lauder, Starbucks).

CEOs who are also top 100 directors include Steven Ballmer of Microsoft, Rex Tillerson of ExxonMobil, Warren Buffet of Berkshire Hathaway, Steve Jobs of Apple, and Ellen Kullman of DuPont.

Based on the selections, Harvard University claimed bragging rights.  According to the Harvard Law School Forum on Corporate Governance and Financial Regulation blog, the Directorship 100 list includes twenty-seven individuals who are Harvard Law School faculty or fellows, guest Contributors to the blog, and/or Harvard Law School alumni – suggesting, the blog says, that Harvard and its governance program play  “a central role in the corporate governance landscape.”

Said Directorship Magazine:  “All members of the Directorship 100, regardless of how they arrived here, have power and influence. Some of it is new, some of it is long-standing.  Our modest job is to reveal those who exert the kind of influence that will permit the continued, if sometimes shaky, path that our system of capitalism is on, and the importance of corporate governance as a critical guidepost along the route.”

When financial results aren’t what they seemed to be – and a company is forced to issue material financial restatements - how does it recoup the incentive pay and bonuses that were awarded to senior managers on the basis of rosier outcomes?

It’s not a simple process, as evidenced by reactions to a provision in the newly-enacted Dodd-Frank financial reform legislation viewed by governance advocates as effective in increasing management accountability for financial results.

Under the law, companies must develop policies to recoup improperly awarded compensation from all current and former “executive officers” for three years preceding the date on which the company was required to file a restatement.

Such financial restatements are not uncommon.  From 2002 through 2009, there were over 2,900 negative restatements of net income by listed public companies, according to an analysis by the law firm Latham & Watkins.

And most companies do not have clawback policies in place.  Only about 17% of 3,680 companies have disclosed clawback policies that at least cover senior management, up from a handful in 2005, according to proxy advisers ISS, as reported in The Wall Street Journal.

Large companies are more likely to have clawback policies: 71 of the largest U.S. companies have policies in place, according to a new survey by the law firm Shearman & Sterling.  But even those will likely need to be revised and updated in response to forthcoming SEC regulations regarding the Dodd-Frank requirements.  The SEC has said it will publish rules in time for the 2011 proxy season.

Proper Risk Management

When designed properly, a policy allowing for clawback of pay from high-level executives “is a significant mechanism for corporate accountability,” says former GE senior vice president Benjamin W. Heineman, Jr., writing on the Harvard Law School Forum on Corporate Governance and Financial Regulation.

The problem, according to Mr. Heineman, is that hundreds of companies that don’t have policies must now design one.   Among the questions they need to answer: Which executives are covered by a policy?  What event triggers implementation of a clawback?  What types of compensation should be recovered?  What is the forum for resolving issues?  Is a “holdback” (cancelling unvested benefits) better than a clawback?

Mr. Heineman makes a number of recommendations for what he calls a “broad, flexible holdback/clawback approach” for holding senior leadership accountable to what he says is the fundamental mission of the corporation: “proper risk taking balanced with proper risk management and the robust fusion of high performance with high integrity.”

Clawbacks are not entirely new.  The Sarbanes-Act of 2002 gave the SEC the power to recover restatement-related compensation and stock profits from Chief Executive Officers and Chief Financial Officers.

But the Dodd-Frank Act expands the breadth of the clawback requirement, according to the Latham & Watkins analysis, because it requires reimbursement from a broader pool of “executive officers” and forces the company (not the SEC) to take action.   The Dodd-Frank legislation also expands the period subject to compensation clawback and, importantly, does not require a restatement to have been the result of “misconduct” by an executive, as required by Sarbanes-Oxley.

Latham & Watkins suggests that the Dodd-Frank clawback provision may provide shareholder plaintiffs and shareholder activists “with a major new weapon.”

“We will not be surprised to see shareholder plaintiffs bring derivative suits challenging the implementation of the company’s clawback policy and attempting to exercise the company’s rights to repayment,” the firm says. “Whether such suits will find any measure of success and how often they will be filed is difficult to predict.”

Whistle-blowing by employees and insiders is a “useful mechanism” for uncovering corporate misbehavior, with clear economic and governance impact on the companies involved, according to a new academic study.

“Whistle-blowing allegations had an immediate negative economic consequence for target firms,” the study found.  On average, the stock price of a target company fell 2.8 percent in the five days around the day an allegation became public and even more severely – an average of 7.3 percent - when the whistle-blower alleged “earnings management.”

The paper – Whistle-Blowing: Target Firm Characteristics and Economic Consequences – was written by Robert Bowen and Shiva Rajgopal, Professors of Accounting at University of Washington, and Andrew Call, Assistant Professor of Accounting at the University of Georgia.  Highlights of the paper were first posted on the Harvard Law School Forum for Corporate Governance and Financial Regulation.

In the wake of scandals at Enron, WorldCom and other companies, the Sarbanes-Oxley Act of 2002 incorporated provisions to encourage and protect whistle-blowers, including requirements for whistle-blowing “hotlines” that facilitate employee reporting.  The paper addresses critics who have argued that whistle-blowers often misjudge a situation and “indulge in trivial or frivolous complaints.”

“Our results suggest whistle-blowing is far from a trivial nuisance for targeted firms,” the paper reports, and provide “indirect evidence on the efficacy” of whistle-blowing protections in the Sarbanes-Oxley Act.

The researchers found that whistle-blowing generally led to more earnings restatements, more shareholder lawsuits, and “relatively poor operating and stock return performance” compared to other firms.  “Whistle-blower allegations appear to be an early indicator of future negative economic consequences for targeted firms,” the study found.

On average, whistle-blowing targets exposed in the press “improved several dimensions of governance relative to the year before the whistle-blowing event” and relative to a matched sample of control firms.   Those governance improvements were not apparent for firms subject to whistle-blowing allegations that were not widely disseminated, the researchers said.

High-growth companies and those with strong stock market performance are more likely to encounter whistle-blowing, according to the study, as are those that have recently made reductions in work force.  “Employees, especially former employees who have been let go, are more likely to make public allegations following layoffs,” the paper says. “Further, layoffs can increase the animosity between the firm and existing employees, and if existing employees perceive their job as being less secure, the potential cost of blowing the whistle decreases.”

Television viewers in more than 3 million homes in New York City and its suburbs discovered this morning that their cable TV provider was no longer carrying local station WABC, flagship of the ABC Television network, raising the possibility that they might not be able to watch tonight’s globally-televised 82^nd annual Academy Awards ceremony.

The cutoff came after the breakdown of negotiations between The Walt Disney Company, which owns ABC, and Cablevision Systems Corporation, one of the nation’s largest cable companies.   Disney wants more from Cablevision in so-called “retransmission fees” for the right to transmit the WABC signal to the cable company’s subscribers.  When the two sides couldn’t reach agreement by their current contract deadline, Disney pulled the WABC signal.

These two prosperous companies will undoubtedly sort out their dispute, maybe even in time for tonight’s orgy of Hollywood self-congratulation.   What’s notable about the confrontation, however, is the harsh public language used by corporate combatants and the hints it provides of progress in the movement toward corporate governance reform.

On its web site for customers, for example, Cablevision argued: “It is wrong for ABC to demand $40 million in new fees, which is nothing more than a new TV tax, to help pay the salaries and bonuses for top ABC executives.”  (Translation: Executive compensation levels at Disney are a real issue.  That affects the type and quality of TV programming you receive.)

Disney’s WABC fired back: “Cablevision pocketed almost $8 billion last year, and now customers aren’t getting what they pay for – again.  It’s time for Jim Dolan and the Dolan family dynasty to finally step up, be fair, and do what’s right for our viewers.”  (Translation: The Dolan family makes an awfully good living because it tightly controls publicly-held Cablevision through its ownership of a special Class B common stock.  That affects the type and quality TV programming you receive.)

It’s no wonder that The Morning Bridge, a TV industry newsletter, published a special Sunday morning bulletin focusing on the war of words and asking: “Think anybody wins in these situations?”

(Update: Disney and Cablevision reached a tentative agreement and the ABC signal was restored 14 minutes into the Oscar broadcast.)

Is the tide turning?

Well, it could be that the movement for corporate governance reform is actually beginning to score some wins, if only because average citizens and small shareholders are beginning to understand that these issues can really mean something to them.  The question is whether these victories are only short-term tactical advantages or constitute signs of longer-term success.

“Up until now, it’s been sort of a Soviet system,” is the way shareholder democracy is described by Stephen Davis, executive director of the Millstein Center for Corporate Governance and Performance at the Yale School of Management.  “We have been operating in the United States under the myth that boards have been accountable to shareholders.”

Davis’s views are reflected in a generally upbeat weekend New York Times article on shareholder democracy which concludes that “the tide is beginning to turn, albeit slightly” for shareholders.  In addition to various rules changes, the Times cites the availability of more Web resources that help educate smaller investors to the issues, including ProxyDemocracy.org, Shareowners.org and MoxyVote.com.

Governance activist and blogger James McRitchie agrees that that the tide “is turning to become more balanced through increased voice from shareowners. Of course, we are still a long way from the point where most directors feel more accountable to shareowners than CEOs,” he adds.  McRitchie says his optimism about the outlook for shareholders, like that of other activists, is also fed by the work of the Securities and Exchange Commission’s newly-formed Investor Advisory Committee.

“A many-splendoured thing…”

Bob Monks

Seemingly less sanguine about the prospects for shareholder democracy is Robert A.G. “Bob” Monks, one of the world's most provocative thinkers on corporate governance.  Back in 2005, my colleague Marjorie Kelly, co-founder and then Editor of Business Ethics Magazine, wrote that “Monks seems to have invented the term ‘corporate governance.’”  As a co-founder with Nell Minow of the Corporate Library, a governance research firm, and founder of Institutional Shareholder Services (acquired in 2007 by RiskMetrics Group), Monks has an established track record in the field.

“Clearly, the modern shareholder, like love, is a many-splendoured thing, but while we can admire such diversity, we also have to ask whether any single class so broadly writ can ever begin to exercise its ownership rights vis a vis entrenched and well-funded corporate power,” Monks writes in a new, lengthy and colorfully-written post on the Harvard Law School Forum on Corporate Governance and Financial Regulation.

Monks goes on: “The practical effect of having ownership spread so broadly is that shareholders as a group have virtually no effective ownership rights they can exercise. Senior management pays itself, boards sit idly or complacently by, corporations abrogate ever more authority to themselves and gain an ever stronger voice in the political process, and when it comes time for the piper to be paid, the shareholders pony up in lost equity value and increasingly of late taxpayers pick up the final tab. This is a condition that ultimately serves no public good.”

One possible solution, suggests Monks, is a standard corporate structure with two classes of stock ownership: “passive shareholders, who choose not to exercise ownership rights, and stewardship shareholders, who already bear a fiduciary responsibility for funds under their management.”  Accomplishing that, Monks says, would require federal government action to create “a framework of legally enforceable responsibility.”

Speaking of Oscars…

None of this is likely to help some 3 million Cablevision subscribers in the New York area watch the Academy Awards tonight.   Their outrage is reflected in the comments on local newspaper web sites:

“GREED THY name is america.......if you make a gazillion dollars you want a bazillion......”

“Corporate blackmail with the consumer caught in the middle. Time for regulatory reform.”

Indeed, the current state of shareholder rights calls to mind the Oscar-winning performance of Peter Finch as TV anchorman Howard Beale in the prophetic 1976 film “Network.” Outraged by the respective states of society and the TV industry, Beale explodes spontaneously on-camera, driving ratings through the roof as he gets millions of viewers to join him in screaming: “I’m as mad as hell and I’m not going to take this anymore.” (YouTube)

It’s a message that the senior management and boards of Cablevision and Disney – and many other publicly-held U.S. companies – should listen to again and take to heart.

Disclosure: Michael Connor is a past employee of Cablevision Systems Corporation and ABC Television.

Oscar Photo: Darren Decker / ©A.M.P.A.S.