Board understanding of culture and mood are pretty low – per NACD materials

Below I have provided a snapshot from NACD promotional materials that I received – the materials are Benchmark Your Board, with which I tend to agree, if the benchmark evaluation is done with meaningful detail, evaluation, and recommendations, and if the board then takes action to improve the board, and all levels of the organization. I find all of the statistics from the materials (see below) of interest; however, for the purpose of this blog post I am focused on the corporate culture section – earlier this year corporate or business or nonprofit or organization culture was heavily in the news, but these things tend to pass.

I don’t hear as much about culture now. But in my view, culture and values need to stay in the news as they are one of the keys to how the entity (i.e., the people in the entity) act or behave, and perform.

Notice, according to the materials, 87% of directors say that their boards have a high understanding of the tone at the top, but is that true and what does that really mean; only 35% of directors say that their boards understand the mood in the middle, whatever that means, but nevertheless, the percentage is very low; and only 18% have a high understanding of the buzz at the bottom, again whatever that means, but the percentage is very low. These seem like failing grades, evidencing, in addition to other things, that board members need get out and visit and mingle at the facilities more.

NACD Benchmark Your Board promotion stat. page

And here are additional materials from prior posts:

Organization Culture Compass Circle

OVERVIEW OF A RISK MANAGEMENT PROCESS THAT YOU CAN USE 03162018

Audit Committee 5 Lines of Success, Diligence, and Defense - David Tate, Esq, 05052018

COSO Enterprise Risk Management Framework ERM Components and Principles

Best to you, David Tate, Esq. (and inactive California CPA), Royse Law Firm, Menlo Park, California office, with offices in northern and southern California.  My blogs: trust, estate, elder abuse and conservatorship litigation http://californiaestatetrust.com, D&O, boards, audit committees, governance, etc. http://auditcommitteeupdate.com, workplace http://workplacelawreport.com

David Tate, Esq., Overview of My Practice Areas (Royse Law Firm, Menlo Park, California office, with offices in northern and southern California. http://rroyselaw.com)

  • Civil Litigation: business, commercial, real estate, D&O, board and committee, founder, owner, investor, creditor, shareholder, M&A, and other disputes and litigation; and investigations
  • Probate Court Litigation: trust, estate, elder abuse, and conservatorship disputes and litigation
  • Administration: trust and estate administration and contentious administrations representing fiduciaries and beneficiaries
  • Workplace (including discrimination) litigation and consulting
  • Board, director, committee and audit committee, and executive officer responsibilities and rights; and investigations

Royse Law Firm – Overview of Firm Practice Areas – San Francisco Bay Area and Los Angeles Basin

  • Corporate and Securities, Financing and Formation
  • Corporate Governance, D&O, Boards and Committees, Audit Committees, Etc.
  • Intellectual Property – Patents, Trademarks, Copyrights, Trade Secrets
  • International
  • Immigration
  • Mergers & Acquisitions
  • Labor and Employment
  • Litigation (I broke out the litigation as this is my primary area of practice)
  •             Business & Commercial
  •             IP – Patent, Trademark, Copyright, Trade Secret, NDA
  •             Accountings, Fraud, Lost Income/Royalties, Etc.
  •             Internet Privacy, Hacking, Speech, Etc.
  •             Labor and Employment
  •             Mergers & Acquisitions
  •             Real Estate
  •             Owner, Founder, Investor, D&O, Board/Committee, Shareholder
  •             Lender/Debtor
  •             Investigations
  •             Trust, Estate, Conservatorship, Elder Abuse, and Administrations
  • Real Estate
  • Tax (US and International) and Tax Litigation
  • Technology Companies and Transactions, Including AgTech and HealthTech, Etc.
  • Wealth and Estate Planning, Trust and Estate Administration, and Disputes and Litigation

Disclaimer. This post is not a solicitation for legal or other services inside or outside of California, and also does not provide legal or other professional advice to you or to anyone else, or about a specific situation – remember that laws are always changing – and also remember and be aware that you need to consult with an appropriate lawyer or other professional about your situation. This post also is not intended to and does not apply to any particular situation or person, nor does it provide and is not intended to provide any opinion or any other comments that in any manner state, suggest or imply that anyone or any entity has done anything unlawful, wrong or wrongful – instead, each situation must be fully evaluated with all of the evidence, whereas this post only includes summary comments about information that may or may not be accurate and that most likely will change over time.

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Elon Musk / Tesla – purported SEC settlement, but corporate governance and board member judicial independence questions also remain

To say the least, it must have been a stressful couple of months for Tesla board members – how do you get your undisputed CEO leader and visionary to control himself, to take care of his mental and physical health, stop doing stupid or ill-advised things and making stupid or ill-advised public communications, and stop causing self-inflicted wounds? Or, at this point, how much do you need Mr. Musk to be the CEO of Tesla – can’t some other person take the helm – someone who is better qualified to build cars, and who also is an electric/battery power visionary? And where was the board in all of this? Well . . . we don’t know because they were silent to the public.  

You might have heard the news that the SEC filed suit against Mr. Musk last week as a result of an ill-advised and possibly unlawful public comment that he made. Yesterday (Saturday) I read two articles about possible settlement or actual settlement with the SEC. The following earlier-in-the-day article represents that Mr. Musk had rejected a settlement offer made by the SEC.  But please be aware that I never simply accept a news or other article as being correct – the article might be correct, or some of it might be correct, or none of it might be correct, you can be reasonably certain that the article is not entirely complete, and I also watch for the adjectives used and the opinions and conclusions reached as opposed to facts and whether or not those facts are supported with objective, credible evidence and sources. Thus, although I am using articles below, I am not representing or suggesting that they are correct or entirely correct. 

I found the first, earlier-in-the-day article interesting because of its discussion about the terms (presumably only some of the terms) of settlement purportedly offered by the SEC, and more interesting for the purported reasons why the settlement offer was rejected. The reasons for rejection, for example, do not include whether or not acceptance of the settlement would be in the best interests of Tesla and its stockholders. The reasons suggest that the settlement was rejected based on reasons personal to Mr. Musk, the reasons suggest a desire to maintain and not lose board control, and the reasons suggest a lack of board member involvement in whether or not the settlement should be accepted, and a lack of board member active diligent governance, oversight, and independence. Of course, obviously there are additional facts about which we are not aware.

In terms of board member independence, I am talking about possible lack of judicial independence, not independence as defined by stock exchange or similar rules, or whether or not the board member is an officer of Tesla. Board member judicial independence is an evolving and increasingly important attribute and evaluation – for example, does the board member truly diligently and prudently evaluate the issues at hand in the best interests of the stockholders and the company, and make decisions that are independent of the director’s self interests and independent of the director’s relationships with the executive officers and with the other directors. As you might be aware, judicial independence, for example, also takes into consideration business, financial, social, family, and friend interactions, relationships, and influences or pressures.

The following is the earlier-in-the-day article representing that settlement with the SEC was rejected and at least some of the purported reasons for the possible rejection – see a picture from the earlier-in-the-day first article below or  Click Here For Article

Musk reportedly doesn't settle with SEC

A later-in-the-day article then represented that settlement with the SEC had been accepted, and at least some of the purported terms of the settlement. I would view acceptance of the purported settlement as a good decision in the right direction for Tesla and its stockholders, and also for Mr. Musk. I will be interested in hearing who the two new directors will be, the process for and who nominates/selects the new directors and what Mr. Musk’s involvement will be in that process, and who the independent directors will be and whether they will be and are judicially independent as they should be judicially independent after taking into consideration that matters, issues and people over which they will have specific oversight and responsibility. See a picture from the later-in-the-day second article below or Click Here For Article

Musk reportedly settles with the SEC

Best to you, David Tate, Esq. (and inactive California CPA), Royse Law Firm, Menlo Park, California office, with offices in northern and southern California.  My blogs: trust, estate, elder abuse and conservatorship litigation http://californiaestatetrust.com, D&O, boards, audit committees, governance, etc. http://auditcommitteeupdate.com, workplace http://workplacelawreport.com

David Tate, Esq., Overview of My Practice Areas (Royse Law Firm, Menlo Park, California office, with offices in northern and southern California. http://rroyselaw.com)

  • Civil Litigation: business, commercial, real estate, D&O, board and committee, founder, owner, investor, creditor, shareholder, M&A, and other disputes and litigation; and investigations
  • Probate Court Litigation: trust, estate, elder abuse, and conservatorship disputes and litigation
  • Administration: trust and estate administration and contentious administrations representing fiduciaries and beneficiaries
  • Workplace (including discrimination) litigation and consulting
  • Board, director, committee and audit committee, and executive officer responsibilities and rights; and investigations

Royse Law Firm – Overview of Firm Practice Areas – San Francisco Bay Area and Los Angeles Basin

  • Corporate and Securities, Financing and Formation
  • Corporate Governance, D&O, Boards and Committees, Audit Committees, Etc.
  • Intellectual Property – Patents, Trademarks, Copyrights, Trade Secrets
  • International
  • Immigration
  • Mergers & Acquisitions
  • Labor and Employment
  • Litigation (I broke out the litigation as this is my primary area of practice)
  •             Business & Commercial
  •             IP – Patent, Trademark, Copyright, Trade Secret, NDA
  •             Accountings, Fraud, Lost Income/Royalties, Etc.
  •             Internet Privacy, Hacking, Speech, Etc.
  •             Labor and Employment
  •             Mergers & Acquisitions
  •             Real Estate
  •             Owner, Founder, Investor, D&O, Board/Committee, Shareholder
  •             Lender/Debtor
  •             Investigations
  •             Trust, Estate, Conservatorship, Elder Abuse, and Administrations
  • Real Estate
  • Tax (US and International) and Tax Litigation
  • Technology Companies and Transactions, Including AgTech and HealthTech, Etc.
  • Wealth and Estate Planning, Trust and Estate Administration, and Disputes and Litigation

Disclaimer. This post is not a solicitation for legal or other services inside or outside of California, and also does not provide legal or other professional advice to you or to anyone else, or about a specific situation – remember that laws are always changing – and also remember and be aware that you need to consult with an appropriate lawyer or other professional about your situation. This post also is not intended to and does not apply to any particular situation or person, nor does it provide and is not intended to provide any opinion or any other comments that in any manner state, suggest or imply that anyone or any entity has done anything unlawful, wrong or wrongful – instead, each situation must be fully evaluated with all of the evidence, whereas this post only includes summary comments about information that may or may not be accurate and that most likely will change over time.

Court holds that a whistleblower need only have a reasonable belief that the defendant’s conduct was unlawful

The United States District Court, S.D. New York, on a FRCP 56 motion for summary judgment, recently held in Murray v. UBS Securities, LLC that a whistleblower under section 806 need only show reasonable belief that the defendant’s conduct violated federal law. In relevant part see the summary snapshot below. This is important for potential defendants and their decision makers to know when evaluating potential whistleblower situations and how to proceed.

David Tate, Esq. (and CPA, California inactive), Royse Law Firm (Menlo Park office, California, San Francisco Bay Area and the Los Angeles Basin)

PCAOB Adopts New Audit Report-Should Be Interesting-Still Has To Be Adopted By The SEC

The following is a link to the PCAOB website page discussing the PCAOB’s June 2017 adoption of a new audit report which in part requires the disclosure of critical audit matters (CAM) for certain audits conducted under PCAOB standards. Here’s the link to the PCAOB page CLICK HERE

The new report standard still must be adopted by the SEC. If adopted, some of the new report standards will first apply to annual audits for years ending on or after December 15, 2017; however, the critical audit matter reporting would not apply until 2019 at the earliest for certain entities.

As the PCAOB notes, there is a need to make the audit report more relevant. In fact, there is a need to make both external and internal audit and auditors more relevant.

More will follow on this; however, I usually don’t spend signification time on new laws, statutes, regulations, rules and standards until (1) they are in fact enacted or adopted, and (2) it is near the time of actual use or requirement.

I do note, however, that this new report and the CAM provision is an interesting development, which perhaps should have occurred years ago. If you click on the above link, and then on the actual standard itself, you will also see that the standard contains worthwhile discussions about critical audit matters, materiality and other topics that are relevant to the standard.

Best, David Tate, Esq. (and CPA, California inactive). Royse Law Firm, Menlo Park Office, California.

Royse Law Firm – Practice Area Overview – San Francisco Bay Area and Los Angeles Basin

  • Corporate and Securities, Financing and Formation
  • Corporate Governance, D&O, Boards and Committees, Audit Committees, Etc.
  • Intellectual Property – Patents, Trademarks, Copyrights, Trade Secrets
  • International
  • Immigration
  • Mergers & Acquisitions
  • Labor and Employment
  • Litigation (I broke out the litigation because this is my primary area of practice)
  •             Business
  •             Intellectual Property – Patents, Trademarks, Copyrights, Trade Secrets
  •             Trade Secrets, NDA, Financial & Accounting Issues, Fraud, Lost Income, Royalties, Etc.
  •             Privacy, Internet, Hacking, Speech, Etc.
  •             Labor and Employment
  •             Mergers & Acquisitions
  •             Real Estate
  •             Owner, Founder, Investor, Board & Committee, Shareholder, D&O, Lender/Debtor, Etc.
  •             Insurance Coverage and Bad Faith
  •             Investigations
  •             Trust, Estate, Conservatorship, Elder Abuse, Etc., and Contentious Administrations
  • Real Estate
  • Tax (US and International) and Tax Litigation
  • Technology Companies and Transactions Including AgTech, HealthTech, etc.
  • Wealth and Estate Planning, Trust and Estate Administration, and Disputes and Litigation

 

NEW NINTH CIRCUIT CASE – PLAINTIFF CANNOT BRING A SECURITIES CASE FOR BREACH OF THE CORPORATE CODE OF ETHICS . . . WELL, NOT SO FAST . . . .

On January 19, 2017, the Ninth Circuit dismissed a securities fraud case holding that the claim could not legally be brought where shareholders of Hewlett-Packard Company (“HP”) alleged that the Company CEO and Chairman violated Hewlett-Packard’s Corporate Code of Ethics after publicly touting the Company’s high standards for ethics and compliance while at the same time himself violating the provisions in the Code of Ethics. The case is Retail Wholesale & Department Store Union Local 338 Retirement Fund v. Hewlett-Packard Co. and Mark A. Hurd, Ninth Circuit Case No. 14-16433 and District Court Case No. 3:12-cv-04115-JST (Northern District of California) and you can view the case at http://cdn.ca9.uscourts.gov/datastore/opinions/2017/01/19/14-16433.pdf.

Plaintiffs’ claim was brought under §10 and Rule 10–b of the Securities Exchange Act of 1934. The Court’s decision is helpful from a defense viewpoint, but the decision shouldn’t be viewed too broadly. In summary, the Court held as follows (note: the below quotes from the case are not necessarily in the exact order in which they appeared in the Court’s decision):

“Retail Wholesale argues that the SBC [HP’s Standards of Business Conduct], bolstered by Defendants’ express promotion of corporate ethics, gives rise to a finding of material misrepresentation. Its claim is based in three factual allegations: (1) HP and Hurd actively promoted the SBC and stated that HP had zero tolerance for SBC violations; (2) Hurd’s SBC violations led to his resignation; and (3) Hurd’s resignation caused HP’s stock price to drop. The Court cannot agree that, under the facts alleged in the complaint, Defendants’ representations about ethics were materially misleading.”

“Defendants made no objectively verifiable statements during the Class Period. As one court has aptly written, a code of conduct is “inherently aspirational.” Andropolis, 505 F. Supp. 2d at 686. Such a code expresses opinions as to what actions are preferable, as opposed to implying that all staff, directors, and officers always adhere to its aspirations. See id.”

“Similarly, Hurd’s comments prefacing the SBC are not objectively verifiable. In the 2008 preface to the SBC, Hurd stated, in part,

We want to be a company known for its ethical leadership . . . .

We know actions speak louder than words. We must make decisions and behave in ways that we can be proud of, that reflect our commitment to doing the right thing . . . .

. . . . Let us commit together, as individuals and as a company, to build trust in everything we do by living our values and conducting business consistent with the high ethical standards within our SBC.”

“The aspirational nature of these statements is evident. They emphasize a desire to commit to certain “shared values” outlined in the SBC and provide a “vague statement[] of optimism,” not capable of objective verification. See Or. Pub. Emps., 774 F.3d at 606. A contrary interpretation—that statements such as, for example, the SBC’s “we make ethical decisions,” or Hurd’s prefatory statements, can be measured for compliance—is simply untenable, as it could turn all corporate wrongdoing into securities fraud.”

However, and equally important, the Court also stated:

“We note that the case may have been closer had Hurd’s sexual harassment and false expenses scandal involved facts remotely similar to those presented by the 2006 scandal [i.e., an earlier unrelated ethics problem at HP in which “A few years earlier, in 2006, a major scandal erupted when a whistleblower informed several government agencies that HP had hired detectives to monitor the phone records and email accounts of HP directors, HP employees, and journalists to find the sources of leaks of company information to the press”], as the ethical code could then have been understood as at least promising specifically not to do what had been done in 2006. Here, however, the context does not make HP’s promotion of business ethics any less subjective or vague. Further, Retail Wholesale cites to no case law suggesting that context may operate to allow a plaintiff to import an out-of-Class-Period statement into the Class Period. The strongest statement alleged in the complaint—the suggestion of a zero tolerance policy for SBC violations—was made outside of the Class Period.”

“In sum, we conclude that as there was no statement during the Class Period that was capable of being objectively false, there was no affirmative misrepresentation.”

It could be easy to read the case too broadly, and to conclude that a securities fraud claim cannot be brought for violation of the company’s code of ethics. Whether such a claim can be brought really depends on the facts and circumstances of the case. Further, and depending on the facts of each case, it might be possible that such a claim could be brought under a different legal theory such as, for example, the Foreign Corrupt Practices Act.

Thus, companies, and their officers, managing agents and directors still must be advised to know the company’s Code of Ethics, to follow the Code, and to be careful about making specific representations about following, satisfying or complying with the Code.

* * * * *

Important – SEC v. United – Administrative Proceeding Relating to United’s Internal Accounting Controls to Prevent Violation of United’s Policies

On December 2, 2016, the SEC issued an Accounting and Auditing Enforcement, Administrative Proceeding Order against United Continental Holdings, Inc. Here is a link to the Order, CLICK HERE

Why is this Order important – because the SEC found that “United failed to design and maintain a system of internal accounting controls that was sufficient to prevent its officers from approving the use of United’s assets in connection with the South Carolina Route in violation of United’s Policies, which prohibited the use of assets for corrupt purposes.” This isn’t a Foreign Corrupt Practices Act case – the alleged corruption or impropriety occurred in the United States. The SEC alleged that United “instituted the South Carolina Route following pressure from David Samson (“Samson”), then the Chairman of he Board of Commissioners of the Port Authority of New York and New Jersey (“Port Authority”). The route provided Samson – who exercised authority and influence as a Port Authority official in matters affecting United’s business interests – with a more direct route to his house in South Carolina.”

The scenario in this case could occur at any time that a public company (1) allegedly acts improperly, and (2) it is alleged that the act was allowed or able to occur because of insufficient internal controls (resulting in a violation of the books and records and internal accounting controls provisions of the Securities Exchange Act, which is automatically alleged in a great number of cases because it is easy in most situations to allege that something unexpected occurred because of inadequate internal controls), and (3) the alleged improper act also allegedly violates some policy or procedure of the public company (i.e., in this case to not use corporate assets for an allegedly corrupt or improper purpose).

What can a company (and the audit committee) do about these possible situations? Review the company’s policies and procedures, and adopt and enact sufficient internal controls, monitored and updated regularly, to ensure that the policies and procedures are followed. But, of course, it is difficult and probably impossible to ensure 100% compliance. I have previously written that the books and records and internal accounting controls provision in the Securities Exchange Act should be amended to include a standard of conduct provision (such as negligence) because it is unreasonable to expect that internal controls, no matter how good, will stop all alleged wrongful conduct.

Below is a screenshot of some of the SEC v. United Order, providing a summary of some of the facts, and I have also included below a link to Tate’s Excellent Audit Committee Guide. Dave Tate, Esq., San Francisco and California

sec-v-united-continental-holdings

The following is a link to Tate’s Excellent Audit Committee Guide (updated October 20, 2016), Click Here

The following is a link to my trust, estate, conservatorship and elder abuse litigation blog, http://californiaestatetrust.com

Audit Committee 5 Lines of Defense 07182016

 

Gretchen Carlson – Harassment & Discrimination – Culture – A Task For The Board – And Internal Audit?

I have provided below a link to a short article about Gretchen Carlson, an interview that she is giving, possible legislative efforts, and sexual harassment and discrimination. We all know, or should know, that this is an important topic. Not only sexual harassment and discrimination, but harassment, discrimination, retaliation, bullying, and hostile environments, and not only male harassment and discrimination of females, but also female v. male, male v. male, female v. female, and including race, color, ancestry and national origin, religion and creed, age and elder, mental and physical disability, sex and gender, sexual orientation, gender identity, and more.

This is or should become an area of oversight for your board, and it also relates to the culture of the organization, and tone at the top, at the middle, and at the lower employee levels, including an environment that encourages people to report harassment and discrimination without fear of retribution, anonymously if the desired, with the knowledge that the reported conduct will be timely, fairly and fully investigated, and that appropriate action will be taken.

This really isn’t new stuff from legal and governance perspectives. Are your board, and the board’s committees, on top of this issue and the culture of the organization?

These can and often are difficult issues and situations.  Of course anyone accused is entitled to a defense, and to rebut the allegations. At law, in most situations, innocence is presumed. In recent past years there have also been stories involving allegations of harassment and discrimination reported in the news that turned out to be false or at least not sufficiently supported.

An investigation into situations involving these allegations often should be performed by outside legal counsel with a reputation for integrity and knowledge and experience in these practice areas.

But let me also suggest that the culture of the organization (but not an actual investigation of a specific situation) also could be an area for attention by internal audit, if the board or management puts it on internal audit’s agenda, and if internal audit is provided education and training about the critical elements, and investigation techniques, and help preparing an audit and reporting program. After all, internal audit also is looking to become more relevant in helping the organization to achieve its organizational objectives, goals and strategies.

The following is a link to one of the articles about Gretchen Carlson and what she is trying to do and accomplish: http://people.com/tv/gretchen-carlson-alleged-sexual-harassment-in-2020-interview/