Posts Tagged ‘Compliance & ethics’

The New York Fed: A “Captured” Regulator

Posted by Luigi Zingales, University of Chicago Graduate School of Business, on Tuesday September 30, 2014 at 4:48 pm
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Editor’s Note: The following post comes to us from Luigi Zingales, Professor of Finance at the University of Chicago, and is based on an op-ed by Mr. Zingales that was published today in Il Sole 24 Ore, which can be found here.

The world of American finance has been invested by a new scandal. At its core, there is New York’s Federal Reserve; in other words, the institution that supervises America’s main banks. The scandal exploded because of the revelations emerged in a legal lawsuit about a layoff.

Carmen Segarra, a supervision lawyer, sued after being fired only seven months into her job. The New York Fed says it fired her due to poor performance. Segarra instead maintains that she was given the pink slip because she did not adapt to ‘Fed culture’—so permissive towards banks it regulates, almost to the point of collusion.

…continue reading: The New York Fed: A “Captured” Regulator

Executive Gatekeepers: Useful and Divertible Governance?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday September 30, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Adair Morse of the Finance Group at the University of California, Berkeley; and Wei Wang and Serena Wu, both of Queen’s School of Business, Canada.

In our paper, Executive Gatekeepers: Useful and Divertible Governance?, which was recently made publicly available on SSRN, we study the role of executive gatekeepers in preventing governance failures, and the counter-incentive effects created by equity compensation. Specifically, we examine the following two questions. First, do executive gatekeepers actually improve governance in the average firm? Second, does the effectiveness of gatekeepers in ensuring compliance and/or reducing corporate misconduct depend on their incentive contracts?

…continue reading: Executive Gatekeepers: Useful and Divertible Governance?

The Effect of Deferred and Non-Prosecution Agreements on Corporate Governance

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday September 23, 2014 at 9:17 am
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Editor’s Note: The following post comes to us from Wulf A. Kaal and Timothy Lacine of University of St. Thomas School of Law.

The increasing use of Non- and Deferred Prosecution Agreements (N/DPAs) has enabled federal prosecutors to incrementally expand their traditional role, exemplifying a shift in prosecutorial culture from an ex-post focus on punishment to an ex-ante emphasis on compliance. N/DPAs are contractual arrangements between the government and corporate entities that allow the government to impose sanctions against the respective entity and set up institutional changes in exchange for the government’s agreement to forego further investigation and corporate criminal indictment. N/DPAs enable corporations to resolve allegations of corporate criminal conduct, strengthen corporate compliance mechanisms to prevent corporate wrongdoing in the future, and mitigate the risks that collateral consequences of a conviction can bring for companies, their shareholders, employees, and the economy.

…continue reading: The Effect of Deferred and Non-Prosecution Agreements on Corporate Governance

SEC Enforcement Actions Over Stock Transaction Reporting Obligations

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday September 21, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Ronald O. Mueller, partner in the securities regulation and corporate governance practice area of Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn alert.

On September 10, 2014, the Securities and Exchange Commission announced an unprecedented enforcement sweep against 34 companies and individuals for alleged failures to timely file with the SEC various Section 16(a) filings (Forms 3, 4 and 5) and Schedules 13D and 13G (the “September 10 actions”). [1] The September 10 actions named 13 corporate officers or directors, five individuals and 10 investment firms with beneficial ownership of publicly traded companies, and six public companies; all but one settled the claims without admitting or denying the allegations. The SEC emphasized that the filing requirements may be violated even inadvertently, without any showing of scienter. Notably, among the executives targeted by the SEC were some who had provided their employers with trading information and relied on the company to make the requisite SEC filings on their behalf.

…continue reading: SEC Enforcement Actions Over Stock Transaction Reporting Obligations

Military CEOs

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday August 28, 2014 at 9:08 am
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Editor’s Note: The following post comes to us from Efraim Benmelech and Carola Frydman, both of the Finance Department at Northwestern University.

In our paper, Military CEOs, forthcoming in the Journal of Financial Economics, we examine the effect of military service of CEOs and managerial decisions, corporate policies, and corporate outcomes. Service in the military may alter the behavior of servicemen and women in various ways that could affect their actions when they become CEOs later in life. Militaries have organized, sequential training programs that combine education with on-the-job experience and are designed to develop command skills. Evidence from sociology and organizational behavior research suggests that individuals may acquire hands-on leadership experience through military service that is difficult to learn otherwise and that they may be better at making decisions under pressure or in a crisis (Duffy, 2006). It is possible, therefore, that military CEOs may be more prepared to make difficult decisions during periods of industry distress. Moreover, military service emphasizes duty, dedication, and self-sacrifice. The military may thus inculcate a value system that encourages CEOs to make ethical decisions and to be more dedicated and loyal to the companies they run rather than pursue their own self-interest (Franke, 2001).

…continue reading: Military CEOs

The Corporate Value of (Corrupt) Lobbying

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday August 18, 2014 at 8:51 am
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Editor’s Note: The following post comes to us from Alexander Borisov of the Department of Finance at the University of Cincinnati, and Eitan Goldman and Nandini Gupta, both of the Department of Finance at Indiana University.

Despite the fact that corporations and interest groups spent about $30 billion lobbying policy makers over the last decade (Center for Responsive Politics, 2012), there is a lack of robust empirical evidence on whether firms’ lobbying expenditures create value for their shareholders. Moreover, while the public perception of the lobbying process is that it involves unethical behavior that may bias rather than inform politicians, this is difficult to show since unethical practices are not typically observable. In our recent ECGI working paper, The Corporate Value of (Corrupt) Lobbying, we identify events that exogenously affect the ability of firms to lobby, and find that firms that lobby more experience a significant decrease in market value around these events. Investigating the channels by which lobbying may add value, we find evidence suggesting that the value partly arises from potentially unethical arrangements between firms and politicians.

…continue reading: The Corporate Value of (Corrupt) Lobbying

Peer Effects and Corporate Corruption

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday August 14, 2014 at 9:09 am
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Editor’s Note: The following post comes to us from Christopher Parsons of the Finance Area at the University of California, San Diego; Johan Sulaeman of the Department of Finance at Southern Methodist University; and Sheridan Titman, Professor of Finance at the University of Texas at Austin.

Traditional models of crime frame the choice to engage in misbehavior like any other economic decision involving cost and benefit tradeoffs. Though somewhat successful when taken to the data, perhaps the theory’s largest embarrassment is its failure to account for the enormous variation in crime rates observed across both time and space. Indeed, as Glaeser, Sacerdote, and Scheinkman (1996) argue, regional variation in demographics, enforcement, and other observables are simply not large enough to explain why, for example, two seemingly identical neighborhoods in the same city have such drastically different crime rates. The answer they propose is simple: social interactions induce positive correlations in the tendency to break rules.

…continue reading: Peer Effects and Corporate Corruption

Compliance or Legal? The Board’s Duty to Assure Clarity

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday August 12, 2014 at 9:02 am
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Editor’s Note: The following post comes to us from Michael W. Peregrine, partner at McDermott Will & Emery LLP. This post is based on an article by Mr. Peregrine; the views expressed therein do not necessarily reflect the views of McDermott Will & Emery LLP or its clients.

A series of developments threaten to blur the important distinction between the corporation’s legal and compliance functions. These developments arise from federal regulatory action, media and public discourse, policy statements from compliance industry leaders, and new surveys reflecting the increasing prominence of the general counsel. If left unaddressed, they could lead to significant organizational risk, e.g., leadership disharmony, misallocation of executive resources, ineffective risk management, and the loss of the attorney-client privilege in certain circumstances. The governing board is obligated to address this risk by working with executive leadership to assure clarity between the roles of general counsel and chief compliance officer.

…continue reading: Compliance or Legal? The Board’s Duty to Assure Clarity

Monitoring the Monitors

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday July 22, 2014 at 9:05 am
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Editor’s Note: The following post comes to us from Jodi Short, Professor of Law at the University of California Hastings College of the Law; Michael Toffel of the Technology and Operations Management Unit at Harvard Business School; and Andrea Hugill of the Strategy Unit at Harvard Business School.

Drawing on insights from the literatures on street-level bureaucracy and on regulatory and audit design, our paper, Monitoring the Monitors: How Social Factors Influence Supply Chain Auditors, which was recently made publicly available on SSRN, theorizes and tests the factors that shape the practices of private supply chain auditors. We find that audits are conducted most stringently by auditors who are experienced and highly trained, and by audit teams that include female auditors. By contrast, auditors that have ongoing relationships with audited factories, and all-male audit teams conduct more lax audits, identifying and citing fewer violations. These findings make five key contributions and suggest strategies for designing audit regimes to more effectively detect and prevent corporate wrongdoing.

…continue reading: Monitoring the Monitors

A Few Things Directors Should Know About the SEC

Posted by Mary Jo White, Chair, U.S. Securities and Exchange Commission, on Friday June 27, 2014 at 9:00 am
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Editor’s Note: Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s remarks to the Twentieth Annual Stanford Directors’ College; the full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

The SEC today has about 4,200 employees, located in Washington and 11 regional offices across the country, including one in San Francisco that is very ably led by Regional Director Jina Choi, who is here [June 23, 2014]. Many of you have likely had some contact with our Division of Corporation Finance, which, among other things, has the responsibility to review your periodic filings and your securities offerings. Some of you that work for or represent a company that we oversee know our staff in our National Exam Program, and I imagine a few of your companies know something about our Enforcement Division staff. Our other major divisions are Investment Management, Trading and Markets and the Division of Economic and Risk Analysis.

So that is just a quick snapshot of the structure of the SEC and as you undoubtedly know, the SEC has a lot on its regulatory plate that is relevant to you—completion of the mandated rulemakings under the Dodd Frank Act and JOBS Act, adopting a final rule on money market funds, enhancing the structure and transparency of our equity and fixed income markets, reviewing the effectiveness of disclosures by public companies, to name just a few. But what you may not be as focused on is the mindset of the agency on some other things that are also relevant to you as directors.

…continue reading: A Few Things Directors Should Know About the SEC

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