The Seaboard Report:
A Helpful SEC Guide To Assess The Quality of Corporate Governance

The Seaboard Report: A Helpful SEC Guide To Assess The Quality of Corporate Governance

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ustomers undoubtedly have besieged reps with questions about companies embroiled in scandals, whether those scandals relate to earnings manipulation or mutual fund late trading and market timing. How should reps respond to customer concerns?

Practically speaking, reps do not have a crystal ball to accurately predict whether a company will do what is necessary to rectify a problem. However, the remedial measures that a company has performed, to date, are important. And reps should have a basic understanding of them.

Further, to amplify the discussion, I recommend that reps respond to questions by considering the "Seaboard Report" criteria, found at http://www.sec.gov/litigation/investreport/34-44969.htm. In this 2001 litigation release the SEC details the factors that it will consider in deciding whether or not to bring an enforcement action against a particular company for regulatory misconduct. Let's examine the 13 factors that the SEC sets forth.

1. What is the nature of the misconduct involved? An honest mistake, negligence, willful misconduct or "unadorned venality"? Were the company's auditors misled? Reps should have a basic understanding of what the regulators allege as to the "state of mind" of those responsible for the misconduct.
   
   
2. How did the misconduct arise? Sales pressure by the company or a "tone of lawlessness set by those in control of the company"? What compliance procedures were in place and why did they fail?
   
   
3. Where in the company did the misconduct occur? At the top? Did senior management not participate but, instead, turn a blind eye? Was the conduct isolated or is it symptomatic of the way the company does business? Reps should know the company employees against whom the regulators are bringing actions.
   
   
4. How long did the misconduct last? One quarter or several years? One time only? Also, if the misconduct facilitated the company's efforts to go public, reps should understand that the SEC will view that misconduct as being more egregious.
   
   
5. How much harm has the misconduct caused investors and others? Reps should note whether the price of the stock has fallen significantly upon the discovery and disclosure of the misconduct.
   
   
6. How was the misconduct detected and who uncovered it?
   
   
7. How long after the discovery of the misconduct did it take for the company to implement an effective response?
   
   
8. What steps did the company take upon learning of the misconduct? The SEC outlines several possible remedial actions. First, did the company immediately stop the misconduct? Are those responsible for the conduct still with the company? In the same positions? Likewise, did the company "promptly, completely and effectively" disclose the misconduct to the public and the regulators? Furthermore, did the company identify additional related misconduct (on its own) and identify the extent of damage to investors and others? Finally, did the company appropriately recompense those harmed?
   
   
9. What processes did the company follow to resolve many of these issues and ferret out necessary information? Were the Audit Committee and the Board of Directors fully informed; if so, when?
   
   
10. Did the company "commit to learn the truth, fully and expeditiously"? Here the SEC wants to learn if the company conducted a thorough review, who (insiders or outsiders) performed the review, and who (insiders or outsiders) oversaw the review. Were there any scope limitations placed on the review; if so, what were they?
    
    
11. Did the company fully cooperate with the regulators? Companies normally issue press releases that they are cooperating fully, but reps should consider the following factors. Did the company make available to the regulators the results of its review and provide sufficient documentation? Did the company identify possible violative conduct and provide evidence to facilitate prompt enforcement actions against the wrongdoers? Did the company voluntarily disclose information that the regulators did not request and that otherwise might not have been uncovered?
    
    
12. Will the conduct recur? Has the company adopted new and more effective internal controls and procedures designed to prevent a recurrence?
    
    
13. Is the company the same company in which the misconduct occurred, or has it changed through a merger or bankruptcy organization?

In conclusion, when a customer raises a concern as to a company, reps now can answer the question by discussing what the particular company allegedly did wrong, what it has done to remedy the misconduct, and what the company plans to do to ensure that the misconduct does not recur, in accordance with these SEC guidelines.