Summer session is beginning at colleges and universities, and management experts say one of the offerings should be Corporate Governance 101. First in line to sign up, they say, should be Facebook Inc. and JPMorgan Chase & Co.
In the matter of Facebook, one of the more significant recent developments involves the Nasdaq Stock Market, which stated June 6 that it would offer $40 million in cash and rebates to clients who may have suffered financially in the company”™s initial public offering. On the first day of trading in Facebook shares, there were complaints that orders were not confirmed quickly enough, as well as shares being offered at too high a price. Lawsuits have since been filed, charging the Nasdaq with botching the sale of stock and alleging that Morgan Stanley and other underwriters did not share reduced earnings forecasts with small investors before the offering.
The New York Stock Exchange objects to the plan, saying it would set a dangerous precedent.
Facebook stock was down almost 30 percent from the offering price of $38 at presstime.
Meanwhile, JPMorgan Chase last month admitted that its London office had suffered a trading loss of at least $2 billion because of a hedging strategy that failed. The revelation raised a new set of questions about risk-taking by banks in the wake of the financial crisis that began in 2008. Former Federal Reserve Chairman Paul Volcker said the loss may be a sign that banks are simply too big and complex. The Volcker rule, still under construction by regulators, would prohibit banks from attempting to profit by making trades with their own money if they get federal guarantees. JPMorgan CEO Jamie Dimon last week appeared before Congress about the trading losses, which were first disclosed by the bank on May 10. He has called them “sloppy” and “stupid.”
With regard to Facebook, “These events signal problems with the effectiveness of internal governance, controls and the role of the chief compliance officer at Facebook and their financial adviser, Morgan Stanley,” said John Alan James, executive director of the Center for Global Governance, Reporting and Regulation at Pace University”™s Lubin School of Business.
“Long ago they should have developed a mission statement, and codes of conduct. A statement of governance, policies, procedures and programs,” James said. “A chief risk officer reporting to the CEO or the CEO and the board. He would have had to be on top of the chief compliance officer. They didn”™t have their internal governance set up adequately.”
James said he “can feel a little bit sorry for Morgan Stanley, they”™re pros. This won”™t be insider trading though, unless the SEC wants to make it so. But giving some investors advantages can involve very heavy fines. It cost Goldman Sachs $550 million,” he said, referring to the firm”™s agreement in July 2010 to pay a fine to settle federal claims that it misled investors in a subprime mortgage product as the housing market began to collapse.
He said the Facebook episode will probably be investigated for the possibility of criminal charges, but stressed that “criminal charges have to be errors of commission, not omission, and that gets into conspiracy to defraud, to withhold information, and that gets into criminal intent.”
Turning to JPMorgan, James said, “One of the investors in JPMorgan went to them in 2011 and said, ”˜We don”™t think your risk organization is paying enough attention to the chief investment officer. They were forewarned that the chief risk officer was being complacent.” He said the system breaks down “if the compliance officer doesn”™t carry weight in the organization. People just tell him to go away. It happens in every organization when staff get involved in line functions.
“All of these events clearly indicate that a major rethink in the relationship between boards of directors, CEOs and oversight of risk management and its relationship to compliance management is long overdue,” James said.
Rick Hyland, head of the Global Business Program at Westchester Community College, said the Volcker rule would certainly help prevent future JPMorgan-type incidents.
“You can throw all the legislation you want at the industry, but without a watchdog and guiding principles” it won”™t be effective, he said. “But you can”™t legislate ethics. And regulatory reform is fine, but if the people making the decisions aren”™t held accountable, this will happen.”
