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

The apparition of 2008 returns once more. Two recently released JP Morgan Chase (JPM) reports on the causes of the “London Whale” trading losses raise important questions about whether financial service firms can exorcise the spectral issues which were so central to the financial crisis. They read as if JPM and a key headquarters unit — the Chief Investment Office — had not learned a single lesson from the meltdown four years ago. And unfortunately, they suggest that, in our huge, complex financial institutions, major failures of organizational discipline and major losses are likely to recur, despite greater attention to risk management.

These reports — one from a company task force and a second from a review committee of the board — were overshadowed by two items announced the same day: the related news that the bank board had slashed CEO Jamie Dimon’s annual compensation in half — from $23 million in 2011 to $11.5 million in 2012 — because of his “Whale-related” failures, and that JPM had posted a record 2012 net income of $21.3 billion.

…continue reading: The JP Morgan “Whale” Report and the Ghosts of the Financial Crisis

In the past 25 years, the size of settlements, fines and penalties for individual corporations found guilty of wrongdoing has escalated from millions of dollars, to tens of millions, to hundreds of millions, to billions. Think Siemens and widespread bribery — about $2 billion. Or, bigger yet, think BP and the gulf disaster — almost $20 billion to date, with another $20 billion-plus likely in the future.

But during this period, there has been another change: highly expensive scandals across business sectors, not just in single companies, and this is reflected in the January 7th agreement by major banks to pay $8.5 billion due to derelict mortgage and foreclosure processes.

These sectoral scandals raise profound issues for business leaders: in a highly competitive global economy, in which some sectors are flooded with money, how do you assess sector-wide integrity risks and achieve a culture of corporate accountability before, not after, bad behavior occurs?

…continue reading: Why Are Some Sectors (Ahem, Finance) So Scandal-Plagued?

At the center of the corporate wreckage of the past fifteen years — the accounting scandals, the outright fraud, the environmental disasters, the financial meltdown — sits the boards of directors. Their failure to choose the right CEO and to provide appropriate oversight on core risks and opportunities has, in my view, reflected a broad failure of the corporate governance movement and its reliance on directors to effectively to oversee the corporation and its business leaders.

Yet, the recent fall of Vikram Pandit, Citigroup CEO, underscores a basic truth: Independent boards of directors are still the best mechanism — or the least worst one — for holding business leaders accountable, even if many boards have failed in their attempts to do this, often in spectacular fashion.

Much of the Citigroup commentary has focused on the behind-the-scenes campaign of Citigroup board chair William O’Neil to oust Pandit and his stark ultimatum during a one-on-one confrontation: resign now, resign at the end of the year, or be fired.

Many have criticized O’Neil for his ham-handedness, saying this was rude to Pandit, demoralizing to essential Citi leaders, lacking in clear public rationale. A minority, however, has said such CEO separations are invariably messy, bringing to mind Lady MacBeth’s advice to her husband about murdering the king: “If it were done when ’tis done, then ’twere well, It were done quickly.”

But the tactics surrounding the decision should not obscure the potential importance of the decision itself. Are boards of directors now more than in the past focusing on their fundamental task — critically evaluating the leadership and the management of the CEO? Are they now much less hesitant to force changes at the top of the corporation due to performance on fundamentals, not just scandal or stock price variation?

…continue reading: Citigroup: A Symbol of Board Resurgence?

In a special New York Times section on business and law, Andrew Ross Sorkin opines: “As regulations change and the threat of litigation rises, the importance of lawyers has never been greater.” He, and writers in the rest of the section, then go on to talk about the downward pressures on private law firms to sustain profits per partner and the burgeoning crisis in private practice, symbolized by the collapse of Dewey & LaBoeuf and the exodus of young associates.

But from a business person’s point of view, Sorkin and other writers in the section don’t even discuss one of the most important developments of the last 25 years: the rise in the role, status and importance of the general counsel and other inside lawyers employed directly by the corporation. The following two critical trends for major companies in the U.S. — and increasingly in Europe and Asia — are not mentioned:

…continue reading: The Rise of the General Counsel

In the wake of its significant trading losses (now reportedly rising from $2 to $3 billion or more), JP Morgan can win back some of its lost reputation by transparently holding those responsible to account.

These individuals could include (but not be limited to) the London trader, Bruno Iksil (“The London Whale”); his London boss, Achilles Macris; their U.S. boss, Ina Drew, the former head of the bank’s Chief Investment Office (CIO); and CEO Jamie Dimon, who oversaw the CIO. Drew quickly retired after the losses, and Iksil and Macris are, according to news reports, leaving the bank.

Although the media has spoken loosely about a company “clawing back” pay, there are, in fact, different ways to hold responsible individuals to financial account. A “claw-back” seeks cash or equity already transferred to an individual. A “hold-back” cancels financial benefits which have been awarded but have not yet vested. A future compensation action would reduce 2012 variable benefits (bonus or equity awards) in absolute terms (or through a much slower rate of increase). Claw-backs or hold-backs of past awards could be appropriate for the departed employees. They could be appropriate for Dimon, but so could a compensation action about future variable comp.

…continue reading: Can JP Morgan Transparently Police Itself?

Federal enforcement authorities should give much more systematic credit to effective corporate compliance programs when making decisions about criminal prosecutions, including nonprosecution or deferred prosecution agreements, and when deciding the scope of civil and administrative settlements.

That is the fundamental conclusion of a recent report from an advisory group constituted in November 2011 to assess the effectiveness of the Federal Sentencing Guidelines for Organizations (FSGO) 20 years after publication by the U.S. Sentencing Commission. Organized by the Ethics Resource Center, the advisory group was composed of law enforcement officials, judges, prosecutors, academics, and compliance experts from companies and law firms. It focused on corporations, not other entities covered by the FSGO (such as unions or pension funds). (Disclosure: I was on the advisory group and approved the final report but was not involved in decisions about scope or in drafting.)

The advisory group faced a fundamental paradox at the outset. In response to the elements of a good compliance program outlined in the FSGO (and elements drawn from numerous other sources), many corporations have established strong compliance and ethics programs during the past 20 years. Yet few corporations received credit under the Sentencing Guidelines because there were so few corporate convictions as more and more corporate criminal investigations were settled outright or resolved with nonprosecution or deferred prosecution agreements (NPAs and DPAs).

…continue reading: Give Credit Where Credit Is Due

Wal-Mart appeared to commit virtually every governance sin in its handling of the Mexican bribery case, if the long, carefully reported New York Times story is true. The current Wal-Mart board of directors must get to the bottom of the bribery scheme in Mexico and the possible suppression by senior Wal-Mart leaders in Bentonville, Arkansas (the company’s global headquarters) of a full investigation.

In addition, the board must also review – and fix as necessary – the numerous company internal governing systems, processes and procedures that appear to have been non-existent or to have failed. And, most importantly, it must define the CEO’s core role as one which truly fuses high performance with high integrity, and does not exalt performance at the expense of integrity – and possibly discipline or remove the past CEO (still on the board) or the current CEO.

The essential allegations in the Times story are as follows:

For a substantial period before 2005, the CEO of Wal-Mart in Mexico and his chief lieutenants, including the Mexican general counsel and chief auditor, knowingly orchestrated bribes of Mexican officials to obtain building permits, zoning variances and environmental clearances, and also falsified records to hide these payments. When the lawyer in Mexico directly responsible for bribery payments had a change of heart and reported the scheme to Wal-Mart lawyers in the United States, those lawyers hired an independent firm which, after an initial look, recommended a major inquiry.

…continue reading: Wal-Mart Bribery Case Raises Fundamental Governance Issues

Should companies use funds from the corporate treasury to advocate directly for or against political candidates in contested elections?

This basic question — now made immediate with the opening of the election season in the Iowa caucuses — raises dilemmas for boards and business leaders:

• Should we adopt detailed governance rules or keep decisions informal and in a small group?
• Should we be passive and avoid such spending, or be active and get involved in partisan politics?
• Should we voluntarily disclose all expenditures or keep expenditures hidden unless disclosure is required by law?
• Should we support generally moderate candidates who can compromise on major structural issues facing the U.S., or narrow, even ideological candidates who will advocate for issues of immediate concern to the corporation?

…continue reading: Tough Dilemmas for Companies on Campaign Spending

Although institutional investors play a major role in our public equity markets, far less is known about the governance of those investor entities than about investee corporations. These investors are critical to individuals, equity markets, publicly held companies, the economy — and to the troubling (and conceptually difficult) issue of good versus bad short-termism in investor and investee behavior. Put simply, the fundamental issue is whether institutional investors are part of the problem or part of the solution within the current state of market capitalism. By institutional investors we mean, at a minimum, pension funds, mutual funds, insurance companies, hedge funds and endowments of non-profit entities like universities and foundations. Recent developments in public policy treat shareholders (primarily institutional investors) as part of the “solution.” The Dodd-Frank Act in the United States and the Stewardship Code in the United Kingdom, for instance, essentially place big bets that institutions can and will police the market with new powers and responsibilities. While this is a worthy objective, it rests on unexamined and unsophisticated assumptions.

In a new paper, Are Institutional Investors Part of the Problem or Part of the Solution?, we attempt to outline major descriptive and prescriptive issues relating to these institutional investors (the paper is available from Yale’s Millstein Center here, and from the Committee for Economic Development here). We call for much greater intellectual and institutional effort in addressing these vital but under-analyzed questions. Set out below is the essence of our argument for much more sophisticated analysis of the governance of institutional investors — based on development of much more robust data bases about the critical elements of investor governance and performance.

…continue reading: Institutional Investors: The Next Frontier in Corporate Governance