Randomly Noted

Disappointment is the word recently used by a commissioner of the Securities and Exchange Commission about the percentage of corporate directors at big U.S. public companies who are women.

The figure cited by SEC Commissioner Elisse B. Walter in a Feb. 10 speech was 15.7%. That’s the percentage of board seats held by women at Fortune 500 companies, according to the 2010 Catalyst Census.

Here is the fuller quote from Walter, who fills one of the Democratic seats of the five-person commission:

“I think it’s fair to say that there are significant challenges for those who want to see true gender diversity in corporate governance,” Walter said in the text of a speech to the DirectWomen Board Institute. “While I will not offer up a personal analysis as to why women are underrepresented on corporate boards – I’ll leave that to the experts – I can tell you that my initial reaction to the statistics is disappointment.”

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Some good quotes from Robert Khuzami, head of the Securities and Exchange Commission’s enforcement division, as he laid out how people associated with an “expert networking” or “matchmaking” firm allegedly shared inside information about some of the big companies that employed them with hedge fund employees.

Said Khuzami in a statement issued today: “Today we pull back the curtain and reveal that the only matching that was going on here was to match theft with greed.”

And lest anyone not understand what’s allegedly involved, Khuzami employed analogy to good use. He said: “These trusted employees chose to steal information that belonged not to them, but to the company and its shareholders. They lined their pockets with tens of thousands of dollars by trafficking in that stolen information in a manner that is not unlike an employee who drives to the loading dock late at night and fills the trunk of his car with valuable office equipment and sells it to his neighbor.”

Bromide of the day: nothing is simple.

Exhibit A: There is a corporate governance tussle going on between the nation’s largest public pension fund and what is perhaps the country’s most admired company, Apple Inc. It is about a fundamental issue: the meaning of elections.

At first glance, you might think the California Public Employees’ Retirement System, better known as CalPERS, wins this argument hands down. It wants Apple to make sure a director who runs uncontested for election receives more ‘for’ votes than ‘withhold’ (the equivalent of no) votes.

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There are facts. There is political reality. As those two clash, it won’t come out well for the Securities and Exchange Commission.

The SEC’s chairman, Mary L. Schapiro, marshalled facts in a speech today, hitting hard that the watchdog agency needs more money to modernize to fulfill its role, especially in light of the additional responsibilities handed the SEC by the Dodd-Frank Act.

The reality is the SEC had better review all its operations, set its priorities and stop some things so it can do others well. The top priorities should be enforcement and watching ever-more-sophisticated stock market patterns.  Other functions, such as investor education, will have to fall by the wayside.

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We are now living through the reason the leader of Securities and Exchange Commission earlier this year called for the right for the agency to fund itself.

We are now living through the reason the Congress won’t honor that request.

It’s about power and control. It’s about the opportunity to take a second whack at signed legislation through a tight grip on the purse.

Let us summarize. SEC Chairman Mary L. Schapiro has asked for the right, granted other U.S. financial regulators, for the SEC to fund itself through the fees it collects from the companies under its purview. That would allow the agency to better meet enforcement and other duties.

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Next time career day comes around to local grade schools, don’t be surprised if some ambitious third grader raises his hand and announces he wants to grow up to be a whistleblower.

College courses and a new major are sure to follow. Maybe whistleblowing can be housed under criminal justice study, or, perhaps, sociology.

Who could blame the apocryphal youngster cited above, especially after recent news that a former employee of GlaxoSmithKline PLC picked up a cool $96 million for information that helped lead to a $750 million settlement between the comany and the Department of Justice.

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Today’s regulatory battles about U.S. corporate governance focus on shareholder power: how much direct influence holders of a company should have to nominate directors or vote on the pay packages of top executives.

In the case of nominating directors, already approved by the Securities and Exchange Commission and now subject to a court challenge, it is the big instiutional shareholders who will get additional power.

A decade ago, the regulatory rage was over more basic things, such as disclosing important information,  and the beneficiaries of a controversial new regulation were the small guys, the seemingly shrinking pool of individual investors.

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We’ve written before about the activist investor saga at the oil giant, Occidental Petroleum Corp., so we thought it only fitting to provide the happy ending, arrived at last week.

The basics of the conflict were that some shareholders thought the long-standing chief executive, 75-year-old Dr. Ray R. Irani, was getting paid too much and that the company didn’t have a good succession plan. Shareholders already had approved a non-binding negative vote on management pay practices. 

There was little doubt that on a relative basis, Irani was quite well paid. The company also has done very well by shareholders. The company produced a total return of 874% for shareholders in the past decade, The Wall Street Journal reported.

The California State Teachers’ Retirement System (CalSTRS) and San Diego money manager Relational Investors LLC were so aggrieved they publicly sent a letter about plans to offer four competing director nominations to Occidental’s board, which they lambasted.

But now peace apparently is the order of the day at Occidental Petroleum. Irani will give up being CEO in May 2011. He’ll serve as chairman through 2014. Stephen I. Chazen, the president, will succeed as CEO. One board seat will go to dissident investors, The Wall Street Journal reported.

Both men will take slimmer though potentially still significant compensation packages. “The direction they moved on the compensation is very good,” said Anne Sheehan, the director of corporate governance at CalSTRS, as quoted in the Journal.

The point made in previous columns on this issue is worth repeating here. CalSTRS and Relational owned about 1% of Occidental’s shares, below the threshhold of the rule recently approved (but under legal challenge) by the SEC that would allow some big holders to nominate directors whose candidacy would be carried on the proxy materials distributed annually by companies.

The point then as now is that big institutional investors are capable, powerful entities that didn’t need the extra and potentially divisive power that will eventually come to them through the SEC’s so-called proxy access rule in order to exert influence at major public companies.

Let’s imagine you are an investor of certain but not overwhelming means who researches and buys the common shares of specific U.S. companies.

You read the securities firms’ research reports on these companies, you know how to navigate balance sheets, perhaps you have your own ideas about societal trends that will influences companies’ success and failure.

You are supposed to be one of the mainstays of the stock market, the fundamental, long-term individual investor who tries to apply research and reason to stock picks.

Then, concerned about what caused the “flash crash” of May 6, 2010, you plow through the recently released 104-page report compiled by the staffs of the Commodity Futures Trading Commission and the Securities and Exchange Commission.

Early on, you come across this lengthy paragraph: “HFTs (high frequency traders) and intermediaries were the likely buyers of the initial batch of orders submitted by the Sell Algorithm, and, as a result, these buyers built up temporary long positions. Specifically, HFTs accumulated a net long position of about 3,300 contracts. However, between 2:41 p.m. and 2:44 p.m. HFTs aggressively sold about 2,000 E-Mini contracts to reduce their temporary long positions. At the same time, HFTs traded nearly 140,000 E-Mini contracts or over 33% of the total trading volume. This is consistent with the HFTs’ typical practice of trading a very large number of contracts, but not accumulating an aggregate inventory beyond three to four thousand contracts in either direction.”

And you think, is this the same market where your research and thought goes into picking companies whose earnings you believe, over time, will grow? Moreover, can these two ideas of stock markets co-exist?

A lot has happened in the past few years to discourage individual investors in U.S. stocks.

Credit crunch, recession, weak economic recovery, still-slumping house prices and more have taken their toll on small investors’ psyches.

More fundamental is the sense that the stock market, as even knowledgable investors used to know it, no longer exists. Not in a  world of high-frequency traders, drak pools that make up significant amounts of daily trading liquidity and all the rest.

So it’s not necessary a causal relationship, but worthy of note, that since the “flash crash” of  May 6 every single week has seen an outflow of money from stock-based mutual funds.

Securities and Exchange Commission Chairman Mary Schapiro made that point in a speech today. “Retail broker-dealers have told us that their customers – individual investors – have pulled back from participating in the equity markets since May 6,” Schapiro added.

It’s hard to find fault with that inaction given the still hard-to-understand nature of that wild spring afternoon aptly named the “flash crash,” when stock prices took an amazing free fall only to recoup much of those losses minutes later.

Though Schapiro employs a lot of question marks in her prepared remarks for the Economic Club of New York speech, you get the sense from the speech that the status quo of stock market structure in the U.S. will not last.

 One essential notion raissed by Schapiro is compelling. In days of yore, market specialists had obligations that in the SEC chairman’s words supported the “stability and fairness of the markets.”

Now the firms that are the most active don’t bear the titles or responsibilities of those specialist firms, whose role became “obsolete.”

And this quote sums it up. “The issue, however, is whether the firms that effectively act as market makers during normal times should have any obligation to support the market in reasonable ways in tough times,” Schapiro said.