Archive for the ‘Op-Eds & Opinions’ Category

Who’s Responsible for the Walmart Mexico Scandal?

Posted by Benjamin W. Heineman, Jr., Harvard Law School Program on Corporate Governance and Harvard Kennedy School of Government, on Thursday May 15, 2014 at 4:00 pm
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Editor’s Note: Ben W. Heineman, Jr. is a former GE senior vice president for law and public affairs and a senior fellow at Harvard University’s schools of law and government. This post is based on an article that appeared in the Harvard Business Review online, which is available here.

The Walmart bribery scandal is one of the most closely-watched cases of alleged malfeasance by a global company. It broke into the open in April, 2012, when the New York Times published a lengthy investigative piece alleging Walmart bribery in a Mexican subsidiary and a cover-up in its Bentonville, Arkansas, global headquarters. The piece, which won a Pulitzer Prize for reporter David Barstow, raised a host of personal accountability and corporate governance issues for the company.

Late last month, on the second anniversary of the story nearly to the day, Walmart released its first Global Compliance Report (GCR). The report describes the company’s governance response and changed compliance framework—from holding 20 audit committee meetings in 2014, to substantial organizational restructuring, to enhanced education and training. On paper, Walmart appears to have adopted many best practices and to have set out a sound plan for moving forward. However, questions of accountability remain unanswered, when it comes to determining what actually happened in the past, what systems failed, and who was responsible for possible violations of the Foreign Corrupt Practices Act, which bars bribery of foreign officials. A lengthy internal inquiry continues, as well as investigations by the Justice Department and the SEC, with the scope broadened to include possible Walmart improprieties in Brazil, China and India.

…continue reading: Who’s Responsible for the Walmart Mexico Scandal?

How to Use a Bank Tax to Make the Financial System Safer

Posted by Mark Roe, Harvard Law School, on Tuesday March 25, 2014 at 9:21 am
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Editor’s Note: Mark Roe is the David Berg Professor of Law at Harvard Law School, where he teaches bankruptcy and corporate law. This post is based on an op-ed by Professor Roe and Michael Tröge that was published today in The Financial Times, which can be found here.

A tax on the balance sheets of big banks—first proposed by US President Barack Obama in 2010 but later shelved—is back on the political agenda. Last month Dave Camp, Republican chairman of the House of Representatives Ways and Means Committee, put forward a proposal for tax reform that included a 0.035 per cent levy on bank assets more than $500bn. This would hit large institutions such as Bank of America, Citigroup and Goldman Sachs.

The aim of the Republican plan is to find tax revenue that could be used to offset cuts in income taxes on individuals. Mr. Obama pitched his proposal as a way of raising money from US banks to help repay taxpayers who had to bail them out at the height of the crisis. Neither plan aims to make the financial system safer, and neither would. But with a few alterations, a balance-sheet tax could help strengthen the banks.

…continue reading: How to Use a Bank Tax to Make the Financial System Safer

Crisis Management Lesson from Toyota and GM: “It’s Our Problem the Moment We Hear About It”

Posted by Benjamin W. Heineman, Jr., Harvard Law School Program on Corporate Governance and Harvard Kennedy School of Government, on Thursday March 20, 2014 at 3:57 pm
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Editor’s Note: Ben W. Heineman, Jr. is a former GE senior vice president for law and public affairs and a senior fellow at Harvard University’s schools of law and government. This post is based on an article that appeared in the Harvard Business Review online, which is available here.

Delay in confronting crises is deadly. Corporate leaders must have processes for learning of important safety issues. Then they must seize control immediately and lead a systematic response. Crisis management is the ultimate stress test for the CEO and other top leaders of companies. The mantra for all leaders in crisis management must be: “It is our problem the moment we hear about it. We will be judged from that instant forward for everything we do—and don’t do.”

These are key lessons for leaders in all types of businesses from the front page stories about Toyota’s and GM’s separate, lengthy delays in responding promptly and fully to reports of deadly accidents possibly linked to product defects.

The news focus has been on regulatory investigations and enforcement relating to each company, but the ultimate question is why the company leaders didn’t forcefully address the possible defect issues when deaths started to occur.

…continue reading: Crisis Management Lesson from Toyota and GM: “It’s Our Problem the Moment We Hear About It”

Jamie Dimon’s Pay Raise Sends Mixed Signals on Culture and Accountability

Posted by Benjamin W. Heineman, Jr., Harvard Law School Program on Corporate Governance and Harvard Kennedy School of Government, on Monday February 3, 2014 at 4:46 pm
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Editor’s Note: Ben W. Heineman, Jr. is a former GE senior vice president for law and public affairs and a senior fellow at Harvard University’s schools of law and government. This post is based on an article that appeared in the Harvard Business Review online, which is available here.

The JP Morgan Chase board of directors has vexed the world with its terse announcement in a recent 8-K filing that CEO Jamie Dimon would receive a big pay raise—$20 million in total pay for 2013, up from $11.5 million for 2012, a 74 percent increase.

Not surprisingly, the news sparked strong reactions, from indignant critique to justification and support. Dimon’s raise obviously has special resonance because JP Morgan’s legal woes were one of the top business stories last year as it agreed to $20 billion in payments to settle a variety of cases involving the bank’s conduct since 2005 when Dimon became JPM CEO. But the ultimate question that gets fuzzed-over in the filing and response is one of culture and accountability—whether a long-serving CEO is accountable for a corporate culture that has spawned major regulatory inquiries and settlements across a broad range of legal issues, even though the firm has otherwise performed well commercially.

…continue reading: Jamie Dimon’s Pay Raise Sends Mixed Signals on Culture and Accountability

The (Advisory) Ties That Bind Executive Pay

Posted by Robert C. Pozen, Harvard Business School, on Monday November 4, 2013 at 9:30 am
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Editor’s Note: Robert Pozen is a senior lecturer at Harvard Business School and a senior fellow at the Brookings Institution. This post is based on an article by Mr. Pozen and Theresa Hamacher that originally appeared in the Financial Times.

While shareholders of public companies in the UK and US have been voting on advisory (non-binding) resolutions about executive compensation, those in the Netherlands, Norway and Sweden have been voting on binding resolutions.

This might change. The UK government has proposed moving from advisory to compulsory resolutions on executive pay and, recently, the Swiss approved a referendum directing its parliament to require public companies to hold binding shareholder resolutions over pay.

Based on the available data, however, we do not support a general requirement for all public companies to hold a binding shareholder vote on executive compensation. But if less than a majority of the shares voted at one annual meeting favour a company’s executive compensation plan, then at the next annual meeting, the shareholder vote on that company’s executive compensation plan should be binding.

Let us begin by reviewing the data on advisory resolutions in the US and UK. In the first half of 2012, only 53 US public companies received less than a majority vote on their executive compensation plan. Of these 53, however, 45 gained majority support for their say on pay resolutions in 2013, according to Institutional Shareholder Services.

…continue reading: The (Advisory) Ties That Bind Executive Pay

No, GCs Should Not Be on the Board

Posted by Benjamin W. Heineman, Jr., Harvard Law School Program on Corporate Governance and Harvard Kennedy School of Government, on Wednesday September 11, 2013 at 3:12 pm
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Editor’s Note: Ben W. Heineman, Jr. is a former GE senior vice president for law and public affairs and a senior fellow at Harvard University’s schools of law and government. This post is based on an article that appeared in Corporate Counsel.

A provocative headline recently topped a CorpCounsel.com story: “Should GCs Be on the Board? GCs Say Yes.”

This former GC says “no.”

In fact, the story presented a much more modest and qualified account of that issue in describing “The General Counsel Excellence Report 2013,” prepared by the news site Global Legal Post, in association with legal referral network TerraLex and based on a survey of 270 chief legal officers globally.

Only 9 percent of the GCs surveyed were on their companies’ boards, and only 20 percent thought that GCs should be on the board. Those 20 percent, in my view, are wrong—and it is a mistake for a trend to develop among general counsel to aspire to membership on their company’s board.

As this site’s readers know well, the GC represents the company, not the CEO. The representative of the owners of the company—who protect both shareholder and stakeholder interests—is, of course, the board of directors. So, the directors are the day-to-day representatives of the company, not management, and thus the ultimate client of the GC.

…continue reading: No, GCs Should Not Be on the Board

Harpooning the London Whale is no Substitute for Reform

Posted by Mark Roe, Harvard Law School, on Thursday August 15, 2013 at 3:14 pm
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Editor’s Note: Mark Roe is the David Berg Professor of Law at Harvard Law School, where he teaches bankruptcy and corporate law. This post is based on an op-ed by Professor Roe that was published today in The Financial Times, which can be found here.

And so the drama moves on to a courtroom. Two prime traders in JPMorgan Chase’s “London whale” misadventure have been indicted. Side plots may unfold, perhaps via extradition proceedings. But here is the big question: will the indictments lead to better, stronger financial markets? Well, yes and no.

Recall the problem: JPMorgan’s London trading desk made trades that would be profitable if the post-crisis American economy remained weak. As the economy improved, the traders sought to reverse the investments, but could not, ultimately losing the bank and its shareholders $6bn.

The indictments are not for the loss, but for deliberately misstating the size of the loss to higher-ups at the bank. That, in turn, led to misstated financial statements to the public and the bank’s regulators. Whether higher-ups pushed for lower reported losses remains to be seen.

Misleading the regulators is serious: if the losses threatened the bank itself, the regulators would have needed to know early so they could act. True, JPMorgan is well capitalised so a $6bn loss was painful but not life threatening; and, the indictment says, the deception was sized in hundreds of millions of dollars. But regulators still want to be alerted, to see if other big institutions were making similar bets. The financial crisis hit in 2008 because too many made similar (bad) bets on the American housing market’s ability to support its massive levels of poor-quality mortgage securities. An early warning system will not work if financiers hide problems.

…continue reading: Harpooning the London Whale is no Substitute for Reform

The Costs of “Too Big To Fail”

Posted by Mark Roe, Harvard Law School, on Wednesday June 26, 2013 at 5:43 pm
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Editor’s Note: Mark Roe is the David Berg Professor of Law at Harvard Law School, where he teaches bankruptcy and corporate law. This post is Professor Roe’s most recent op-ed written for the international association of newspapers Project Syndicate, which can be found here.

The idea that some banks are “too big to fail” has emerged from the obscurity of regulatory and academic debate into the broader public discourse on finance. Bloomberg News started the most recent public discussion, criticizing the benefit that such banks receive — a benefit that a study released by the International Monetary Fund has shown to be quite large.

Bankers’ lobbyists and representatives dismissed the Bloomberg editorial for citing a single study, and for relying on rating agencies’ rankings for the big banks, which showed that several would have to pay more for their long-term funding if financial markets didn’t expect government support in case of trouble.

In fact, though, there are about ten recent studies, not just one, concerning the benefit that too-big-to-fail banks receive from the government. Nearly every study points in the same direction: a large boost in the too-big-to-fail subsidy during and after the financial crisis, making it cheaper for big banks to borrow.

But a recent research report released by Goldman Sachs argues the contrary — and deserves to be taken more seriously than the first dismissive views. The report concludes that, over time, big banks’ advantage in long-term funding costs relative to smaller banks has been one-third of one percentage point; that this advantage is small; that it narrowed recently (and may be reversing); that it comes from the big banks’ efficiency and their bonds’ liquidity; and that historically it has been mostly small banks, not big ones, that have failed.

…continue reading: The Costs of “Too Big To Fail”

Only the Right CEO Can Create a Culture of Integrity

Posted by Benjamin W. Heineman, Jr., Harvard Law School Program on Corporate Governance and Harvard Kennedy School of Government, on Wednesday June 5, 2013 at 6:12 pm
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Editor’s Note: Ben W. Heineman, Jr. is a former GE senior vice president for law and public affairs and a senior fellow at Harvard University’s schools of law and government. This post is based on an article that appeared in Corporate Counsel.

Corporate Counsel recently ran an article entitled “Bringing Compliance to the C-Suite,” based on a Rand Corporation conference of a similar name and previewing a subsequent report-out. The focus of the conference, as reflected in papers presented there and referenced in the article, is that a variety of pressures cause CEOs to act badly or, at the least, to be indifferent to issues of corporate integrity. This is, of course, an important perspective.

But, despite the headlines, many CEOs, supported by boards of directors and top company leaders, are trying to do the right thing. Indeed, how a corporation fuses high performance with integrity—from the CEO to the shop or trading floor—is a venerable topic. And, despite important roles for the board and top company leaders like finance, legal, compliance, and HR officers, the profound reality, in my view, is that only the right CEO can create a robust culture of integrity.

Given the often-dour public perception of CEOs and given the contrasting reality of their centrality in a company’s fusion of performance with integrity, I thought it worth re-emphasizing core principles of private-ordering that can serve as practical ideals for CEOs and for companies seeking to do the right thing. These core principles should be kept in view as various discrete problems about aberrant CEO behavior are discussed in venues like the Rand conference, and it is helpful to think of them as arising in two dimensions of corporate governance.

…continue reading: Only the Right CEO Can Create a Culture of Integrity

For Dimon and Board Leaders: Function Matters, Not Form

Posted by Benjamin W. Heineman, Jr., Harvard Law School Program on Corporate Governance and Harvard Kennedy School of Government, on Friday May 17, 2013 at 1:06 pm
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Editor’s Note: Ben W. Heineman, Jr. is a former GE senior vice president for law and public affairs and a senior fellow at Harvard University’s schools of law and government. This post is based on an article that appeared in the Harvard Business Review online.

One of the dumbest corporate governance issues is whether to split the roles of Board Chair and CEO. That debate is now playing out on the front pages of business sections (print and online) as shareholders will decide next week in a nonbinding vote whether to take the chairman of the board title away from JP Morgan CEO Jamie Dimon.

This is a reprise, for the zillionth time, of the pointless push by governance types to call the senior director “chairman of the board” rather than “lead” or “presiding” director and to deny the CEO the chairman of the board title. (Dimon, of course, is today Chairman of the Board and CEO of JP Morgan; Lee Raymond is JPM’s “lead” director.)

What is lost in virtually all stories and commentary hyping the Dimon election is an answer to the basic question: what is the function of the lead director? It is this issue of function, not form (i.e., what title that senior director carries), which is crucial.

It has been a governance verity, if not always a reality, that a strong board should provide oversight and constructive criticism to the CEO and other company leaders.

Since Enron, this basic principle has been implemented in most companies by designating one director to be first among equals, whatever her title. That director performs at least the following core roles (as I have discussed in detail elsewhere):

…continue reading: For Dimon and Board Leaders: Function Matters, Not Form

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