pascalsview

The SEC's Colossal Failure of Oversight-- Isn't This a Violation of the Business Judgment Rule?

The damning New York Times headline, "SEC CONCEDES OVERSIGHT FLAWS FUELED COLLAPSE," from a September 26th article by Stephen Labaton, will hopefully end up as more than a footnote in the long list of misdeeds by the 'stewards' of the American economy that have brought American capitalism to the precipice of systemic financial collapse. According to the article, a report by the inspector general of the SEC asserts that "voluntary regulation does not work" and that the SEC's oversight program for the investment banks "was fundamentally flawed from the beginning."

The article goes on to state:

The report found that the S.E.C. division that oversees trading and markets had failed to update the rules of the program and was “not fulfilling its obligations.” It said that nearly one-third of the firms under supervision had failed to file the required documents. And it found that the division had not adequately reviewed many of the filings made by other firms. The division’s “failure to carry out the purpose and goals of the broker-dealer risk assessment program hinders the commission’s ability to foresee or respond to weaknesses in the financial markets,” the report said.

We should not gloss over the importance and the far reaching nature of this indictment of the SEC by the SEC's inspector general. The most fundamental fiduciary duty in business is the Duty of Oversight. Oversight is a theme which binds together the more commonly referred to fiduciary Duties of Care, Loyalty, Confidentiality, and Disclosure. Violators of the fiduciary duties listed above often seek refuge in the Business Judgment Rule and try to to hide behind 'squishy' judgment call concepts like "good faith" and "honest belief". But the Business Judgment Rule stands on oversight, and the SEC clearly failed in its duty of oversight of the investment banks. In my view, in addition to the bankers, the regulators themselves should also be held responsible for this crime against America.

Below is a definition of the rule, taken from the white paper, "A Simple Guide to the Basic Responsibilities of VC-Backed Company Directors", written by the Working Group on Director Accountability and Board Effectiveness:

Business Judgment Rule
Creates a presumption that in making a business decision, the directors of a company acted on an informed
basis, in good faith and in the honest belief that the action taken was in the best interests of the company.
The business judgment rule helps protect a director from personal liability for allegedly bad business
decisions by essentially shifting the burden of proof to a plaintiff alleging that the director did not satisfy
its fiduciary duties. This presumption and the protections afforded by the business judgment rule are lost if the directors involved in the decision are not disinterested, do not make appropriate inquiry prior to
making their decisions, or fail to establish adequate oversight mechanisims.

All corporate directors and persons in positions of accountable oversight responsibility need to commit these rules to memory-- and, more importantly, to act on them in the daily course of business.

Aspen Ideas Festival: Peter Hirshberg Interviews Jim Steyer About How Children Must Learn Responsible Digital Citizenship on the Web

Technorati's Chairman,Peter Hirshberg, is on the move at the Aspen Ideas Festival-- his video blog provides an excellent forum for impromptu commentary from influential thought leaders in various fields who are attending the conference (link below). Globally, children are developing differently as a result of the pervasive influence of the Internet in their social relations. Jim Steyer, CEO of Common Sense Media, explains why it is imperative to define 'rules of the road' for every kid on the Internet and the role that his organization plays as a thought leader in this area. According to Steyer, "this is a huge issue of ethics and responsibility . ... kids get this, parents are clueless but know they should." Despite many challenges when it comes to media content regulation, Steyer is optimistic about the future. This important discussion that ties directly into the that we discussed at our Socrates Society seminar last week on issues of the Media and our Conflicting Values. to watch the video: click on the following link:

http://fora.tv/myfora/PeterHirshberg/clip/127/Aspen_Ideas_Festival_Interview_Jim_Steyer

Re-Defining the Public Interest in the Media Torrent of the Internet

Media and Our Conflicting Values: Day 3

On our last day of this Socrates Seminar, we jumped squarely into the discussion of the Internet that we all wanted to have since Day 1.

First, we acknowledged the disruptive transformation of the media away from its historical one-to-many controlled distribution model, which was largely restricted to professionally produced print, radio, and linear video broadcasting content. We discussed how the Internet’s broadband infrastructure has supported the development of a global multi-media content stream now defined by many content creators, both professionals and amateurs. Today we are inundated by countless streams of data broadcast in a free flow of information that is truly a torrent of bits.

Research has shown convincingly that the attention span of Americans has shortened substantially over the past several decades and that the rate of change in this direction continues to accelerate.
Are we doomed to being Information Snackers, a nation of dilettantes distinguished only in being a mile wide and an inch deep in our thinking? Does this trend raise troubling questions and pose risks to the integrity of our democratic society?

I think so. Why?

First, because we are drowning in choice. While America’s obsession with Freedom is empowering, too much choice is debilitating. We have too many choices in the Internet Age of mass customization in digital media. While people like to speak of their love of choices, in fact, people hate choices. Notice the incredible power of global brands today after the initial view that the dawn of the Internet rendered traditional brands worthless.

What are some of the nasty implications for democracies overwhelmed by media choices? In my view, the hyper abundance of choice makes individuals increasingly susceptible to manipulation by groups that have an agenda—especially an agenda associated with power and manipulation of masses of people (does anyone doubt that Al Qaeda has developed a sophisticated web presence, for example?)

The web has massively reduced the costs of coordination among large groups and truly revolutionized social collaboration on a large scale—for a positive example, consider the fundraising powerhouse of the Obama campaign and the massive empowerment and inclusion in the democratic political process of otherwise alienated and disenfranchised groups of American society.

There are many good things associated with these paradigmatic changes in the American political process enabled by the Internet borne media revolution.

But we should also consider the corner cases, the potential for abuse, for manipulation, for the propagation of lies through the digital media. We need to remember the potential for Tyranny of the Majority in a digital media search construct that determines what rises to the top by its popularity.

As Newton Minow, Chairman of the FCC said in his historic address to the National Association of Broadcasters in 1961, “some say the public interest is merely what interests the public. I disagree. … broadcasting, to serve the public interest, must have a soul and a conscience, a burning desire to excel, as well as to sell; the urge to build the character, citizenship and intellectual stature of people, as well as to expand the gross national product.” Promoting citizenship! A novel concept, and one that I have written about extensively in this blog in the context of the Democracy in America Revisited Series and Professor Michael Sandel.

In my view, being right and doing the right thing should have nothing to do with what is popular and everything to do with the responsible exercise of leadership (something that is in very short supply in America today). Having technology drive people to the most popular result only accelerates the mediocrity that Alexis de Toqueville foresaw for American democracy.

We should not let our passion to uphold the First Amendment’s guarantee of freedom of speech trump the obligation that we have as a democratic society to keep our citizens informed of objective facts so that they can responsibly exercise their civic responsibilities. To be clear, I do not see this statement as being unsupportive of the First Amendment in any way.

Unfortunately, our discussion on Day 3 did not address a redefinition of the Public Interest.

Domain expertise, an objective mastery of the facts and the nuances associated with a specific body of knowledge, requires more than a passing acquaintance with that domain (would you go to a doctor for surgery who is not truly an expert in his/her field?). In my view, the knowledge crisis facing our next generation will be rooted in the misconception that surface knowledge is sufficient to impart expertise.
We are certainly still in our infancy in this new realm of digital media, but it is abundantly clear that technology has left our regulatory institutions in the dust. While I am a strong believer in the positive power of the market, I fear for those members of our society who will be left behind, for the voices that will not be heard.

The Government is a steward of the Public Interest, and that Public Interest will, of necessity, be redefined when we face a crisis. There needs to be a cool hand, a slow, deliberative process, that gets us to the right answer. Unfortunately, the history of regulation in America shows us that it is most often reactive and likely to generate severe, negative unintended consequences (Sarbanes Oxley, for example).

While I greatly enjoyed our Socratic discussion, I left the seminar continuing to ask myself, what will force this question, and how great a cost will our society bear along the way?

Of Free Markets, Regulation, and Tipping Points

A very interesting Day 2! Some highlights:

First Amendment issues and the specific domain of government regulation over free speech are narrowly confined to content creators over the licensed spectrum. For example, had the famous Janet Jackson Super Bowl breast exposure incident occurred on cable TV as opposed to broadcast TV, there would have been no regulatory issue over indecent exposure and hence no grounds for the FCC to get involved.

In short, you can be the willing consumer (or the inadvertent and unwilling spectator) of the most indecent behavior embedded in content on cable TV anytime and cannot object to it on grounds of Public Standards of decency because you have paid for the basic cable TV transport infrastructure. If the content is broadcast over the government licensed spectrum, then it's a totally different story, as you have entered the domain of the Public Trust.

Today, 95% of US homes are passed by cable and increasingly ubiquitous access to the Internet brings streaming media of just about anything you can think of all the time. Most people get their content from new forms of media that are unsupervised and unaccountable to anyone other than The Market. Many people may feel this is not a problem at all-- on the contrary, they may see it as a blessing.

Licensed spectrum broadcast content is now dwarfed by other media transports. In short, the domain of the Public Trust, and thus standards of socially and morally acceptable program, are hurtling toward irrelevancy in our new digital world.

My problem with this is that a few clicks away for ANYONE, especially children, you will find abominable violence, graphic examples of human enslavement for sexual exploitation, and hard core porn. The evidentiary record is increasingly showing that exposure to these types of negative human behaviors has a bad influence on children and absolutely impacts their social development.

The consequences of these trends are not well understood, but, in my view, these tectonic shifts in the landscape of content distribution will reach a tipping point that will trigger new regulation. Can the market self-regulate? Perhaps, but at what cost in the process? While America was built on freedom of speech, the proliferation of freedoms in the Digital Age may substantially fray the fabric of our society before we reach a new equilibrium.

Whether or not we think this is a good thing, we are already in the soup.

Some Thoughts on Inappropriate Language, Dignity, and Bill Clinton

The word 'scumbag' should not be in the lexicon of any current or former U.S. President, living or dead.

I was disappointed, but not surprised, to learn that former President Bill Clinton went directly into the gutter to berate Todd Purdum, the Vanity Fair reporter who wrote a thoroughly scathing article about President Clinton's penchant for excess in the current issue of the magazine. Recognizing that President Clinton threw out the 'Dignity' baby with the Lewinsky bath water some years ago, it is still hard for me to believe that a man with Clinton's vision doesn't consider himself to remain a steward of America's image as he defines an unprecedented public role for himself in the election of 2008. Clinton's instantly infamous 'scumbag interview' will not soon be forgotten (click here for links).

As much as they are reprehensible and undignified for a former President, Clinton's cutting remarks are also symptomatic of the American disease and reveal more about the sorry state of this country than they do about Clinton.

As we ask ourselves what it means to be an American and search for something to bind us together as citizens this pivotal election year, we need to recognize that we can only cure the American Malaise of the early 21st century if we pull our country's image out of the "I want it all, and I want it now" hole that has swallowed former President Clinton and many others in positions of trust and leadership.

President Clinton is speaking at Radio City Music Hall on June 17 in New York as part of The Minds that Move the World Speaker Series.

I was in a cab driving up Avenue of the Americas last Monday morning and saw the famous marquee wrapping around the Radio City Music Hall, announcing 'Cindy Lauper', the 'Indigo Girls', 'President Bill Clinton', and the 'Steve Miller Band'. My big question is whether, by the time Bill Clinton is scheduled to open for Spinal Tap, will he precede or follow the Puppet Show?

The Black Knight and Hillary Clinton-- Separated At Birth?

Pay no attention to any collateral damage to the Democratic Party.... it's just a scratch.

Click here to see the entire Monty Python and the Holy Grail Black Knight scene on YouTube

Smart Car Scores Exceptionally Well in IIHS Crash Safety Tests

The Smart ForTwo, which is the smallest "micro-car" ever tested by the Insurance Institute for Highway Safety (IIHS) scores very well in safety crash tests!

According to the reviewers at IIHS:

The ForTwo is the smallest car the IIHS has ever tested. "All things being equal in safety, bigger and heavier is always better," said institute president Adrian Lund in an statement. "But among the smallest cars, the engineers at Smart did their homework and designed a high level of safety into a very small package."

The car scored extremely well for frontal and side crashes but did not do as well in protecting passengers from whiplash. Comparing the IIHS data to the National Highway Traffic Safety Administration (NHTSA):

In the NHTSA front crash test, the ForTwo earned the top rating of "Five Stars" for driver protection, but just "Three Stars" for passenger protection. Few vehicles today get ratings as low as three stars in NHTSA's front crash tests.

The IIHS uses a different type of front crash test and does not place a crash test dummy in the passenger seat. While NHTSA tests vehicles by crashing them straight into an immovable barrier, the institute crashes vehicles into a deformable barrier so that just part of the vehicle's front end strikes it.

My takeaways: This car is an ideal urban vehicle and should not be driven at high speeds. See my forthcoming post on the maiden voyage of my Smart ForTwo (including my first experience with ForTwo highway driving)!

Democracy's Byproducts and American Exceptionalism-- Prison System Update

Adam Liptak of The New York Times has recently written a very informative and insightful series on America's prisons. Updated statistics and analysis from "Inmate Count in U.S. Dwarfs Other Nations" support comments made in my April 13 post, "Have Prisons Become America's New Social Safety Net?":

Criminologists and legal scholars in other industrialized nations say they are mystified and appalled by the number and length of American prison sentences.

The United States has, for instance, 2.3 million criminals behind bars, more than any other nation, according to data maintained by the International Center for Prison Studies at King’s College London.

There is little question that the high incarceration rate here has helped drive down crime, though there is debate about how much. ...

Criminologists and legal experts here and abroad point to a tangle of factors to explain America’s extraordinary incarceration rate: higher levels of violent crime, harsher sentencing laws, a legacy of racial turmoil, a special fervor in combating illegal drugs, the American temperament, and the lack of a social safety net. Even democracy plays a role, as judges — many of whom are elected, another American anomaly — yield to populist demands for tough justice.

Whatever the reason, the gap between American justice and that of the rest of the world is enormous and growing.

It used to be that Europeans came to the United States to study its prison systems. They came away impressed.

“In no country is criminal justice administered with more mildness than in the United States,” Alexis de Tocqueville, who toured American penitentiaries in 1831, wrote in “Democracy in America.”

No more. ...

Mr. [James Q.] Whitman,[a specialist in comparative law at Yale] who has studied Tocqueville’s work on American penitentiaries, was asked what accounted for America’s booming prison population.

“Unfortunately, a lot of the answer is democracy — just what Tocqueville was talking about,” he said. “We have a highly politicized criminal justice system.”

For a detailed analysis of the rise in gunfire incidents leading to more murders across America and contributing to the growth in American prisoners, read James Beldock's blog series on gun violence, "Putting the Bullets Back in the Gun", and "A PAX on Gun Violence".

Democracy in America Revisited-- Defining America’s Current Political Identity [Seventh of a Series]

You can’t stretch a shared political identity so far that it becomes overly abstract and therefore impossible for people to articulate in a way that everyone can easily understand it.

Think of this statement in the context of the Presidential debates in the current election. Why is the media obsessively focused on candidate mis-statements regarding their exposure to ‘sniper fire’ or commenting on how social alienation can lead to ‘clinging to guns and religion’. Why does it take 43 minutes into a debate for George Stephanopolous to ask the Democratic Party candidates the first substantive question on the economy, which he acknowledges as the most important issue in the election? Should candidate gaffes be defining elements of campaign momentum and qualifications for Presidential leadership? Not in my view.

American citizens span the spectrum from evangelical Christians to ardent atheists; from observant Muslims to secular and orthodox Jews. Ethnically, American citizens include Mexican Americans, African Americans, Puerto Rican Americans, European Americans, Russian Americans, and many other ethnicities. The definition of family in America now includes traditional marriages, same sex marriages, and no marriages. It is uneasy for societies to live with a complex narrative of citizenship forged from the richness of diversity that has made the melting pot of America historically great.

The rise of Evangelical Christian religious fundamentalism in America and Muslim fundamentalism in the rapidly modernizing societies of the Third World each share a reactive thread in opposition to the forced acknowledgement of diversity highlighted to all of us by the Internet. These movements, which are organized attempts to re-assert a single identity and to fight social complexity, trigger equally negative reactions form those that are left out of the picture. A complex world where differences are heightened because everyone is aware of everyone else requires nations to grapple with a complex narrative of citizenship. America's great historical achievement as a pluralistic society stems from its immigrant melting pot roots and from the strong democratic institutions that have evolved over 232 years to embrace this complexity. Let's not forget this in the 21st century.

Sarah Lacy, Silicon Valley Host of Yahoo! Finance Tech|Ticker, Interviews Pascal, Sharon Wienbar (Scale Venture Partners), and Jessica Canning (Dow Jones/VentureSource) on Current VC Industry Trends

Last Thursday I joined Sharon Wienbar, Managing Director of Scale Venture Partners, and Jessica Canning, Director of Global Research for Dow Jones/ VentureSource, on Yahoo! Finance's Tech|Ticker program, hosted by Business Week's Sarah Lacy. We discussed issues ranging from opportunities in Clean Tech investing and the current state of tech IPO's to the implications of recent VC industry funding statistics and how entrepreneurs should manage their companies through an economic downturn. Two of the segments were posted this morning and can be accessed at http://finance.yahoo.com/tech-ticker