"Three may keep a secret if two of them are dead." Even before the internet, cell phones, and the 24/7 news cycle, Benjamin Franklin -- the man credited with that adage -- understood there was no such thing as a kept secret. Corporate America knows the keeping of its secrets is critical to maintaining a company's reputation and share value. But how can any company keep information known to dozens, maybe hundreds, of corporate executives, lawyers, bankers and accountants confidential?
Recent examples of insider trading in the US and elsewhere suggest the quest for "the edge" -- the relentless pursuit of knowing absolutely everything about the companies or industries in which you invest -- drives Wall Street in this environment. How does a company protect itself from insider trading and other ethical violations when the necessity of maintaining a competitive edge is the backbone of the free market economy?
Analysts, traders, fund managers, bankers and investors watch industries and companies like meteorologists watch tropical storms looking for the slightest change in velocity or path, hoping to hedge their losses and increase their gains. Traditionally speaking, "insider trading" is the crime of trading stock while possessing what securities regulators call "material non-public information," obtained from someone with a duty to keep such information confidential. Boiled down, insider trading is nothing more than pursuing and using corporate secrets to make profitable investment decisions.
Initially, sanctions against telling and trading were imposed on two groups: tippers, who have a fiduciary responsibility to keep quiet; and tippees, who traded as a result of learning these secrets. The defense usually employed by tippees -- especially employees of the targeted company -- was to insist they were trading for other reasons separate from their knowledge of corporate secrets. Historically, an alarmingly number of federal appellate courts in the country bought this securities fraud version of "I didn't inhale," requiring proof of a direct link between the acquisition of inside information and the decision to trade.
In 2000, the SEC answered the regulators' favorite koan, "Is it ever possible to know non-public information, trade stock after learning this information, and not have traded that stock because of such knowledge?" in the negative by promulgating Rule 10b5-1, making all stock transactions conducted after the acquisition of inside information illegal unless such transactions were executed as part of a pre-existing trading plan.
Even the requirement of "trading plans" doesn't seem to have stopped many executives from using corporate secrets to their financial advantage. Stanford Graduate School of Business professor Alan Jagolinzer analyzed over 117,000 trades performed pursuant to publicly disclosed 10b5-1 trading plans. He found that these corporate insiders achieved statistically significant higher returns on their "planned trades" because these trades typically occurred more frequently before or after stock price increases or decreases than trades executed by outside investors.
When acknowledging this alarming and creative misuse of Rule 10b5-1, then SEC Director of Enforcement Linda Chatman Thomsen suggested the best solution to stopping securities fraud was not more enforcement or regulation but more corporate ethics. If you can't stop securities fraud from the outside, as Thomsen suggested, how is a serious and sincere corporate compliance officer going to teach hungry traders and ambitious junior executives to stay on the ethical side of the edge when most everyone else on the Street is not? One solution would be to bring in a third party that specializes in issues of compliance and corporate ethics. Companies like Nardello & Co. offer training and guidance that is critical to keeping corporate America honest and on the level -- and to preventing ethical quandaries from becoming legal nightmares.
But in the first instance, I suggest that compliance officers and senior staff at every company, big or small, domestic or international, adhere to a simple set of rules:
1. Make the line between acceptable and unacceptable behavior bright and clear and in writing.
2. Repeat the rules of corporate conduct as often as possible and make the need to consciously apply them to real workplace situations a part of every employee's job description.
3. Lead by example.
4. Don't make profit the only yardstick for measuring success.
5. Don't be afraid to question someone's motives, especially your own, when contemplating risky, aggressive, or controversial behavior.
6. Seek advice when facing a dilemma, ethical or otherwise.
7. Investigate early and often, rewarding employees for coming forward with concerns and questions.
8. When something appears too good to be true, it most likely is.
9. When you find yourself hoping no one else is watching or listening, stop immediately.
10. Never believe you are too big too fail or too smart to get caught or too important to avoid legal and regulatory niceties. No one is.
By instituting and following a clear, common-sense plan that encourages employees to maintain ethical standards and rewards them for it, corporate America will foster an environment that will help ensure that its secrets are best kept.
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