Leonard Lance, (R.NJ): Mr. Cruikshank, to follow up in your remarks. Do you believe there were corporate governance failures at Lehman?
Thomas Cruikshank, Chairman, Lehman board auit committee: No, I don’t. I think our governance procedures were really very, very good.
House Committee on Financial Services, April 20, 2010
A number of revealing facts emerged from testimony before Congress this week on the Lehman Brothers bankruptcy. The Securities and Exchange Commission said that, despite being aware of red flags, it did not believe it could press for any changes at the company where staff members were embedded for several months. It appears some SEC staff had other things on their minds, however.
CEO Richard S. Fuld Jr. claimed he had no idea about the problems that were brewing and had never heard of any Repo 150 transactions. And Thomas H. Cruikshank, chairman of the defunct investment banker’s audit committee and a Lehman director since 1996, pronounced that “(Lehman’s) governance procedures were really, very, very good.”
His statement came in response to a question from Rep. Leonard Lance (R-NJ), who accepted Mr. Cruikshank’s assurance without further question. And that was all that was asked about board practices at Lehman. The committee could have probed into some of the concerns we first raised on these pages nearly two years ago. It might have inquired whether it was really a good idea to concentrate so much power in Mr. Fuld, who was CEO, chairman and of the board and chairman of the board’s executive committee, or for half of Mr. Fuld’s handpicked board members to be in their seventies and eighties. It could have looked at the executive committee, which had just two members — Mr. Fuld and John D. Macombre, who was in his eighties at the time the Lehman crisis was unfolding. It might have cast its eyes on the risk committee of the board, which met on only two occasions in 2007, or considered whether several of the directors had been overloaded with responsibilities on other boards. Was being an actress sufficient qualification to be a board member,or was a poor performance something that was common to all of Lehman’s directors? The committee did not pursue any of these lines of inquiry.
In his voluminous report, Anton Valukas, the court appointed examiner for Lehman’s bankruptcy, gave the board a clean bill of health and said it did not know what was going on. He could not point to anywhere management had actually informed the board of the extent of the risks that were being incurred or the undisclosed use of accounting tricks like Repo 150. But he also does not cite a single case where directors asked discerning questions and where they were misled by management’s response.
However, in a scathing criticism of the SEC, Mr. Valukas told the committee:
The SEC did not ask the right questions. It’s failure to ask about off-balance sheet transactions in the post Enron-era is hard to understand.
But it is also hard to understand why Mr. Valukas did not apply the same thinking to Lehman’s board, which he seems to exonerate because it was not told about wrong doing or alerted to red flags. This, too, raises the ghost of the Enron board whose specter the examiner invoked.
On that point, it is unfortunate that neither Lehman investors nor legislators have had the benefit of an investigation such as the one the Enron board itself commissioned (much to its later dismay). In an extensive and courageous probe conducted under the chairmanship of William Powers Jr., the report concluded that:
Enron’s “Board of Directors failed … in its oversight duties” with “serious consequences for Enron, its employees, and its shareholders.” With respect to Enron’s questionable accounting practices, the Report found that “[w]hile the primary responsibility for the financial reporting abuses … lies with Management, … those abuses could and should have been prevented or detected at an earlier time had the Board been more aggressive and vigilant.
One wonders what at Lehman Brothers would have made the actions of its board so different or less deserving of scrutiny and condemnation than Enron’s. Would not a prudent board, faced with a crisis of unprecedented proportions in the capital markets, have made diligent inquiries of management that could have produced the answers needed to grasp the real extent of the company’s exposure? What questions might it have asked of its auditors and management that would have enabled the firm to detect the unfolding disaster at an earlier time? What steps could it have taken in its structure and composition as a board that would have made it more pro-active and less an array of Christmas lights that only work when the CEO turns them on? Mr. Valukas’s report was unenlightening in this regard, as were Mr. Fuld and Mr. Cruikshank at the committee’s hearing.
Mr. Fuld was paid nearly half a billion dollars in salary, stock options and bonuses between 2000 and 2007. In the same period, independent directors were paid approximately $20 million in fees and stock awards. For that sum, shareholders saw the fabled firm that had been a Wall Street landmark for more than 150 years sink into the ground and the value of their stock plunge with it.
They can be grateful, however, that Lehman’s governance procedures were “very, very good.” Had they not been as long-time director Thomas Cruikshank warranted and the Congressional committee accepted without challenge, instead of being faced with a calamitous outcome of historic proportions, investors would have had to deal merely with a catastrophe of unprecedented magnitude.
Such is the fantasy world that has long come to define corporate governance in America and the legislative and regulatory apparatus that permits it.
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.
With the tragic news that there were no survivors of the explosion at the Massey Energy coal mine in Montcoal, West Virginia, and all 29 miners were lost, attention will soon turn to the causes of the disaster. The company’s board of directors should not be permitted to escape scrutiny in that regard or to invoke an implausible claim, like the Lehman Brothers board did, that it had no idea what was really happening in the company. Indeed, there were plenty of red flags to alert Massey’s board to the point where it may well be in possession of information that could prove vital for regulators and investigators.
Over the years, Massey has developed a reputation as something of a serial safety violator in the mining industry. More than 800 citations, many involving gas and ventilation, have been issued against the company since 2008 alone. These are the kind of matters which the board’s committee on safety issues is required to take note of and to act upon.
The committee is composed of seven independent directors. Company filings claim that its purpose is to:
“review and make recommendations regarding safety, environmental, political, and social trends and issues as they may affect our operations and the operations of our subsidiaries,” among other things.
This is not an incidental committee for the board. Seven of nine directors sit on the committee. The unusually high number of directors suggests that the board has consciously decided to give serious attention to safety concerns. How it manifested its purported concern is a question the families of many victims will be asking.
The committee is also required on a quarterly basis to make a report to the full board regarding the company’s compliance with “worker safety and environmental compliance, rules, regulations and goals.”
There will be considerable interest in these reports. They will give a clue as to how the company viewed the safety issues that made their way into the Massey boardroom and what, if anything, company management and directors might have done to prevent the Upper Big Branch site from becoming the worst mining tragedy in more than 40 years.
More than 20 hours since the horrific explosion that killed 25 and has left others missing at the Massey Energy mine in Montcoal, West Virginia, the company’s web site still shows a photo of a smiling vice president of safety and training, and boasts that 2009 was another “record setting year for safety.” It is amazing that a company listed on the NYSE with sales last year of more than $2 billion does not understand that a web site needs to be a tool to quickly and accurately inform during times of crisis, not a device that seems hideously disconnected from reality. This does a terrible disservice to the families affected. Unbelievably, many still have not been contacted by the company and are not being kept aware of developments on any systematic basis. If there is one lesson gained from previous mining disasters, it is that family members of victims should not just be left to figure things out on their own.
So far, the company has issued only written statements and has not been available to reporters, according to CNN. It will be interesting to see whether Don L. Blankenship, the company CEO who also holds the positions of president and board chairman, comes forward to face the media and what will become apparent in the culture and governance of the company that might have contributed to the deadliest mining disaster in a quarter-century. We know one thing about the board so far: none of the eight independent directors could have bothered to look at how Massey is handling the crisis in its online presence or, if they have, they don’t understand anything about the nature of a crisis. The unease of investors in that connection is also being registered in the stock price, which is down nearly ten percent in morning trading.
Update: April 9, 2010
Massey Energy has finally updated the home page of its web site to remove the inapproprate graphics and text noted above. It is unfortunate that such a large organization took so long to show the sensitivity that should have been evident at the outset of the tragedy.
