There is no substitute for a culture of integrity in organizations. Compliance alone with the law is not enough. History shows that those who make a practice of skating close to the edge always wind up going over the line. A higher bar of ethics performance is necessary. That bar needs to be set and monitored in the boardroom.  ~J. Richard Finlay writing in The Globe and Mail.

Sound governance is not some abstract ideal or utopian pipe dream. Nor does it occur by accident or through sudden outbreaks of altruism. It happens when leaders lead with integrity, when directors actually direct and when stakeholders demand the highest level of ethics and accountability.  ~ J. Richard Finlay in testimony before the Standing Committee on Banking, Commerce and the Economy, Senate of Canada.

The Finlay Centre for Corporate & Public Governance is the longest continuously cited voice on modern governance standards. Our work over the course of four decades helped to build the new paradigm of ethics and accountability by which many corporations and public institutions are judged today.

The Finlay Centre was founded by J. Richard Finlay, one of the world’s most prescient voices for sound boardroom practices, sanity in CEO pay and the ethical responsibilities of trusted leaders. He coined the term stakeholder capitalism in the 1980s.

We pioneered the attributes of environmental responsibility, social purposefulness and successful governance decades before the arrival of ESG. Today we are trying to rebuild the trust that many dubious ESG practices have shattered. 


We were the first to predict seismic boardroom flashpoints and downfalls and played key roles in regulatory milestones and reforms.

We’re working to advance the agenda of the new boardroom and public institution of today: diversity at the table; ethics that shine through a culture of integrity; the next chapter in stakeholder capitalism; and leadership that stands as an unrelenting champion for all stakeholders.

Our landmark work in creating what we called a culture of integrity and the ethical practices of trusted organizations has been praised, recognized and replicated around the world.


Our rich institutional memory, combined with a record of innovative thinking for tomorrow’s challenges, provide umatached resources to corporate and public sector players.

Trust is the asset that is unseen until it is shattered.  When crisis hits, we know a thing or two about how to rebuild trust— especially in turbulent times.

We’re still one of the world’s most recognized voices on CEO pay and the role of boards as compensation credibility gatekeepers. Somebody has to be.

Who Leaked the News About the Goldman Settlement?

When the SEC filed civil charges against Goldman Sachs last April, we postulated that the end game would be:

…one of those vague and disappointing resolutions for which the SEC has become famous, as discussed here,  whereby the defendant company’s shareholders pay a pile of money as a penalty for what management did (but for which it does not admit wrongdoing) along with some tinkering on the corporate governance side to make it look like more was done.

That seems to have been precisely what happened today with Goldman agreeing to pay some $550 million to settle the case — and without admitting or denying the charges, thanks very much.  What strikes us even more than the fact of the settlement — where shareholders will have to cough up the half-billion dollars, as opposed to management having to pay anything out of the huge compensation they made when they were making the decisions that resulted in the penalty — is that news of the deal was obviously leaked during the trading day.  A huge spike in volume occurred late Thursday while the NYSE was open and before the formal announcement was made. It was too much to be on the basis of speculation or idle gossip (see chart above).

The Goldman case was just one more example of why it often appears to ordinary  investors that the market is a rigged game where those with inside information are the only ones who can profit.  The timing of the settlement and what occurred just before it will only add to that suspicion.

Someone at the SEC or Goldman talked, and others made quite a lot of money on the knowledge.  The idea that there would be an impropriety connected with the timing of the SEC settlement with a company it accused of wrongdoing and lack of disclosure is more than ironic.  It is an outrage that needs a closer look and some fast answers from both the regulator and the company.

Goldman’s Kryptonite?

How is it Goldman felt it necessary to warn shareholders that enforcement actions can have a negative impact upon the company’s business in the abstract, but apparently felt no need to reveal the material fact that it had been formally alerted by the SEC to an investigation?

In the greatest financial meltdown since the 1930s, few industry giants seemed as favored as Goldman Sachs.   At a time when others where failing from a combination of folly and misjudgment, Goldman seemed to be imbued with superhuman qualities, including the ability to leap over the tallest obstacles and dodge bullets that were taking out one icon after another.  Goldman, to many, and especially to itself, was Superman.  But even the Man of Steel has his foil, and if the civil charges brought by the SEC are proven, kryptonite for this Wall Street marvel came in the form of a 27-year-old French-born employee and a bizarre mortgage investment fund called Abacus 2007 – ACI that was designed to fail.

The complaint asserts, among other matters, that Goldman failed to make full disclosure about the intent of the fund and how it was designed.  In the best case, the truth about the charges will eventually be determined.  On the other hand, perhaps there will be one of those vague and disappointing resolutions for which the SEC has become famous, as discussed here,  whereby the defendant company’s shareholders pay a pile of money as a penalty for what management did (but for which it does not admit wrongdoing) along with some tinkering on the corporate governance side to make it look like more was done.

But right now, another, and less disputable, fact should be raising questions.  Goldman failed to disclose that it was being investigated by the SEC for possible civil fraud charges, which it was formally made aware of in July of last year when it received the Commission’s “Wells” notice.  Goldman knew that would likely be material information shareholders would want to know, because the company said as much to investors just last month.

In its 2010 10K  statement published in March, Goldman noted that among the potentially adverse impacts upon its business, “investigation by regulators” was a material factor.  The company went on to say:

Penalties and fines sought by regulatory authorities have increased substantially over the last several years, and certain regulators have been more likely in recent years to commence enforcement actions…  Adverse publicity, governmental scrutiny and legal and enforcement proceedings can also have a negative impact on our reputation and on the morale and performance of our employees, which could adversely affect our businesses and results of operations.

How is it Goldman felt it necessary to warn its shareholders that such investigations and enforcement actions can have a negative impact upon the company’s business in the abstract, but apparently felt no need to reveal the material fact (as Goldman itself had defined it) that it had been formally alerted by the SEC to an investigation?   Goldman’s CEO, Lloyd Blankfein, would have been aware of the SEC investigation during his appearance before the Financial Crisis Inquiry Commission in January.  Was the Angelides Commission?   Should it have been?  Answers are needed if the panel and its mission are to maintain any credibility.

Perhaps this is another telling sign that Goldman is really mortal after all and that its attempted leaps into the air can bring about the same unintended consequences that they do for anyone else.  At the very least, it raises the question about what more Goldman knows that it is not telling the investing public at the very time when confidence in its reputation requires full disclosure.

The Half-Baked Pie that Hit Bank of America Shareholders in the Face

The settlement was not crafted to act as a deterrent to future wrongdoing or to give the investing public confidence that the SEC is looking out for their interests in this post-Madoff era.

U.S. District Court Judge Jed S. Rakoff had finally approved the settlement between the Securities and Exchange Commission and Bank of America.  Our concerns seemed at least to have made an appearance in the courtroom, though they clearly did not carry the day.

As we set out here before the judgment, our greatest misgiving in the proposed settlement was the inherent unfairness surrounding the $150 million penalty, which effectively involved the transfer, without their consent, of money from one shareholder pocket to another.  The main players in the abuse, which included key officers and directors, got a pass on making any payment proportionate to their responsibility.  To us, the settlement could easily have been concocted by Groucho Marx.  It was not crafted to act as a deterrent to future wrongdoing or to give the investing public confidence that the SEC is actually looking out for their interests in this post-Madoff era.

Judge Rakoff correctly focused on this shortcoming in his combined opinion and order:

An even more fundamental problem, however, is that a fine assessed against the Bank, taken by itself, penalizes the shareholders for what was, in effect if not in intent, a fraud by management on the shareholders.

Unfortunately, the specter of judicial deference to tribunals like the SEC was also looking over his shoulder and he was unable to do more than register his chagrin.  That does not do a lot for investors who were victimized by the shell game Bank of America engaged in, but it may serve as further evidence that the SEC needs to seriously rethink what precisely it is seeking in such settlements.  Too often, they seem cleverly designed to create the illusion that justice is being served, rather than fostering policies that promote investor confidence in the capital markets and stand the test of garden-variety common sense on Main Street.

Judge Rakoff gave his verdict on that score, calling the settlement “half-baked justice, at best.”  We see it more like a pie in the face of shareholders, despite the efforts of a plain-speaking judge to do his best to prevent it.

Bank of America – SEC Settlement | Problem #2 (The Houdini Effect)

Harry Houdini and the board of directors.Regulators and the investing public need to demand that boards of directors be placed on the front line of accountability and not be allowed to slip away from scrutiny like some escape artist in a circus act.

The SEC’s settlement with Bank of America, still to be approved by the court, raises another question beyond the shell game contrived to give the impression – entirely misleading in our view – of a fair financial settlement for shareholders.  Our thoughts on the $150 million “penalty”  were set out here.

The boards of both Bank of America and Merrill Lynch appeared to escape the scrutiny of regulators, as well.  While some 25 management personnel and in-house lawyers were deposed by the SEC, no independent director of either company underwent such questioning.  Though a great deal of attention was focused on emails to and from legal counsel and management, there is no evidence of any effort to look into what the board was thinking when it came to its role in the merger or in related compensation and disclosure issues.

The settlement makes reference to some rather cosmetic changes in respect of the compensation committee.  One bars members from accepting “consulting, advisory or other compensatory fees from the Bank…other than routine compensation for serving as a Board member.”  But the Commission has offered no evidence that any compensation committee director at Bank of America was receiving anything beyond normal compensation.  In any event, the idea that such ancillary compensation might have played a role in compromising the independent judgment of compensation committee members has no antecedent in any of the SEC’s supporting documentation.  It has, instead, the appearance of being included as a part of the settlement to make it look like something meaningful was done.

Finally, the settlement requires the Bank’s CEO and CFO to certify proxy statements along the lines set out under the Sarbanes-Oxley Act for quarterly and annual financial statements.  But there is no requirement that any independent director, like the chairman of the board or the chairman of the audit committee, has to certify anything along SOX standards.  This has always been a flaw in the existing SOX legislation from our perspective.  It is one that could have been addressed in the settlement, as the certification process is intended to concentrate the mind of key shareholder guardians in a way that ensures that they have done their due diligence.

It is astounding that in the recent succession of corporate disasters of Depression-era proportions – which many feared would lead to a return of Depression-era misery – the SEC has not been moved to conduct a sweeping review of the generic failings of the board of directors.  The often expressed discovery that it was the last to know of the problems, and that it had no idea what was really happening around it, is a common refrain on such occasions, as we remarked some years ago to the U.S. Senate Banking Committee when it was considering legislation in response to the Enron et al. debacle, and as we repeated in an appearance before Canada’s Senate equivalent later.  It does not assist in investor confidence or society’s faith in its giant institutions of capitalism that boards either view themselves, or are viewed by regulators, as the junior partners in corporate performance and outcomes, as if they were some 1950s suburban housewife who by custom and design tended to be sheltered from having any knowledge of or responsibility for the business affairs of the household.

Time and again, in one corporate calamity after another, the question has been posed: Where was the board?  If the world’s top securities regulator is not prepared to dig deeper to find out the answer, if it is unwilling to hold directors’ feet to the fire during major enforcement investigations like the one involving Bank of America, that question will persist like a great mystery.  But as the world has been painfully reminded on too many occasions, boards have a role beyond being viewed as a riddle or the perennial focus of ridicule.

They are the governing authority elected by company owners to operate in their interests and according to the customs and standards of society.  They are generally paid handsomely to perform their tasks, and when they fail, the consequences, in personal and financial terms, have been devastating. The only option, therefore, is for regulators and the investing public to demand that boards be placed on the front line of accountability and not be allowed to slip away from scrutiny like some escape artist in a circus act.

Bank of America – SEC Settlement | Problem #1 (The Groucho Marks Plan)

Under the so-called new and improved SEC settlement with Bank of America, the bank will pay $150 million to settle the charges. According to court records, the settlement only “contemplates” that the sum will be paid, at some future date, to shareholders who were harmed by the bank’s non-disclosure of material facts.

But where is this money coming from? Funny, that’s B of A’s shareholders, too. To add to the insult, no details are provided as to exactly when investors would receive such compensation (from themselves, that is).  One sees the handiwork of Groucho Marks all over the SEC’s arrangement. We hope U.S. District Court Judge Jed Rakoff, a much respected figure on these pages who rejected the SEC’s previous deal, will see beyond the mustache and glasses that mask the “hello, I must be going” settlement.

The SEC has become famous over the years for this kind of shell game, where it looks like something significant is being done but where there is much less than meets the eye when all is said and done.  If there is any payment of a penalty, all or at least a substantial part should be made directly by the officers and directors (past and current) on whose watch the bank’s failures to disclose material information occurred. It was shareholders who were deprived of the information to which they were entitled. It serves neither their interests, nor those of justice, to have their money taken from one pocket and put into the other.

We examine other weakness in the settlement in a further comment.

A Judge Who is Not a Rubber Stamp

Bank of America’s settlement shows that it’s  time to look at the way the SEC allows companies just to pay when they break the rules. It is part of the culture that created the financial crisis of recent months.

An interesting development is occurring in a federal courtroom in Manhattan. U.S. District Judge Jed Rakoff is departing from what most judges do when it comes to SEC  settlements:  he is actually asking questions about the deal struck between the SEC and Bank of America.  The case involved the Bank’s failure to disclose material information to shareholders about the Merrill Lynch bonuses and expected losses.  The Bank knew more than it previously admitted, according to the SEC.  For its part, BofA does not admit any wrongdoing, but it will pay the SEC some $33 million to settle the regulator’s charges.  Would that be $33 million in TARP funds, aka public money?

The fact is that Bank of America’s deceit here was a disgrace.  It was very expensive to investors, to taxpayers and to public confidence in the marketplace at a time when it is already in short supply.  The size of the settlement falls insultingly short of the magnitude of the offense.  And how exactly did the SEC conclude that BofA’s investors, whom it contends were misled in the first place and suffered huge losses at the hands of its management, should now have the privilege of paying millions more on top because of management’s deception?

Perhaps these are some of the factors prompting the judge’s heightened scrutiny.  As he told lawyers for both the SEC and BofA:

I would be less than candid if I didn’t express my continued misgivings about this settlement at this stage. When this settlement first came to me, it seemed to me to be lacking, for lack of a better word, in transparency. I did not know much about the facts from the complaint. I did not know much, or really anything, about the basis for the settlement.

The settlement process between the SEC and securities issuers is part of the old way of doing business involving weak oversight and overly permissive regulation that helped to create the recent market debacle.  Far from spurring accountability and transparency, which is generally regarded as a necessary part of financial reform, it allows companies to pay money out of shareholders’ pockets and evade any larger sense of responsibility for what they have done.  In this charade, management knows it can try to get away with as much as possible and, if caught, has only to come up with a few million, which becomes another business expense.  It is an easy way of creating the impression that the SEC is making progress toward reform and enforcement when it is nothing more than a mere slap on the wrist that perpetuates the culture of always skating close to the edge of the law.  That is a culture that needs to change dramatically if the lessons from the market’s meltdown and credit collapse mean anything.

If any greater reminder were needed, another recent SEC settlement involved one of the most storied names in American capitalism: General Electric.  That company paid $50 million to settle an SEC civil suit over alleged improprieties in GE’s accounting.  GE says it did nothing wrong but apparently just had an extra $50 million in shareholder funds kicking around and decided to throw it at the SEC to keep them happy.

One might ask the SEC where the so-called renewed commitment to principles of financial responsibility is in all of this?  The approach to enforcement seen in these examples does a disservice to investors and to taxpayers, both of whom deserve more than what amounts to a pantomime of regulatory gestures and corporate nods. When you have some of America’s most capitalized and prominent institutions falling short and misleading even in the wake of the most costly financial breakdowns in generations, more than just the formalities need to be observed.  Thankfully, there is a judge who appreciates that notion and is, at least for now, standing up for both taxpayers and shareholders when no once else bothered to do so.