Archive for the ‘Ethics’ Category

This week, the Corporate Reform Coalition released a video interview with Vanguard Group’s founder, John C. “Jack” Bogle, about his vision in 1975 to set up a different kind of mutual fund company and how he thinks companies should best serve their shareholders.

Watch Vanguard’s founder Jack Bogle talk about a shareholders right to information like a company’s political spending.

Bogle, who founded Vanguard over 40 years ago based on a novel principle at the time- that a mutual fund company should be owned by the shareholders of its funds and not just by management- remains committed to that vision today. He fosters that commitment by speaking out on broader investor issues, for example, corporate political spending disclosure.

Bogle has submitted public comment to the U.S. Securities and Exchange Commission (SEC) on the securities law professor’s petition calling for the SEC to put forth a rulemaking that would require publicly- held companies to disclose how they spend money in politics. When asked why he commented on the petition Bogle replied, “It’s the shareholder’s right to know what we are all doing,” referring to corporate activities.

bogle-shareholder-right2-twitterBogle’s remarks come at a significant time. Investor advocates are reaching a tipping point in their push for the SEC to issue a rule requiring companies to disclose how they spend money in politics.

As of October 21, outside spending in the 2016 election alone has totaled over $1 billion, much of which is coming from dark money groups that do not have to disclose their donors. This makes it impossible to track secret corporate influence. American know that more dark money in our politics is not good for the health of our democracy, but when faced with adversaries such as giant corporations it’s hard to see an easy way to make change.

One way to combat secret corporate influence is to bring it into the light, which this disclosure rulemaking would do. Unfortunately, the SEC has been dragging its feet on the rulemaking and Congressional Republicans have helped the stagnation by inserting an inappropriate policy rider into the federal budget forbidding the SEC from finalizing (though not from working on) the rule.

For the last decade, investors have been filing shareholder resolutions at individual companies and seeing promising responses from many who are interested in increasing their transparency. Without a uniform rulemaking, though, others are allowed to continue to keep shareholders and the public in the dark about how they spend in politics. Even those who do disclose may not do it the same way as other corporations, making it hard for investors to actually use the information to make corporate comparisons.

How do mutual funds fit into this picture? The major ones, like Vanguard and BlackRock, have incredible power in corporate elections; power accumulated from the millions of retirement savings accounts they manage. With the volume of shares they control, the major mutual funds can and should support shareholder resolutions calling for political spending disclosure. Instead, Vanguard, specifically, either votes against or abstains from voting for these resolutions at the companies where its clients’ savings are invested. The weight of the major mutual fund vote means that many times resolutions fail to get majority support without it.

All shareholders, whether the traditional kind or those who own shares through their mutual fund investments, “are entitled to the information they want, they’re owners,” says Bogle in the interview. Therefore, if shareholders are calling for information about how companies spend money in politics so that they can weigh the reputational risk of this activity, companies should listen and increase their transparency.

The gravity Jack Bogle continues to hold within the investment community is immense, and we should heed his words about shareholder rights. The SEC should make strides on the political spending disclosure rule and Congress should not stand in its way. Until the rule is finalized, though, mutual funds should not hamper the efforts of shareholders calling for disclosure at individual companies.

Bogle seems optimistic that the tide is turning in shareholders’ favor. “When shareholders aren’t served first the world will change,” he says. “And it is changing.”

Originally published on the Corporate Reform Coalition’s website.

Disclosures from a sick Wells Fargo obviously soil the efforts of deregulators on many issues. One of these is the very issue of disclosure.

In the Wells Fargo scandal, more than 5,300 employees created more than 2 million accounts unsolicited accounts for their customers.

Photo courtesy J B/Flickr, CC BY 2.0.

Photo courtesy J B/Flickr, CC BY 2.0.

First, the Wells Fargo employees faked the accounts to avoid being fired for failing an account creation quota.  Then, their bosses pressured them to meet quota because the bosses got bonuses based on quotas. And finally, their bosses and bosses’ bosses all the way to the CEO got bonuses when investors drove up the stock price as those investors figured those ever expanding account creation numbers demonstrated exceptional management.

Twelve times in the last half decade, CEO John Stumpf made reference to those account numbers on the quarter calls with Wall Street analysts.

The very core of this pathology involves disclosure.  In this case, both non-disclosure and fake disclosure.

Yet at this very time, Chair White’s Securities and Exchange Commission is railroading through a monster rule designed explicitly to reduce disclosure. Keeping with the tradition of misdirection, this reduction is misnamed the “Disclosure Update and Simplification.”

As Wells Fargo was diligent in reporting rigidly account sales figures, here are simply a few of the inconvenient items that are obviously material to how an investor values this stock that Wells Fargo elected not to disclose.

  • In 2009, Wells Fargo executives recognized that certain ambitious sales programs – such as “Jump into January” – were generating fraudulent accounts. This was not disclosed.
  • In February 2011, Chairman and CEO John Stumpf reportedly received an email from a 22 year veteran of the company explaining how the appearance of growth in new accounts could be faked; this employee was subsequently terminated. This was never disclosed.
  • In 2011, employee satisfaction surveys reportedly found that bank employees were uncomfortable with instructions from management to push customers to buy products. This was not disclosed.
  • In 2012 the community banking unit began to investigate suspicious practices in areas with high levels of customer complaints, such as Southern California. These investigations reportedly led to the firing of 200 employees in February 2013. This was not disclosed.
  • In 2013 and 2014, the board and management took action in response to these signals and at the behest of regulators— including increased risk management standards in the community banking divisions, modification of some sales goals, and an internal investigation by Accenture and Skadden, Arps on which the board was reportedly updated. This was not disclosed.
  • The Consumer Financial Protection Bureau began its investigation in 2013. This was not disclosed.
  • Wells Fargo employees delivered petitions with more than 10,000 signatures to the board at both the 2014 and 2015 annual meetings that urged the board to recognize the link between Wells Fargo’s high-pressure sales quotas and the fraudulent opening of accounts without customer permission. These petitions called on Wells Fargo to cease using these high-pressure quotas. This was not disclosed.
  • The New York Times reports that even after the company began to recognize the problem and provide ethics training that warned against creating false accounts, the continued sales pressure from management overwhelmed the ethical training. When employees either refused to sell customers products they did not want, or reported fraudulent account creation to the Wells Fargo ethics line, they were subject to discipline including termination. This was not disclosed.

While viewing this perfect example of non-disclosure, Chair White has been speeding through her SEC a major proposal to gut disclosure rules. The bewilderment of changes includes gutting disclosure on executive compensation.

The Agency proposes to delete its requirement that CEO and other senior officer pay be disaggregated. Disaggregation allows investors to see what in the pay package is cash, stock, options, etc. Had it been clear to investors that the millions in bonuses for the top brass stemmed from line salespeople (paid $25,000 a year) to open an absurdly high eight accounts per customer,[1] or be fired, or cheat and try not to get caught, then this runaway fraud might have lasted two years, instead of a possible two decades.

In addition,  White plans to reduce what firms using repurchase agreements (repo) for loans must disclose. Repo is like a pawn shop, where you deposit a watch worth $1,000 and get $900 for a day, then you buy back the watch for $1,100, which you agreed to from the outset. (You need to do well at the horse race track in the interim for this to work out for you.)  The financial crisis demonstrated that firms such as Lehman had grown addicted to repo, and had manipulated tax and other rules to enable its dependency. In fact, repo disclosure should be enhanced, not deleted.

There are a number of other disclosure rules that Chair White wants to white out.

On many items, White says the SEC won’t require a disclosure if GAAP requires it. GAAP may stand for “generally accepted accounting principles,” but that must be an inside joke since they’re not generally accepted. U.S. GAAP differs from accounting standards in other countries (an acute problem given that many public companies operate in multiple nations). And it can change, regardless of what the SEC does. As with many other proposals, the Agency is ceding its responsibility to safeguard disclosure.

That’s not a very cheery pep talk to write comment for the Nov. 2 deadline. So, Citizens, just try this:

Write Ms. White at, put this in the subject line:  Re: “Disclosure Update and Simplification,” Proposed Rule; File No. S7-15-16; RIN 3235-AL82, and write something like: “Chair White,  Wells Fargo shows that all’s not well that ends well short of full disclosure. Wells Fargo shows that your disclosure idea goes in the opposite direction. Investors want to know.  Sincerely, your name.”

(Oh, and white-out apparently doesn’t work on computer screens, which is double-entendre.)

wellsgraph2The Fair Arbitration Now coalition strongly denounces Wells Fargo and its CEO, John Stumpf, for refusing to end the bank’s practice of preventing defrauded customers from suing in court. At a hearing held in the U.S. House of Representatives Committee on Financial Services yesterday, Stumpf stated unequivocally that Wells Fargo will continue to force consumer disputes into secret individual arbitration. The hearing examined Wells Fargo’s massive scheme to fraudulently open accounts in his its customers’ names.

The FAN Coalition is disappointed, but not surprised, that the CEO of a powerful financial institution would publicly champion forced arbitration.  In 2015, the Consumer Financial Protection Bureau (CFPB) released a comprehensive study on forced arbitration, which found that it is heavily rigged in favor of financial institutions. Among other things, the CFPB found that in forced arbitration, consumers bringing claims against corporations won only 9 percent of the time. However, when corporations sued their customers, the corporation won in 93 percent of arbitrations. Additionally, arbitration proceedings are completely confidential, which allows which allows corporations like Wells Fargo to hide widespread wrongdoing, as was the case with their fraudulent account cross-selling scheme.

Yesterday, Stumpf was asked by Rep. Brad Sherman (D-CA) whether his bank would continue to invoke forced arbitration clauses buried in the fine print of its customer contracts to prevent customers from holding the bank accountable for its illegal activities. Stumpf refused to end the practice, stating that he “believes in arbitration.” Stumpf previously declined to restore his customers rights last week when asked by Sen. Sherrod Brown (D-OH) during a hearing held by the U.S. Senate Banking Committee. At the same Senate hearing, Sen. Elizabeth Warren (D-MA) stated that the bank’s use of forced arbitration allowed them to cover up their patterns of abusive conduct, noting that “[i]f we had class actions on thisback in 2010, 2009, 2008, then this problem never would have gotten so out of hand.”.

The CFPB recently proposed a rule to restore consumers’ right to join together in class actions. More than 280 consumer, civil rights, and small business advocacy groups and over 100,000 individuals commended the CFPB for taking this crucial step to limit big banks’ and other financial companies’ efforts to escape accountability for breaking the law, and urged the agency to use the full force of its authority to restore consumers’ right to choose how to resolve disputes with financial institutions.

497px-edward_snowden-2Oliver Stone’s 2016 film Snowden debuted at the height of a controversy over whether or not President Obama should pardon Edward Snowden. His defenders argue that his disclosures prompted important legal and policy changes, while his opponents argue that he’s a criminal who should come back to the United States to stand trial.

The film itself paints a portrait of Snowden as a young conservative from a military background. He begins his career with the Central Intelligence Agency (CIA) with a loyalty to the United States and a desire to serve his country. As he transitions through different positions with private contractors in the intelligence community, he becomes increasingly disturbed by the breadth of government mass surveillance systems. What he witnesses at work haunts him – he develops an aversion to being photographed – and plagues his relationship with his girlfriend. Eventually, it leads him to flee to a hotel room in Hong Kong where he works in secret with The Guardian’s Glenn Greenwald and Ewen MacAskill and documentary filmmaker Laura Poitras. They race against the clock to make his story public before the government can arrest him.

The rest, as they say, is history.

It’s easy to get lost in the controversy of Snowden’s disclosures, but it’s important to remember the context of his decision to go public. Snowden was familiar with the whistleblowers in the intelligence community who came before him. Despite making their own disclosures through designated channels within the government, these workers had no safeguards against the severe retaliation they faced.

Take the case of Ed Loomis, a former National Security Agency employee and contractor within the intelligence community. After he reported an ineffective and wasteful surveillance program through a designated government hotline, the government responded by revoking his Top Secret security clearance, rendering him unable to work in the intelligence community. The Federal Bureau of Investigation (FBI) also raided his home for five hours. He and his wife watched as agents in Kevlar vests confiscated their possessions.

Contractors in the intelligence community deserve better than what happened to Ed Loomis. Public Citizen and many other organizations committed to open and transparent government support extending protections to contractors who blow the whistle on waste, fraud, and abuse in the intelligence community.  Without safeguards against employer retaliation, whistleblowers may either stay silent about government wrongdoing or make disclosures through the media.

Lawmakers recognize the urgent need for reform, but change has been slow. In 2015, Sen. Claire McCaskill (D-Mo.) introduced a bill to extend whistleblower protections to contractors in the intelligence community. In theory, this bill should not be contentious. Certain intelligence community contractors had access to such protections for a limited time without any evidence of negative consequences to national security. But, lawmakers controversially revoked these rights in 2012. So far, Congress has failed to take action on Sen. McCaskill’s critical measure.

Snowden ends with familiar audio clips from the 2016 presidential primary debates where the candidates voiced their opinions about his actions. Their reactions are mixed, but frustratingly, there is no discussion of the much-needed whistleblower protection reforms like those in Sen. McCaskill’s bill.

The controversy over Snowden and his 2013 disclosures is unlikely to end anytime soon. However, if policymakers want to prevent future national security leaks, they should make whistleblowing safe for all intelligence community workers – including contractors. Congress should enact Sen. McCaskill’s bill to protect these individuals who bravely risk so much in serving the public good.

IRS Commissioner John Koskinen’s appearance in front of the House Judiciary Committee on Wednesday was a missed opportunity to advance an important discussion about nonprofit governance. Members of the committee from both parties chose to create a political spectacle rather than talk about real solutions for problems with the definition of political activity for tax-exempt organizations.

Republicans proceeded as though the hearing was a genuine impeachment hearing, while denying Commissioner Koskinen any kind of due process –including the rights to have counsel present and to call and cross-examine witnesses.

John Koskinen

IRS Commissioner John Koskinen, courtesy of Brookings Institution/Flickr

On the other side of the aisle, many Democrats chose to question the Commissioner about Donald Trump’s unreleased tax returns and the Donald J. Trump Foundation’s alleged self-dealing. Some Democrats did defend the Commissioner and labeled the proceeding a “sham” and a “farce.”  Even though Koskinen made it evident early in the hearing that he could not comment on particular taxpayer situations, a number of Democrats asked again and again about thinly veiled hypotheticals relating to Trump’s tax situation.

It is understandable that Democrats would not ask Koskinen questions related to the impeachment attempt by the House Freedom Caucus, given that the impeachment is doomed to fail and is merely designed to make headlines. Democrats could have used the opportunity to show the American public that they are serious about creating clearer rules for tax-exempt organizations rather than respond to a political attack with a political attack of their own.

In fact, members of both parties could have used this as a chance to confront the dysfunction and disunity that has plagued Congress. Instead of asking the Commissioner questions he has already answered and accusing the Commissioner of nefarious acts of which the Treasury Department’s independent Inspector General and the Department of Justice have cleared him, members should have asked substantive questions on topics that can move the government forward.

For example, members of the committee could have used the opportunity to ask Koskinen about the negative effects that the current vague rules have on nonprofits – especially 501(c)(3) organizations. They could have asked about the effects of the Congressional prohibition on the IRS’s ability to engage in rulemaking activities for 501(c)(4)s. Or, they could have asked about how to improve the current tax regime for non-profit organizations moving forward.

Without clearer rules to define political activity, risk averse 501(c)(3)s will be forced to refrain from civic activities that should be permissible because they do not want to jeopardize their tax-exempt status. In addition, bad rules cloud the waters when it comes to responding to an attack on an organization’s core mission. When someone close to a political candidate compares refugees to skittles, how can a refugee-focused 501(c)(3) respond without violating the (c)(3) ban on political activity? There are nonpartisan ways to respond, but because the rules are so unclear, most would choose to remain silent rather than take any risk they could accidentally stray over the line.

The time has come to stop using the IRS to further partisan political goals and instead acknowledge the important nonpartisan role it plays in governing tax-exempt organizations and the critical responsibility it has in maintaining American democracy.

© Copyright . All Rights Reserved.