Real Versus “Realish” — Thoughts On When Factual Inaccuracies Matter, And When They Don’t

Two days ago, Yahoo’s board announced that the company’s CEO, Scott Thompson, was leaving in the wake of disclosures that he either misrepresented his academic background by falsely claiming to have a degree in computer science, or allowed his credentials to be misstated. Yahoo had repeated the inaccurate biographical information in investor communications, press releases, and at least one SEC filing.

In an earlier post, I argued that Thompson should be fired.  Although a computer-science degree isn’t a prerequisite to serving as Yahoo’s CEO, I felt that Thompson’s repeated claims to a non-existent academic degree reflected negatively not only on his integrity, but also his temperament and professional judgment. In addition, I argued that failing to hold Thompson to the Yahoo’s professed ethical standards would engender cynicism among rank-and-file Yahoo employees and damage the company’s culture.

Lest you think that I completely lack appreciation for creative license: I had the exact opposite response to a story that appeared in yesterday’s Washington Post about factual embellishments in the semi-autobiographical sketches of humorist and storyteller David Sedaris. The Post reported, among other things, that Sedaris invented some elements of his darkly hilarious SantaLand Diaries, which recounts Sedaris’s experiences working as one of Santa’s elves at the Macy’s flagship NYC store.

According to the Post, officials at NPR (which broadcasts This American Life, a public radio program to which Sedaris often contributes ) and Chicago Public Media (which produces This American Life) are debating how best to ensure that Sedaris’s listeners understand that his humorous sketches should not be viewed as factual reporting or literal truth.  Reportedly, NPR and Chicago Public Media are considering two options: subjecting Sedaris’s pieces to New Yorker-style fact-checking, or including a warning to alert listeners that they shouldn’t regard Sedaris’s sketches as journalism. Chicago Public Media, reportedly, is leaning toward fact-checking Sedaris’s work, whereas NPR is said to favor a “warning label” approach.

Warning listeners that Sedaris’s pieces represent entertainment — humorous, and possibly embellished, personal recollections — seems superfluous but innocuous. I doubt that anyone who has actually listened to Sadaris read his stories would view them otherwise. The idea of fact-checking the accuracy of each element Sedaris’s stories strikes me as absurd. For example, the “facts” to be checked for the SantaLand piece would include: Was Sadaris’s elf name really “Crumpet”? Does Macy’s provide newly hired elves with a manual called “The Elfin Guide” and is the guide 40 pages long? Did Sadaris’s pre-employment urine sample really contain “[marijuana] roaches and stems”?  The very notion of verifying such “facts” could well inspire yet another Sedaris sketch.

The bottom line: context matters. Creatively blending fact and imagination is permissible, indeed expected, if you’re an entertainer like Sedaris. Comparable creativity not only isn’t permissible on a resume, job application, or SEC filing, but may actually cost you your job.

Yahoo Board Faces An Important Decision

“Several Yahoo employees .  .  .  said they felt sadness and disbelief over the incident.  They said it has damaged Mr. Thompson’s credibility with his workforce.”   Wall Street Journal May 5, 2012

Earlier this week, we learned that Yahoo CEO Scott Thompson either misrepresented his academic background by falsely claiming to have a degree in computer science, or allowed his credentials to be misstated for years.  Yahoo repeated the inaccurate biographical information in investor communications, press releases, and at least one SEC filing.  In fact, the Form 10-K (Annual Report) that Yahoo filed with the SEC on April 27 contained both the inaccurate information about Thompson’s academic credentials and Thompson’s certification (required by SOX Section 302) of the 10-K’s accuracy.

Now, Yahoo’s board is facing tough questions about its due diligence in filling the CEO slot:  how thorough could they have been if they didn’t even verify basic information about the CEO’s academic background?   It’s embarrassing, and raises questions about the board’s competence.  A hedge fund that owns 6% of the company’s stock has demanded Thompson’s removal by noon on May 7th.

This morning’s Wall Street Journal cited  leadership experts who felt that sacking Thompson would be a mistake:  Yahoo has already fired one CEO in the past year, and the company is facing many challenges.  The WSJ also reported that:

In the absence of evidence that Mr. Thompson actively misled Yahoo about his resume, Yahoo directors likely won’t force him out, one person close to the company said. ‘Maintaining him as CEO of Yahoo at this time is more important than whether he had a computer science degree or not,’ this person said.

I disagree with this assessment.  As unfortunate and distracting as it would be to have to replace Thompson (especially given his short tenure and his predecessor’s messy discharge last December) I think the company will do long-term damage to its culture if Thompson is allowed to remain as CEO.

It’s true that holding a computer-science degree isn’t a prerequisite to serving as Yahoo’s CEO.  Indeed, some of our most admired corporate leaders haven’t been  college graduates at all (Steve Jobs and Bill Gates are notable examples).  But Jobs and Gates never claimed degrees they didn’t possess.  When you’re the CEO of a public company, repeatedly claiming (or repeatedly failing to disavow) a non-existent academic degree reflects badly not only on your integrity, but also your temperament  and professional judgment.

In my experience, a low or mid-level employee who engaged in a similar conduct would be quickly terminated.  Misrepresenting one’s professional qualifications on an employment application or resume is a firing offense in most of corporate America — even if the fictional credential (e.g., an academic degree, bar admission, AICPA membership) isn’t a prerequisite for your position.

I suspect that Yahoo’s rank-and-file employees know that a Thompson-like “error” on their part would lead to swift termination.  And, I suspect that employees are watching closely to see how the board responds.  It’s truly a “teachable moment” —  if the  board doesn’t remove Thompson, the incident will likely engender cynicism among Yahoo employees because it will reinforce the common perception that  employee ethics rules aren’t enforced against senior officers.

Yahoo’s website posts the company’s employee ethics code.  The document professes to apply to everyone who works for the company, regardless of position.  Among other things, it requires company personnel to produce accurate business records and communications, and specifically mentions the need for accurate SEC filings.

Through its actions on the Thompson matter, Yahoo’s board will demonstrate to employees whether the ethics code is, or is not, window dressing.

Delaware’s Novel Arbitration Procedure Prompts Questions: Is It Really Arbitration? Is It Constitutional? Is It A Good Idea To Use Chancery Court Judges As Arbitrators?

Yesterday’s Wall Street Journal reported on a constitutional challenge to a relatively new Delaware  arbitration procedure:  Secret Arbitrations Put Delaware Judges on Defense. Under this procedure, parties to a commercial dispute may elect to have a sitting member of the Delaware Chancery Court decide the matter in arbitration rather than in a court proceeding.  The statutory provision that authorized the arbitrations specified that they are “confidential and not of public record.”

From the standpoint of commercial litigants, the appeal of such an option  is obvious:  they get the benefit of decision makers who are the nation’s experts in business law, they get a faster decision, and they avoid having their dispute aired in open court.

The Delaware Coalition for Open Government (“DelCOG”) has challenged the constitutionality of the arbitration process, and the statutory provision that authorized its creation, on the ground that they deny the public its First Amendment right of access to judicial proceedings and records.  The plaintiff argues that Delaware’s arbitration proceedings are, in substance, judicial trials. As such, plaintiffs argue, the proceedings must be open to the public.

DelCOG’s complaint names the judges of the Chancery Court as defendants.  The defendants argue that designating an active judge to preside over and decide a commercial arbitration doesn’t convert the proceeding into a judicial trial, and stress the absence of any history of public access to commercial arbitration proceedings.  They also note that the availability of the confidential arbitration process may prevent commercial litigants from resorting to non-US arbitration venues.  The relative attractiveness such non-US forums could, they argue, discourage companies from registering as Delaware corporations, doing business in the US, and listing their stock on US financial markets.

Apart from the uncertain constitutionality of the process Delaware has created, you have to question its wisdom.  Members of the Chancery Court are business-law authorities who have unparalleled expertise in commercial litigation.  In marketing materials directed to companies deciding where to incorporate, the State of Delaware has noted:

Many experienced lawyers believe that the principal reason to recommend to their clients that they incorporate in Delaware is the Delaware courts and the body of case law those courts have developed. They point, in particular, to the national reputation and importance of the Court of Chancery.

.   .   .  The reasons why a separate equity court was created in Delaware are obscure. The important fact is that cases involving corporation law issues came to be concentrated in a separate court in Delaware where there were no juries and where judges were called upon, on a regular basis, to explain the reasons for their decisions in written opinions. Over time, this body of decisional law, and the reputation for expertise in corporate matters which followed, caused more and more jurisdiction over business issues to be centered in the Court of Chancery. In effect, the same kind of symbiosis occurred—and continues—in the court system as in the development of statutory law. The Court of Chancery developed expertise in corporation law matters. Its reputation for expertise led, in turn, to more cases being brought to the Court and, over time, more expertise.

It’s not difficult to imagine how a state legislature, concerned about budget issues, might have viewed the court’s stature and expertise as assets to be monetized.  But I can’t help but wonder if Delaware isn’t diminishing precisely what makes the Chancery Court so special.  As yesterday’s Journal noted:

Delaware’s legal “product,” what it has to “sell” corporations, is a body of business law that has been forged in public view and is refined and certain, says Brian JM Quinn, an assistant professor at Boston College Law School. Once that body of law starts developing in the dark, that product will degrade, he says. “I understand why Delaware is doing this,” he says. “Over the long term, they may wish they hadn’t.”

________

Related links:

• WSJ Law Blog: A Judge and an Arbitrator Too?
• Why Corporations Choose Delaware (distributed by Delaware Department of State – Division of Corporations)
• Court filings in Delaware Coalition for Open Government v. Strine

The “Inside Job Effect” – One Year Later

Just over a year ago, I wrote a post (The “Inside Job Effect”) about undisclosed conflicts of interest among academic economists.  During the past weekend, the American Economic Association took a significant step toward requiring disclosure of such conflicts.  During its annual meeting, which concluded yesterday, the AEA’s Executive Committee adopted the following guidelines, which apply to articles submitted for publication in the organization’s journals:

(1) Every submitted article should state the sources of financial support for the particular research it describes. If none, that fact should be stated.

(2) Each author of a submitted article should identify each interested party from whom he or she has received significant financial support, summing to at least $10,000 in the past three years, in the form of consultant fees, retainers, grants and the like. The disclosure requirement also includes in-kind support, such as providing access to data. If the support in question comes with a non-disclosure obligation, that fact should be stated, along with as much information as the obligation permits. If there are no such sources of funds, that fact should be stated explicitly.  An “interested” party is any individual, group, or organization that has a financial, ideological, or political stake related to the article.

(3) Each author should disclose any paid or unpaid positions as officer, director, or board member of relevant non-profit advocacy organizations or profit-making entities. A “relevant” organization is one whose policy positions, goals, or financial interests relate to the article.

(4) The disclosures required above apply to any close relative or partner of any author.

(5) Each author must disclose if another party had the right to review the paper prior to its circulation.

(6) For published articles, information on relevant potential conflicts of interest will be made available to the public.

(7) The AEA urges its members and other economists to apply the above principles in other publications: scholarly journals, op-ed pieces, newspaper and magazine columns, radio and television commentaries, as well as in testimony before federal and state legislative committees and other agencies.

The new guidelines are just that:  guidelines rather than mandatory rules.  While the AEA tells authors that they “should” make the disclosures described in Guidelines 1-3, authors are not required to do so (although, confusingly, Guideline 4 refers to the disclosures “required” in the first three guidelines, and Guideline 2 contains a similar internal inconsistency).  The only mandatory disclosure appears in Guideline 5, which requires authors to disclose if another party was entitled to review a paper prior to its circulation.

Nonetheless, some prominent economists view the guidelines as a significant step forward.  In particular, Guideline 7, which encourages economists to apply the guidelines in other contexts, could eventually embed the guidelines’ disclosure principles into broadly observed  professional standards.  Moreover, there is no reason that non-AEA journals, the print and broadcast news media, and government entities that make use of economic  testimony or analysis cannot require (versus suggest) the disclosures suggested in the new AEA guidelines.  As economist Gerald Epstein observed in an interview on the guidelines:

These guidelines should be widely promoted and reported on in the press and it would be important for journalists, students and others to try to see if such guidelines can be broadly implemented for other publications, TV and radio appearances, etc. The point would be to make such guidelines a broad norm that are widely implemented.

 

Related Content:

• Economists Set Rules on Ethics, Wall Street Journal, Jan. 9, 2012
• “Stronger than I expected” – Gerald Epstein On AEA Disclosure Guidelines, Economics Intelligence, Jan. 8, 2012
• The Inside Job, no more, Economics Intelligence, Jan. 6, 2012
• The Economist’s Oath:  On the Need for and Content of Professional Economic Ethics, George F. DeMartino (2011)

Noteworthy Words of 2011

As we know from Ecclesiastes, to every thing there is a season. Since we’re in the last days December, this is the season for religious and secular celebrations, reflection, resolutions, and  .  .  .  lists of what was best and worst about the past year. This post represents my own modest contribution to the year-end-list genre: a completely subjective compilation of words or phrases I first encountered in 2011 and found novel or interesting.

“Lehman Moment.”  Throughout 2011, journalists have debated whether the ongoing euro zone economic crisis represents a “Lehman Moment” the for continent. What would a European Lehman Moment look like? The NY Times described it as “a shock so severe that it would cause banking crises and domino bankruptcies throughout Europe.” NPR’s Planet Money painted an even more dire picture:  a Lehman Moment would be an event that would “tear a hole in the fabric of global finance and cause widespread chaos — just like the bankruptcy of Lehman Brothers did back in 2008.”

There’s no doubt that “Lehman Moment” offers an effective shorthand way of communicating the looming danger of a contagious global financial meltdown. But the term has been terribly overused: my Google search of “Lehman Moment” + “Europe” for the past 12 months yielded over 60,000 hits. We should all hope that “find an alternative to ‘Europe’s Lehman Moment’” appears on the 2012 resolutions of financial writers and editors everywhere.

“Zombie Company” and “Zombie Stocks.” Zombies enjoy so much popularity in movies that it was, perhaps, inevitable that we’d see more references to zombies in the financial pages. The “zombie” appellation has been applied in a variety of circumstances. A “zombie company” may be one that’s still operating, but insolvent and unlikely to be able to meet its obligations.

Eastman Kodak, for instance, has joined the zombie ranks  because of its massive unfunded pension liabilities. Fannie Mae has been dubbed the “King of Zombies.” Freddie Mac, Lehman Bros., and Washington Mutual are also high-profile zombies.

The zombie swarm also includes the stocks of companies that continue to trade well after the issuers ceased to operate. A few months ago, the Washington Post profiled such a zombie issuer:  the aptly named Fantom Technologies, which ceased operations in 2002, hadn’t submitted filings to the SEC for over a decade, but whose stock continued to trade in the remote corners of the OTC market until May of this year.

For an entertaining primer on zombie financial institutions, check out Investopedia’s The Curse of the Zombie Banks video (“they may not eat brains, but zombie banks definitely hurt the economy”).

“Retail Regulation.”  It’s what happens when large retailers require their supply chains to adhere to standards more rigorous than those mandated by the government. Earlier this year, Wal-Mart won praise for a move the Washington Post described as “perhaps the boldest example yet of ‘retail regulation,’” when Wal-Mart banned the use of a controversial and common class of fire retardants in products supplied to the retailer. The Post noted that Wal-Mart was “stepping ahead of federal regulators and using its muscle as the world’s largest retailer to move away from a class of chemicals researchers say endanger human health and the environment.”

“Ethics Sinkhole.”  A term used by Max Bazerman and Ann Tenbrusel and their 2011 book, Blind Spots: Why We Fail to Do What’s Right and What to Do About It. The authors use the term term to describe the high-risk areas in which an organization’s informal values differ from its desired ethical values.

The “sinkhole” image vividly communicates the outsized destruction that such organizational pockets can wreak. It also lends itself to use in the context of other types of business disfunction. The still-unfolding News Corp scandal, for instance, can be described as an ethics sinkhole, a governance sinkhole, or a reputational sinkhole. Perhaps companies that have ethics sinkholes are prone to governance and reputational problems as well?

“Locavesting.”  Amy Cortese, author of the 2011 book, Locavesting: the Revolution In Local Investing and How to Profit From It, coined the term “locavesting” to describe a movement that advocates local investing. As Cortese has explained, “[j]ust as locavores eat a diet sourced close to home, locavestors try to invest that way. The idea is to earn profits while supporting your local community. Locavesting is about investing in Main Street, rather than the casino known as Wall Street, and creating a more inclusive and just form of capitalism.”

“Cash Mob.”  A term used to describe buy-local campaigns in which social media are used to increase sales at a local merchant. Basically, it’s a flash mob that comes to spend money.

The Wall Street Journal reported that the first known cash mob occurred on August 5 of this year, when about 100 people showed up to make purchases at a Buffalo NY wine shop. The group had been organized through Facebook and Twitter by Chris Smith, who realized that consumers tended to swarm to small businesses in response to daily deals available through online sites like Groupon. Smith asked himself why discounts were needed to attract customers to good local businesses. The rest, as they say, is history: cash mobs have cropped up in more than 20 US cities.

“Spear-Phishing” and “Whaling.”  For years, “phishing” has been used to describe fraudulent electronic solicitations that offer phony “bait” (“click here to claim your free iPad!” ) to compromise your computer or personal information. During 2011, there seemed to be a proliferation of terms (some marine-inspired, some not) to describe more targeted forms of phishing.

“Spear phishing,” for instance, describes bait that comes with a familiar face: messages that seem to be from co-workers, friends or family members, customized to trick you into letting your guard down online. During 2011, I fell prey to a Twitter-based spear-phishing ploy (“spear twishing”?): an urgent-sounding direct message from an acquaintance who’s a Twitter follower.

Another example: “whaling,” which is spear phishing directed at high-profile organizations or individuals. The the most common targets are government agencies and senior managers and executives.

“Ponzimonium.”  Last month, CFTC Commissioner Bart Chilton gave a speech called The Pandemic of Ponzimonium, in which he discussed an explosive increase in the number of Ponzi schemes.  In addition to his speech, Chilton has written a consumer-education book, Ponzimonium: How Scam Artists Are Ripping Off America, which addresses the same topic.

“Sleazgle.”  I owe this one to CFTC Commissioner Chilton as well. He used the term to describe conduct that is legally permissible but nonetheless sleazy or unethical.

“Oppo Dump.”  I hadn’t heard of this term until quite recently, in news coverage and commentary about GOP presidential candidates.  ”Oppo,” I learned, refers to opposition research: negative information that political campaigns compile about opponents.  Political campaigns use “Oppo Dumps” to supply the negative information to press outlets.  Now, the term is in danger of becoming ubiquitous, as long-shot candidates attain front-runner status, they’re serially subjected to Oppo Dumps, and then revert to to their former status.

My earliest — and by far the most entertaining — encounter with the term Oppo Dump came in a column by Peggy Noonan about the November 9 GOP candidate debate.  Writing about Newt Gingrich’s generally well regarded debate performance, she observed (very presciently, it turns out):

Mr. Gingrich will never not be compelling, intelligent and fearless in his way, but there was a small moment in the debate in which he was asked about his apparently lucrative past lobbying for Fannie Mae. Keep your eye on that. Right now he’s on the uppalator, as a child once called an elevator going up. But the voting starts in 7½ weeks, the press has never really unleashed on him, and it’s Full Oppo Dump time. He may be on the downalator soon.

Regardless of what one thinks about politics in general, the GOP candidates, or the ethics of using opposition research, Noonan’s uppalator/downalator imagery brilliantly conveys the often-transitory nature of political ascendancy.  It’s also useful in describing the vicissitudes of life in general.  To every thing, there truly is a season.

Thanks so much for reading this rather long year-end  post.  I wish you a healthy and happy 2012, and hope that the new year will provide us all with more uppalator than downalator.

STOCK Act Meets Skepticism In the House

STOCK Act faces skepticism in the House – Political Hotsheet – CBS News.

As reflected in the above article, Congress’ recent enthusiasm for the STOCK Act isn’t universal. But reservations about the proposed statute go beyond the wounded pique some House members exhibited at yesterday’s hearing. Rather, witnesses who appeared at House and Senate hearings in the past week have expressed serious substantive concerns about the scope and collateral effects of the proposed legislation.

The SEC’s Enforcement Director, for instance, urged Congress to consider “simple and clearer” legislation and to refrain from making broad changes to the already-complex law of insider trading. His concern: that the STOCK Act might inadvertently make it harder to pursue insider-trading charges in non-Congressional contexts.

Legal scholars who appeared before a Senate committee last week made a similar point. Indeed, Columbia University’s John Coffee proposed replacing the entire STOCK Act with a single sentence. Here’s Coffee’s formulation of a minimalist statute that would resolve the status of members of Congress for purposes of insider-trading law without potentially upsetting the elaborate judge-made law of insider trading:

Members of Congress [and their staffs] shall be deemed fiduciaries with respect to material nonpublic information they receive in the course of performing their duties or as a result of their status, regardless of whether they exchange anything of value for such information or engage in any deceptive act, and they may not purchase or sell or otherwise trade in securities, commodities, security-based swaps or other financial instruments based upon such information, unless such trading is specifically exempted or permitted by rules adopted by either the Securities and Exchange Commission or the Commodity Futures Trading Commission.

This language, Coffee observed, would both address all the shortcomings of the current STOCK Act bills and allow courts to rely on existing case law. Under this formulation, he noted, Congress could avoid the messy task of attempting to define terms like “material” and “nonpublic.”

To me, this approach is simple, elegant, and worth serious consideration.

* * *

Related Background:

• December 7, 2011 Wall Street Journal story: Congress Pushing Curb On InsiderTrading.
• November 30, 2011 Washington Post story: TV Segment On Insider Trading Has Congress Looking At Itself As Members Rush to Support Bills.
• The 60 Minutes “Insiders” segment that set recent events in motion.
• And, if you’re an aficionado of insider-trading law, it’s worth reading (and watching) the testimony of the three legal academics who have testified on the STOCK Act to date: Donna Nagy (who testified before both House and Senate committees), John Coffee, and Donald Langevoort. Click the following links to view written and video testimony before Senate and House committees.

Revolving-Door Rating Analysts: How Serious A Problem?

An article in today’s WSJ discusses statistics that have been filed with the SEC on “revolving-door analysts” — credit rating analysts who go to work for a company they rated. The article notes that committees, not individual analysts, make ratings decisions. Nonetheless, you can’t help but wonder whether the possibility of future employment exerts at least a subtle effect on analysts’ assessments.
According to the interactive feature that accompanies the online version of article, the overwhelming majority of analysts who later joined rated companies merely participated in the company’s rating. However, the interactive content also shows that some of the revolving-door personnel were in a leadership roles and hence positioned to exert influence on the ratings decisions: four were senior officers; eight supervised the ratings of their future employers; and in one case the supervisor was also a senior officer of the rating firm.
Given the structural conflicts of interest that may have played a role on overly rosy pre-2008 ratings (for instance, the market-share pressures rating firms experienced after going public), do you think Dodd-Frank focuses too much on the issue of individual revolving-door analysts?

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Worth Watching: advice on what a company should do/say when approached by a potential acquirer

This 10-minute video interview provides a lot of very useful information on what a company’s CEO and board do if an acquirer comes calling. Advance preparation (whom will you call? what will you say?) and sensitivity to fiduciary duties and potential conflicts of interest are key.
The video also provides insights on why such approaches are more likely to occur now than in the past: huge cash stockpiles and stock volatility may make acquisitions attractive to potential buyers.
Key advice for a CEO who receives an approach: put yourself in your directors’ shoes. If you were in their position, what would you want to know and when?

See this Amp at http://amplify.com/u/a1gjkc

A Belated Recusal Finds A Place In My “Conflicts Collection”

“It’s easier to ask forgiveness than it is to get permission.”

Rear Admiral Grace M. Hopper

In an earlier post, I discussed an example of a recurring type of conflict: an undisclosed financial interest. Now, I turn to the case of Solyndra, the solar-panel firm that received a $535 million Department of Energy (DOE) loan guarantee in 2009, and went bankrupt earlier this year. Solyndra’s demise prompted questions over how the financially shaky company was able to qualify for the loan guarantee and whether political connections played a role in the selection process. As interesting as those question are, this post focuses on an ethical issue that’s embedded within the larger Solyndra story, and what it tells us about how conflicts of interest should not be handled.

Documents released in response to a House investigation of Solyndra show that DOE ethics officials recognized that allowing DOE employee Steve Spinner to work on Solyndra’s DOE loan guarantee application presented at least the appearance of a conflict of interest. Spinner’s wife was a partner at Wilson Sonsini Goodrich & Rosati, the prominent California law firm that represented Solyndra (as well as other DOE applicants).

In an opinion dated September 18, 2009, DOE ethics personnel described Spinner’s job functions as monitoring the progress of grant and loan applications, but without involvement in DOE decisions on individual applications. The opinion stated that, on applications in which Wilson Sonsini was providing services, Spinner was permitted to carry out his normal job functions, but was not to participate in any discussions about such applications. A few weeks later, in a September 23 email, Spinner confirmed that “I will [emphasis added] recuse myself from any active participation in” several companies’ DOE applications, including Solyndra’s.

On the face of it, Spinner’s conflicts issue appears to have been addressed in exemplary fashion: he obtained an ethics opinion telling him exactly what he was permitted to do vis-a-vis Solyndra, and he committed in writing that he would recuse himself from active participation in Solyndra’s application.

What’s the problem with Spinner’s recusal? First, there’s a significant timing issue because both the ethics opinion and Spinner’s confirmatory email post-dated Spinner’s involvement in the Solyndra application. In fact, both the ethics opinion and Spinner’s September 23 email were written after the Solyndra loan guarantee had closed. At this point, his prospective commitment to refrain from active participation was meaningless.

In addition, Spinner’s Solyndra-related activities appear to have gone far beyond simply “monitoring” the progress of Solyndra’s application. Indeed, emails show that Spinner actively sought to expedite Solyndra’s loan, acted as an intermediary between company and government officials, and reassured White House personnel who were concerned about the company’s financial viability.

The timing of Spinner’ activities illustrates a key aspect of recusal: you’re supposed to do it before, not after, you’ve worked on a matter that presents a conflict. Recusing yourself belatedly doesn’t provide after-the-fact absolution, or legitimize impermissible participation that’s already occurred.

There’s a reason the government and private companies require personnel to get clearance before working on a matter that involves a possible conflict: if the conflict is addressed too late, a do-over is time-consuming, wasteful, and sometimes (as in the case of Solyndra’s DOE application) impossible.

In sum, Admiral Hopper’s famous observation (quoted at the start of this post) doesn’t apply to conflicts of interest. You really do need to get permission before charging ahead. As Solyndra illustrates, employees sometimes overlook this point, at considerable reputational cost to themselves and their organizations.

Two Internet IPOs break new ground re super-voting shares

Share structures for Groupon and Zynga IPOs will feature an unusually large disparity in voting rights. Supporters of dual-class structures argue that they can protect a company from short-term pressures, but opponents contend they permit founders to continue running a public company as their own.

Amplify’d from www.wallstreetjournal.com

Two-tiered share structures skewed toward insiders aren’t new in U.S. companies. But the large gap between the voting rights of the two classes of shareholders at Groupon and Zynga breaks new ground not just for the Internet sphere but for companies broadly, investors and corporate-governance experts say. As such, the two IPOs could prove a test of investors’ appetite for executive control. Michael Garland, who manages the corporate-governance program for five New York City pension funds with $120 billion in assets, says giving founders supervoting shares raises the risk “they will continue to run it as their own company.” He added: “We believe in one-share, one-vote.” With Groupon and Zynga, the added voting rights could be used “as a wedge by investors” to try to get the price down in the meetings between management and investors that typically precede IPOs, said Linda Killian, who manages a fund that invests in IPOs at Renaissance Capital in Greenwich, Conn. Others say it can make sense for leaders to use available tools to maintain control. Lise Buyer, a former Internet stock analyst during the bubble, a onetime Google Inc. executive and now an adviser to companies pursuing IPOs, says the structure can be appropriate for certain company founders who may face pressure to make decisions to boost short-term profits at the expense of long-term goals. Read more at www.wallstreetjournal.com

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