Spend time with directors and who knows what you’ll find? At the NACD Directorship D100 Forum I caught up with Henry Hu, risk czar for the SEC until next year when he returns to the University of Texas, and famed Madoff whistleblower Harry Markopolos. Both shared their unique insights on how directors should deal with risk and regulation. Hu said financial innovation may upturn the world of corporate governance—by the use of sophisticated derivatives that can make a hedge fund want to place a bet on a company’s decline or even a default.
Perfectly legal. Perfectly absurd. For directors, it’s no longer only about knowing who their shareholders are, but what kind of derivatives they own. To compound the confusion, they may own two contrary instruments, making the net difference the direction.
Harry talked to me about lax oversight in the previous SEC administration when faced with a complex case that had little national media potential; and, of course, the corollary that when a high-profile CEO of a major company wanders into their sights, it’s all-out war. When it comes to public company fraud, Harry also faults boards for not asking the right questions of the C-suite, where the empirical evidence shows the problem starts.
Remedies? Henry and Harry would agree: Boards need to become self regulating. They have to do their homework on the hedge fund universe and its contra mindset. Encourage even greater auditor independence. Oversee compliance. Make life safe for whistleblowers. Directors must direct.