Recently, the SEC formed the Investor Advisory Committee (IAC) to address how environmental, climate change, and sustainability issues should be addressed from a regulatory standpoint. Headed by SEC Commissioner Luis A. Aguilar, the IAC provides the SEC with investors’ viewpoints on regulatory and disclosure issues. Current SEC regulations require companies to disclose any information pertaining to how their operations might cause harm to the environment. In order to accurately estimate the amount of environmental damage a company’s operations might have on the environment, firms must invest both manpower and financial capital to fund extensive research projects. For most companies, providing such figures is difficult and often significantly underestimates the true toll a corporation’s operations will have on the environment.

“It’s the board’s responsibility to oversee what the company is doing—it’s a growing trend for companies to have a structure to deal with [environmental disclosure].” – Timothy Smith, vice president of Walden Asset Management

More companies are designating specific committees for environmental issues to help inform the board of potential problems. “It’s the board’s responsibility to oversee what the company is doing—it’s a growing trend for companies to have a structure to deal with [environmental disclosure],” says Timothy Smith, vice president of the environmental, social, and governance group at Walden Asset Management. “The pressure is growing globally, and boards need to be both aware of the trend and ensure their company is being responsive.” Investors are pushing companies to reveal how they assess risk so that they can better evaluate their own ventures, putting additional pressure on directors. “It’s like walking a tightrope,” says Smith.

Ultimately, boards need to ask their audit committees or environmental committees more questions, including requesting forecasts and inquiring as to how the company’s operations will impact the environment—but there are risks. “It can be difficult to file financial disclosures because of the time and effort needed to provide auditable estimates of what needs to be disclosed,” notes Gayle Koch, principal at The Brattle Group, which provides environmental policy and litigation consulting to corporate boards and management teams. Koch believes that there will be more enforcement from the SEC under the Obama administration, leading to more research and, ultimately, more transparency. “The SEC needs to provide more guidance, giving companies a consistent process, or companies can use voluntary consensus standards, such as the ASTM International Standards on cost estimation and disclosure.”

Once directors have forecast trend information, they are under an obligation to report it if it is material. “Do you risk Sarbanes-Oxley, SEC enforcement, or investor action?” asks Koch. “Some companies don’t ask so they don’t have to report them and that needs to change.” Drawing from her own experience as a consultant, Koch said a firm she worked with was reluctant to provide an estimate report that would be open to investor scrutiny. “They could afford it, but they would only consider [submitting an environmental disclosure report] as long as it didn’t hurt their bottom line for that quarter.” Koch notes that despite the board’s concerns, she believes companies that report their forecast trend information do not suffer a lower stock price.

Ceres, a national network of investors, environmental organizations, and other public interest groups, ignited the process to seek greater environmental disclosure and played a large part in the SEC’s decision to form their advisory group. “[Ceres] really spearheaded efforts to look at the laws to make sure [companies] are doing what they should,” notes Betty Huber, counsel at Davis Polk & Wardwell. Today, companies often refer to Ceres’ global reporting initiative (GRI), which provides customizable guidelines that serve as a template for companies to disclose their environmental support efforts.

Today, boards and management teams are realizing that they can appropriate environmental disclosure to boost their bottom line. Andrew L. Shapiro, founder and president of GreenOrder, a strategy and management consulting firm specializing in sustainable business, perceives a general shift in attitude in the business world regarding environmental sustainability efforts. “Sustainability is going to be a source of competitive advantage,” says Shapiro. “Directors need to ask themselves, ‘Where do the opportunities lie?’ not just, ‘How do I avoid problems?’”

In many cases, directors are unaware of how their competitors are approaching environmental disclosure. “Bring in some outside experts to bring up general trends or top five concerns in their company’s industry affecting environmental issues; let management and the board hear the buzz because they will definitely get interested,” insists Ivy Wafford Duke, deputy general counsel and chief compliance officer at Calvert Group. Boards that actively monitor how their company is affecting climate change, or what kind of carbon footprint their operations are imposing, can use this knowledge to propel business and improve their public image.

“Education—boards need to see it more often, hear it more often, and they should communicate with management.” – Ivy Wafford Duke, general counsel and COO at Calvert Group

Some companies are making efforts to provide more information now, not later. “There’s a great variability among companies,” says Koch. “There are some good actors trying to get good estimates, but you have to consider what is disclosed compared to what is being held back because of attorney-client privilege; either focusing on reporting only the ‘known minimum’ or a ‘don’t ask, don’t tell’ approach.” Companies are often reluctant to produce reports that may expose sensitive information to competitors.

Audit committees are advised to engage their colleagues in charge of environmental affairs and corporate responsibility, by conducting meetings and having conversations to become better educated. “Education—boards need to see it more often, hear it more often, and they should communicate with management,” adds Duke.

Boards that recognize the need to address environmental concerns will find themselves appeasing investor concerns, meeting legal requirements, and improving their overall image. “It’s quite likely that disclosure will come as the legislation landscape develops,” says Shapiro. “Boards are finding that all aspects of their business can benefit from awareness, from the final product they produce, to their supply chains, which often times span multiple countries.”

Shapiro adds that proactive boards that promote environmental awareness can reap the fiscal rewards of an earth-friendly reputation from their consumers. “Acquiring a compliance mindset could lead to an opportunistic mindset—resulting in getting brand loyalty,” he says.

Many global firms are already disclosing their environmental impact. Wal-Mart, PepsiCo, Coca-Cola, Intel, HP, and even Ford Motor Company, recognize that their impact on the environment is not mutually exclusive to their bottom lines. Says Smith: “The winds are all blowing in the right direction—boards need to be aware of the trend, see how their company is being responsive, and create meaningful oversight.”

One of them was Dov Seidman, the ‘guru of good’ and author of How: Why How We Do Anything Means Everything in Business (and in Life) and the founder of LRN, a consulting firm that helps companies “outbehave the competition.” The other was Michael Beer, Harvard Business School professor and author of just published High Commitment, High Performance.

Both agree that the new organizational model is one where a transparent management inspires principled performance and creates a high-integrity work environment. These organizations, they argue, will be more efficient, more productive, and are more sustainable.

These ideas may sound Pollyannish, but both are convinced that organizations should be based on values rather than just value. High ethical standards and principles will outperform organizations who lack these fundamentals. What is new about their message is that it is not about doing the right thing because you should; or doing the right thing to avoid the penalties that come with doing wrong,; or even doing the right thing because there are profits to be made in areas that are considered social goods, such as alternative energy or green products; but simply this: ethical organizations perform better.

At the core of their argument is that a values driven organization motivates people. Employees and management are more committed and interact better. There is complete transparency and communications are streamlined. Compliance becomes integrated and requires less policing. The parts of the organization cooperate because they are committed to the whole.

At the board level, Beer says that directors need to re-frame their purpose from maximizing shareholder value to multi-stakeholders. This entails promoting a corporate culture that provides meaning to what people do and a brand that customers will be proud of. He says the companies he has studied that have outlasted their competitors tend to have a culture that is focused on a common mission.

They both see this as a logical evolution in management style from the old school command and control to an organization built on regulations and compliance (which is where most organizations are today), to one built on mutual trust and values.  In these companies, the spirit of the rules are instilled in people and there is an element of self-governance.

Seidman compares what he expects to be a boom in managing for responsibility, integrity, and social good, to the drive for quality in the 1980s. He says at the time, quality was considered a “soft” pursuit, until companies were able to build the mechanisms to measure it and manage for it. He says companies will start to internalize metrics and processes around integrity. They will hire, compensate, and measure for culture. Both cited Southwest Airlines as a company that is moving in this direction, but they say no one is truly there yet.

I can’t say that I’m convinced that companies that turn themselves into goody goodies will outperform those who are known to bend the rules a little now and then. But there are plenty of good lessons in their work, and in these times it does seem like we could all use a little more transparency and integrity in what we do. Nor do I believe that nice guys finish last. I’m just not so sure they finish first either.

Nearly two-thirds (63.3 percent) of executives polled during a recent webcast expect accounting fraud to increase during the next two years.

“While fraud is committed during strong economic conditions, it is clearly exacerbated in declining markets,” said Kerry L. Francis, U.S. chairman of the board for Deloitte FAS. “Smaller paychecks, reductions in employee headcount and internal controls, as well as diminished morale, are just a few factors that can open the door to fraud in a down market.”

Industries experiencing the greatest risks for potential accounting fraud during downturns include: computer, retail and other service industries such as telecom and healthcare.

Historic fraud schemes during a downturn include manipulation of revenue recognition, reserves and inventory or cost of goods sold. Additional potential fraud schemes in this economic downturn may include improper or omitted disclosures in financial statements and Foreign Corrupt Practices Act (FCPA) violations.

To prepare for the risks that a downward economy poses, 45.7 percent of respondents indicated their organizations have established protocols for conducting investigations.

Executives also report that fraud awareness training throughout organizations (38.7 percent), more robust fraud risk assessments (21.5 percent), and expansion of internal audit monitoring efforts (20.3 percent) would most assist their organizations’ fraud prevention efforts in the face of the current economic environment.

“Strong anti-fraud programs and controls can reduce fiscal, investigative and reputational costs,” said Donna Epps, partner and national leader of Deloitte Financial Advisory Services’ Anti-fraud Consulting practice. “It is important that controls are created, implemented and monitored to mitigate fraud. Clearly communicated, written guidance helps promote an integrated fraud prevention program across all levels of an organization.”

Some leading practices Deloitte recommends to help companies mitigate fraud risk include:

• Update fraud risk assessments regularly to reflect current conditions
• Clearly define anti-fraud program roles and responsibilities of the board, the audit committee, company management, and line employees.
• Set a positive, anti-fraud tone at the top by communicating consistent expectations for all employee.
• Establish and maintain an effective whistle-blower hotline that is both accessible and confidential.
• Continue fraud awareness through regular training.

More than 1,280 executives from the banking and securities, financial services, and technology industries responded to the poll during the webcast titled “Financial Fraud: Does an Economic Downturn Mean an Uptick?”

A total of 210 federal securities class actions were filed in 2008, a 19 percent increase over the 176 such class actions in 2007, and a 9 percent increase over the average of 192 such class actions between 1997 and 2007.

Almost half of the 2008 litigation activity, or 103 class actions, involved firms in the financial services sector.

The Maximum Dollar Loss (MDL) attributable to all 2008 claims is $856 billion, a 27 percent increase over comparable 2007 data and a 23 percent increase over the $698 billion average observed between 1997 and 2007.

Financial services firms represented 46 percent of MDL in 2008. The Clearinghouse’s newly introduced Litigation Heat Map, a graphic that portrays the intensity of litigation activity within each industry over time, shows that nearly a third of all large financial firms were a named defendant in a securities class action filed in 2008.

The financial firms named as defendants in 2008 represented more than half of the sector’s total market capitalization.

“This level of litigation intensity against a single industry [financial services] is unprecedented since the passage of the 1995 Reform Act, ” noted Prof. Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse, in a statement.

Other findings include:

• Of the companies included in the S&P 500 index, 9 percent were sued in a federal securities class action in 2008, compared to only 5 percent in 2007.
• The subprime crisis was associated with 97 federal securities class actions, including 21 complaints filed on behalf of holders or purchasers of auction rate securities.
• Breaking from the historical pattern, a larger number of companies listed on the NYSE and Amex exchanges were sued in 2008 than those listed on the Nasdaq. In 2008, 111 class actions were filed against firms listed on the NYSE/Amex compared to 68 against firms listed on Nasdaq.

The article, “There is Only One Alternative to the Dollar,” concludes that “the clear alternative tothe dollar in 2009 is not other currencies but that ancient form ofmoney: gold. Precious metals could emerge as a hedge for investorssuspicious of central banks and fearful that inflation will be thesimplest solution to the challenge of global deleveraging.”

]]> http://www.directorship.com/stimulus-program-could-lift-us-recession/feed/ 0 http://www.directorship.com/accountants-face-heat-in-madoff-scam/ http://www.directorship.com/accountants-face-heat-in-madoff-scam/#comments Thu, 01 Jan 1970 00:00:00 +0000 Joseph McCafferty http://www.directorship.com/?p=3246 Accounting firms that oversaw many of the “feeder” funds that invested billions of dollars into what prosecutors now describe as the largest Ponzi scheme ever perpetrated, are likely to be among the defendants, The New York Times’ Michael J. de la Merced reports.

ThoughBernard L. Madoff Investment Securities itself was audited by small firms, questions are arising over how major firms such as PricewaterhouseCoopers and KPMG overlooked several red flags related to the operations over a number of years.

The big accounting firms are likely to face queries about why they gave their seal of accounting to the astoundingly steady positive returns booked by a fund manager whose investment strategy was nearly completely opaque.

One investor in a feeder fund, New York Law School, has already sued BDO Seidman, the auditor of one of its money managers, arguing that the firm failed to notice warning signs related to the $50 billion scandal.

The Madoff case presents an unusual situation, ScottM. Berman, a partner at the law firm Friedman Kaplan Seiler &Adelman who represents investors in several feeder funds, told the NYT. Previouscases focused on the auditors of the firm at the center of the scandal,not the auditors of investment managers one rung removed.

“I expect that this is an issue that has not been litigated before,” Berman said.

]]> http://www.directorship.com/accountants-face-heat-in-madoff-scam/feed/ 0 http://www.directorship.com/ap-study-finds-16b-went-to-bank-execs/ http://www.directorship.com/ap-study-finds-16b-went-to-bank-execs/#comments Thu, 01 Jan 1970 00:00:00 +0000 Joseph McCafferty http://www.directorship.com/?p=2583 Banks that are getting taxpayer bailouts awarded their top executives nearly $1.6 billion in salaries, bonuses, and other benefits last year.

The payouts came in spite of poor results last year. Some trimmed their executive compensation due to lagging bank performance, but still paid out multimillion-dollar executive pay packages.

The total amount given to nearly 600 executives could cover bailout costs for many of the 116 banks that have so far accepted tax dollars to boost their own bottom lines.

U.S. Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said the bonuses tallied by the AP review amount to a bribe “to get them to do the jobs for which they are well paid for in the first place.”

The average paid to each of the banks’ top executives was $2.6 million in salary, bonuses, and benefits.

Lloyd Blankfein, president and CEO of Goldman Sachs, took home nearly $54 million in compensation last year. The company’s top five executives received a total of $242 million.

Goldman Sachs has said it will forego cash and stock bonuses for its seven top-paid executives. They will work for their base salaries of $600,000.

Bank of New York Mellon CEO Robert P. Kelly’s stipend for financial planning came to $66,748, in addition to his $975,000 salary and $7.5-million bonus. His car and driver cost $178,879. Kelly also received $846,000 in relocation expenses, including help selling his home in Pittsburgh and purchasing one in Manhattan, the company said.

Goldman’s leased car costs ran as high as $233,000 per executive. JPMorgan Chase Chairman James Dimon used the private jet, costing the company $211,182. JPMorgan has received $25 million in bailout funds.

U.S. Rep. Brad Sherman (D-Calif.) questioned the justification of companies allowing some executives the use of private jets. Sherman, a member of the House Financial Services Committee, said pay excesses undermine development of good bank economic policies and promote out-of-control pay spirals. He wants these financial institutions to come before Congress, like the automakers did, and spell out their spending plans for bailout funds.

“The tougher we are on the executives that come to Washington, the fewer will come for a bailout,” he said.

The Euro Zone is distinct from the European Union in that it only includes those countries that use the Euro as their official currency. Of the 27 countries that make up the EU, 15 are in the Euro Zone: Austria; Belgium; Cyprus; Finland; France; Germany; Greece; Ireland; Italy; Luxembourg; Malta; Netherlands; Portugal; Slovenia; and Spain.

Q3 saw a -0.2 percent growth rate for the gross domestic product figures of both the Euro Zone and the EU as a whole. With a Q2 GDP drop of 0.2 percent for the Euro Zone (the EU’s Q2 GDP numbers were stagnant), this makes two consecutive quartile GDP drops, officially putting the Euro Zone in a recession.

As in the United States, Europe’s economy has been hit hard by decreased manufacturing and consumer spending, linked to the massive global losses sustained in the credit crisis. Many European governments have extended bailout packages to their financial institutions, pledging to pump up to 1 trillion Euros into the EU’s flagging banks. Germany is responsible for €500 billion, while France has pledged up to €360 billion.

Most individual Euro Zone nations suffered either negative or neutral GDP growth in Q3. Spain, for example, suffered a 0.2 percent loss, while Germany lost 0.5 percent. The United Kingdom, not a member of the Euro Zone, lost 0.5 percent, compared to losses in the United States of 0.1 percent.

Among the executives whose credentials fell under question: Dennis Workman, chief technical officer at Trimble Navigation, a maker of global-positioning-system devices; and James DeHoniesto, who, until Wednesday, served as chief information officer at Cabot Microelectronics, a supplier of chemicals and pads used to polish microchips.

Over the past few years, corporate officials or directors have lost their jobs due to resume inaccuracies, including executives at RadioShack, Herbalife, and Usana Health Sciences. Barry Minkow, a sometimes short seller, uncovered the erroneous credentials at the latter two companie and the WSJ story suggested that his research could cause investors to question vetting policies for management and board members. “You have to ask yourself, as any good investigator would say, what else might be there?” says Minkow, who heads the San Diego-based Fraud Discovery Institute.

Minkow also told the WSJ he has cross-checked companies’ top officials’ biographies—typically included with the Securities and Exchange Commission—against a database of college degrees open to private investigators. The search confirmed each case of inaccurate degree claim with the university involved.

The SEC filing found that Workman, Trimble’s CTO, inaccurately stated that he holds a master’s degree in electrical engineering from the Massachusetts Institute of Technology. M.I.T. says Workman attended the school and studied physics for two semesters but did not earn a degree.

LeaAnn McNabb, a spokesperson for Trimble, believed he had received a master’s degree when he left M.I.T.’s doctoral program in the late 1960s.

“I don’t remember receiving the degree,” says Workman to WSJ. “It’s my position that I earned it, that’s for sure. I’m unequivocal about that.” Workman also said he had planned to earn a Ph.D., but had to leave school because of the Vietnam War.

A corporate biography claimed DeHoniesto, Cabot Microelectronic’s CTO, had a bachelor’s degree in computer science from the University of Pittsburgh. While he did attend the school in the 1980s, he never earned a degree. DeHoniesto resigned from the company on Wednesday.

Sam Box, who until recently served as president of Tetra Tech, appeared repeatedly in the company’s SEC filings as a holder of a bachelor’s degree in civil engineering from the University of California. However, upon further questioning, the environmental-engineering company said that Box had admitted that he does not have a college degree and that they would demote him to vice president.

When searching beyond the executive suite, inflated credentials are also prevalent further down the corporate ladder. Jenifer DeLoach, who supervises background checks for corporate clients at Kroll, the investigative arm of Marsh & McLennan, says inflated credentials are common.

Kroll issues an annual report of its “hit ratio” that says about 20 percent of job seekers and rank-and-file employees undergoing background checks by their company are found to have inaccurate and inflated credentials on their resume.

Robert Lazarowitz, who sits on the board of Knight Capital group, said he earned a bachelor’s degree in accounting from the University of South Florida. However the school confirmed that he only attended USF for two years—in 1975 and 1976—and never earned a degree, according to WSJ.

Owen Kratz, CEO of Texas-based Helix Energy Solutions Group, said he earned a bachelor’s degree in biology and chemistry from the State University of New York at Stony Brook. Another falsehood, as Stony Brook confirmed that Kratz does have a biology degree from the College at Brockport, a less-prestigious SUNY campus where Kratz transferred in 1974.

Kenneth Keiser, the president and COO of PepsiAmericas, one of the country’s largest Pepsi bottlers, says he has a bachelor of the arts degree from Michigan State University. The university confirmed that he never graduated.

A PepsiAmericas spokesperson, Mary Viola, says the company was aware that Keiser stopped attending college “10 or 20 hours short of a degree.” She said that his bachelor’s degree was mistakenly imputed in its past several proxy months.

“I’m sure Keiser does read their proxy, but he doesn’t read his own bio,” says Viola.

C.H. Robinson, the company responsible for the error had “mistakenly assumed that he earned a degree.” However, Angie Freeman, a spokesperson for C.H. Robinson, said Keisner signed off on his own mistaken biography. “The company did periodically provide the materials for him to review,” she says, in the process of preparing its 2006, 2007, and 2008 proxy statements—all of which included the false degree.

National Century operated by buying up patients’ bills from health-care providers and packaging them into investor bonds, a financial vehicle much like credit-derivatives. The company went under in November of 2002 after an auditor refused to approve its financial statements, effectively shutting off the company’s flow of capital.

Charges were filed against both Poulsen and his personal associate, Karl Demmler, in addition to five other National Century executives, who were convicted on similar counts in March. Poulsen and Demmler did considerable damage to their own case at the first trial by tampering with a witness’s testimony, each earning a separate conviction six months before their own trial was due to begin.

In his closing arguments Thursday, U.S. trial attorney Leo Wise likened National Century to Enron and Worldcom, claiming that the case was one of the largest frauds ever investigated by the FBI. Poulsen, 65, could face up to 35 years for his crimes.

The appeal is in the latest in a series of cases the court has agreed to hear on suits brought under state laws concerning FDA-regulated products, such as drugs and medical devices.Two other cases–one involving Medtronic and the other involving Pfizer–are also pending in the Supreme Court’s current term.

In its appeal, Wyeth contends that instructions for Phenergan, an anti-nausea drug, met FDA requirements superseding any state product liability claims.

According to a report this morning in The Wall Street Journal, the Chamber of Commerce hascalled the battle “the business case of thecentury.” The Bush administration has long promoted the idea thatfederal law pre-empts state lawsuits. It has included the notion ofpre-emption in regulations for dozens of products, ranging from suntanlotion to seat belts, and has weighed in on Wyeth’s side before theSupreme Court.

The American Bar Association has posted all briefs filed in support of both the respondent, Diana Levine, and Wyeth.

New York remained in second place in the twice-yearly ranking conducted by the City of London Corp., while Singapore climbed past Hong Kong into third place, followed by Zurich, Geneva, and a resurgent Tokyo, which rose two places to seventh, the FT reported.

The survey found that both London and New York had lost ground since February in the wake of financial crises and huge job losses in financial services.The gap between New York and the third-place city is now the smallest it has ever been.

Stuart Fraser, head of policy for the City of London, told the FT that Singapore was benefiting from a perception that it was already tightly regulated and less likely to experience a strong regulatory crackdown. “London and New York are the two global cities and they are going to remain the global cities for a while yet but [other centers] will close the gap a bit,” he said. “Singapore and Dubai are recruiting people. That makes them look positive.”

The Global Financial Centres Index is commissioned by the City of London and calculated by the Z/Yen group based on surveys together with publicly available indices of financial activity, infrastructure and affordability.The latest index covers 59 cities.

The last surveys, conducted  in July, did not reflect the impact of the global credit crises that has intensified in the last month.Dubai, which came in 22nd on the main ranking, was ranked highest on a separate question about which cities were most likely to become significant in the future.

]]> http://www.directorship.com/london-is-top-finance-center/feed/ 0 http://www.directorship.com/aig-execs-agree-to-115-million-settlement/ http://www.directorship.com/aig-execs-agree-to-115-million-settlement/#comments Thu, 01 Jan 1970 00:00:00 +0000 Joseph McCafferty http://www.directorship.com/?p=2713 After lengthy preliminary hearings and a litigation process that lasted six years, former AIG executives agreed yesterday to a settlement, just four days before the scheduled start of the trial on September 15. The settlement money will total $115 million, $29.5 million of which will come from former AIG executives, including former CEO Maurice “Hank” Greenburg.

The settlement marks the largest in a derivative suit under the Delaware Court of Chancery, easily overtaking a $50 million settlement that was made in 2006. A derivative lawsuit is one waged by the shareholders of a company against a company’s executives, with the settlement going towards the company itself. Generally, a former company executive’s penalty is paid by liability insurance, as will be the remainder of the $115 million.

The original suit was brought in 2002 by the Teachers’ Retirement System of Louisiana, and alleged that the insurance company’s executives had directed their business to C.V. Starr, a global investment firm. The pre-trial hearings had also determined that C.V. Starr had been using AIG employees and resources at the expense of the insurance giant. C.V. Starr is run by Greenburg.

The other former AIG executives, former CFO Howard Smith, former vice chairman of investments Edward Matthews, and former vice chairman of insurance Thomas Tizzio, were also executives at C.V. Starr. The plaintiffs were represented by Grant & Eisenhower P.A., a firm that specifically represents institutional investors.

In a derivative action, the suit is brought about by shareholders on behalf of the corporation itself, with proceeds being awarded to the company.

This latest suit is one of many in an options backdating controversy that has dogged Apple since 2006, when reports of improper behavior first began to circulate. Options backdating is the practice of lowering the exercise price on a stock option grant, thus allowing the beneficiary to make a greater profit when the price increases above the “new” price. Though options backdating is not illegal, it is required that backdated grants are properly accounted for and disclosed to shareholders.

A 2006 independent investigation into Apple’s conduct determined nothing improper, but that Jobs and others in fact knew about more than 6,000 grants between 1998 and 2003 that were given false dates. One notorious incident showed that Jobs had received 7.5 million options, priced at a 2001 meeting that had in fact never taken place.

Of the $14 million paid to Apple, $8.85 million will go to the attorneys representing the plaintiffs. An October 31 hearing has been scheduled to finalize this agreement. Shares of Apple opened at $148 Thursday morning, down 2.4 percent from the previous day.

Plaintiffs filed 607 civil cases related to the subprime mortgage market meltdown in federal courts, Navigant found. That compares with 559 lawsuits stemming from the savings and loan turmoil, a six-year period widely viewed as the high-water mark in terms of litigation fall-out from a financial crisis.

“It is perhaps of little surprise that, as the current crisis takes on unprecedented scale, the related litigation would as well,” Jeff Nielsen, head of Navigant’s financial services disputes and investigations group, told the FT.

One lawyer called what’s happening on the state level “scary.”Veronica Rendon, a partner in the New York office of Arnold and Porter, said: “What is scary is that what is hap­pening in the federal courts is only a piece of a picture…it’s an even worse trend once you picture in the states.”

More than half of the new lawsuits tracked by Navigant were filed in the first six months of this year, exceeding the total filed in all of 2007.

Yet board members are increasingly giving them greater credence in deal deliberations. That’s because they can provide important legal cover for the board that it is acting in a fair manner and using sound business judgment. Although a fairness opinion is, by its nature, of limited scope and purpose, its usefulness as an additional level of due diligence can be enhanced if board members actively engage with financial advisors to understand the scope of the fairness opinion, challenge its conclusions, and appreciate its inherent limitations.

Fairness opinions can help directors gain clarity into the soundness of a deal and underscore their duty of care to shareholders. However, they should not be seen as a good governance panacea and do not absolve directors from considering other factors in their deal deliberations. Nor are they a substitute for independent business judgment and scrutiny. The more involved the board is with its advisors throughout the process, the more insight it will glean to help it make the right business decision.

Getting At What’s Fair

Two recent developments affecting fairness opinions are worthy of closer attention by board members: a decision by the U.S. 7th Circuit Court of Appeals involving Credit Suisse and the recent adoption of the new rule (FINRA 2290) by the Financial Industry Regulatory Authority, a non-governmental regulator of securities firms.

The first sheds light on financial advisors obligations and responsibilities, and the advisors terms of engagement when they rely on the management of the advisor’s client (the seller in the Credit Suisse case) for financial information. In the Credit Suisse case, the court found that the bank acting as financial advisor to the buyer (a trust known as HA 2003 Liquidating Trust) was not grossly negligent and had fulfilled its responsibilities under the terms of its engagement when it delivered a fairness opinion based on financial projections provided by manage-ment of the seller. Subsequent to closing, the target company failed to achieve those expected results. The court found that Credit Suisse acted appropriately and in accordance with the terms of its engagement even though management had access to conflicting financial projections provided by another outside advisor that stood in stark contrast to the information management provided to Credit Suisse. The court ruled that Credit Suisse “did not write an insurance policy against managers’ errors of business judgment” and had acted appropriately in relying on the financial information provided by management without independently verifying that information and in accordance with its terms of engagement.

Additionally, because the Credit Suisse engagement agreement did not provide for updates, the court found that Credit Suisse had no obligation to update its fairness opinion between the time the fairness opinion was delivered and the deal closed, even though market conditions had deteriorated dramatically during that intervening period.

This decision highlights the importance of understanding the potential limitations of a fairness opinion created by the specific scope of work carried out by the financial advisor and the quality of information underpinning its analysis. When engaging financial advisors, boards should consider the context of the fairness opinion analysis and the potential limitations of that analysis.

Increased Disclosure

FINRA Rule 2290, adopted late last year, was the outcome of a process initiated a few years ago to review the role of fairness opinions in corporate control transactions. The basic question FINRA aimed to address was whether existing proxy disclosure requirements mandated by the Securities and Exchange Commission (SEC) are sufficient to inform investors about the subjectivity that goes into rendering fairness opinions as well as the potential for insider or advisor biases.

Rule 2290 does not actually prescribe methodology or the type of transactions requiring a fairness opinion. It does, however, prescribe additional disclosure requirements and procedures that FINRA member firms must follow when issuing fairness opinions.

FINRA maintains, as evidenced by Rule 2290, that shareholders are best served through further disclosure of conflicts and enhancement of advisor procedures. The rule requires all FINRA member firms that issue fairness opinions to disclose whether they have material relationships with any party to the transaction. They are also required to disclose whether their fee is contingent on the success of the transaction. Procedurally, FINRA member firms are required to have written procedures outlining processes and to disclose whether a fairness committee was involved in approving opinions issued. They must also disclose whether they have independently verified information relied upon in coming to a conclusion on fairness and whether they expressed any opinion on the fairness of compensation to be received by insiders as a result of the transaction relative to shareholders.

Although Rule 2290 formalizes some of the procedures and disclosures commonly provided by financial advisors, there are several potential implications that directors should understand. For example, the requirement that financial advisors disclose whether they have verified information used as a basis for issuing the opinion may cause more robust processes around record-keeping and information management, and may extend reasonable time-frames required for financial advisors to provide fairness opinions.

In addition, increased disclosure of conflicts and advisory relationships may open debate about the objectivity of fairness-opinion providers and could extend deliberations over business decisions. The board can take steps to minimize conflicts by forming a special committee of independent directors and hiring an advisor to provide a fairness opinion that is otherwise independent of the transaction and whose fee is not dependent on the success of the deal.

Board Practices to Consider

The primary responsibility for determining whether a fairness opinion will be obtained will continue to reside with the company’s board of directors. In turn, directors must be more vigilant than ever in demonstrating they have fulfilled their fiduciary obligation to shareholders. What follows are some items that should be on the to-do list when directors obtain a fairness opinion.

1. Assess Risk

Assessing risk is the starting point for determining whether a fairness opinion would be useful to directors in evaluating the fairness of the consideration to be paid or received in a transaction. Directors should consider the nature of the contemplated transaction and consider the following characteristics that may signal the need for a heightened level of board oversight, which is closely correlated with the need for a fairness opinion:

• Terms and conditions that depart from comparable transactions
• Non-competitive sale process
• Materiality of the transaction
• Multiple classes of equity with different rights
• Substantial executive severance in the event of a change of control
• Related party transactions
• Apparent investor conflicts
• A deal that is far afield from the company’s normal business or operations
• A deal driven by expected synergies
• The amount and type of consideration to be received/paid in the transaction

2. Manage Conflicts

Litigation risk may be heightened in situations in which there are perceived conflicts among parties involved in a transaction, such as a transaction between related parties or if a financial advisor acts in multiple capacities on the same transaction.

Although this does not necessarily indicate a real conflict, directors should have a heightened awareness of the perception of conflict and take action to demonstrate that they have considered such perceived conflicts. This may include forming an independent committee of directors to make key decisions regarding the pending transaction. In cases where a financial advisor is providing a fairness opinion as well as other services on the same transaction, the board may want to consider requiring the financial advisor to use separate teams for different activities and to have those teams observe ethical walls so information is not shared between teams. Or the board may opt to satisfy this need more directly, by engaging an altogether independent financial advisor.

3. Define Scope

Directors should be involved with financial advisors in establishing the scope of the fairness opinion analysis. It can make a big difference whether the scope of the analysis includes a specific consideration of the compensation arising from the transaction to a particular class of shareholders, or just considers transaction compensation as a whole. In addition, transaction compensation structure and the premium over market offered by the proposed counter-party, if any, that diverge from industry norms deserve a deeper dive since they are likely to attract a high level of investor scrutiny. Directors are well advised to engage in detailed discussions with financial advisors at the outset of the fairness opinion analysis to ensure that the scope of the analysis is commensurate with the needs of the transaction.

4. Consider Methodology

Financial advisors will determine methodology largely based on the specifics of the transaction and the nature of the business. This will be influenced by, among other things, any of the basic transactional business factors, including the type of transaction (merger of equals, acquisition, etc.), key risks and value drivers, the nature of the business and stage of development, expected growth and profitability, availability of information, and market capitalization. Financial advisors have wide latitude in applying methodologies, and directors are well advised to not only understand the methodologies, but also why the financial advisors applied them or chose not to use particular approaches. For example, were synergies explicitly considered? If so, how were they analyzed? How will a company engaged in several unique businesses be analyzed? Will those businesses be separately evaluated or will the advisor look at the company as a whole?

5. Understand Limitations

Directors must interpret fairness opinions subject to the limitations of the analysis conducted by the financial advisor. For example, although Rule 2290 requires financial advisors to disclose whether they have independently verified financial information underpinning their analysis, it is not common practice for financial advisors to do so. Directors will, therefore, typically need to conduct additional diligence to get comfortable with the quality of certain information.

6. Review Results

Boards hire financial advisors and pay them a fee for rendering fairness opinions. The value of a fairness opinion is not just in the physical letter delivered by a financial advisor but also the insight that the financial advisor can provide to help shed light on the business decisions boards must make. For this reason, directors are well advised to spend time with their financial advisors to understand the rationale behind their conclusions. Remember, a fairness opinion is the culmination of an extensive analysis and the synthesis of a variety of information that attempts to portray an accurate picture of a company and its intended transaction. What it may not be is objective in the most comprehensive sense of the word.

Ceres and the Interfaith Center on Corporate Responsibility jointed released data that showed what it called a record 57 shareholder proposals filed with U.S. companies, 25 were withdrawn by proponents after the companies agreed to positive climate-related commitments.

The 26 resolutions that went to a vote won a record average of 23.5 percent. Five resolutions were omitted or withdrawn because of technicalities and while a sixth, at Meredith Corp., will be decided by shareholders at its Nov. 5 annual meeting.

Last year, by comparison, there were 43 global warming proposals. Of those, 15 went to a vote and garnered average support of 21.6 percent.

“There are vast investment opportunities in infrastructure where we can generate solid returns for our fund while supporting essential community services that are crucial to continued economic development,” said Rob Feckner, president of the CalPERS board.

Meanwhile, the search to replace CalPERS Chief Investment Officer, Russell Read who resigned in April after two years, continues.  The CIO will oversee the $230-billion pension fund and manage a staff of more than 200 managers.

Infrastructure was the last component of a new asset class to be approved by the CalPERS board, which earlier had adopted policies for three other sub-asset classes including commodities, inflation-linked bonds, and forestland.

CalPERS noted that the State of California itself has an estimated $500-billion requirement to develop and improve physical structures, facilities, and networks to keep pace with population growth over the next 20 years.

The new CalPERS policy includes provisions to:

• Allocate up to 3 percent of total CalPERS market assets to infrastructure through the year 2010.
• Achieve an average annual investment return of 5 percent over the rate of inflation, net of fees, over five years.
• Invest in both public and private infrastructure including but not limited to transportation, energy, natural resources, utilities, water, communications, and other social support services.
• Secure agreements from investment vehicle managers to follow CalPERS Responsible Contractor Program guidelines for fair labor practices.
• Minimize potential adverse impacts to public employee jobs in the development and operation of infrastructure projects.

CalPERS had $4.7 billion in its inflation-linked asset class (ILAC) as of June 30, 2008, or 2 percent of the total fund.

“I understand the desire to know a little more. But this is regulating an investment organization that belongs to a country,” he told the board members of the California Public Employees’ Retirement System during their yearly off-site meeting.

“Disclosure has never been the cure,” said Sudarskis, who was speaking on a panel during a session titled “International Institutional Investment Organizations” at the meeting of the $227.7 billion system as reported by Pensions & Investments.

Other panelists included David Neal, chief investment officer of the A$61.5 billion (US $56.3 billion) Future Fund of Melbourne, Australia, and Robert Kaproth, director of the office of international monetary policy at the U.S. Department of Treasury.

At least one member of the retirement board had different views from Sudarskis.

George Diehr, vice president of the CalPERS board, said it is in the interest of sovereign wealth funds to provide more transparency of their actions. “It’s because they are so opaque that people are concerned,” Diehr said in an interview wth Pension

The initiatives Quattrone referred to at a recent West Coast forum for entrepreneurs and venture capitalists, was the settlement reached by former New York Attorney General Eliot Spitzer that forced the separation of investment banking from research.

The settlement followed an investigation into whether some Wall Street analysts provided misleading ratings of companies to bolster their firm’s investment banking initiatives. As a result, banks are no longer allowed to pay analysts from revenue derived from the investment side of the business.

Quattrone, who led IPOs for Cisco Systems, Amazon, Netscape and others, told New York Times’ Dealbook Editor Andrew Ross Sorkin, “I’m not denying there’s a potential for conflict–always has been, always will be. I’m just questioning the best means of managing the conflict.”

Sorkin writes that Quattrone is right. “Analysts should be allowed to talk to their own investment bankers on occasion. Most analysts I talked to for this column said that they missed talking to bankers calling for advice ahead of a meeting, which they said made their research better and helped the banker. They argued that would perhaps make the whole franchise more valuable and give firms the impetus to spend more on research.”