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<table class="image-container float_right" width="200"><tr><td><div class="image"></div><a href="http://commons.wikimedia.org/wiki/File:AIG_Lobby_at_70_Pine_Street.jpg">Wikimedia Commons</a>AIG headquarters</td></tr></table>By Sonja Ryst, Financial Reporter
American International Group Inc. (<keyword id="6477487" type="CITY" weightage="60" keywordseo="AIG">AIG</keyword>)’s senior managers earned multi-million paychecks after the U.S. government bailed the company out in 2008.
The New York insurer’s board will reportedly meet today to consider joining a $25 billion shareholder lawsuit alleging that the U.S. government enforced onerous terms in connection with its rescue of AIG, according to the <a href="http://dealbook.nytimes.com/2013/01/07/rescued-by-a-bailout-a-i-g-may-sue-its-savior/">New York Times</a> and court documentation.
AIG’s CEO Robert H. Benmosche earned $2.7 million in total summary compensation in 2009, $8.4 million in 2010, and $13.9 million in 2011, according to the company’s most recent proxy <a href="http://www.sec.gov/Archives/edgar/data/5272/000119312512150889/d323130ddef14a.htm#tx323130_14">filing</a>. CFO David L. Herzog received $6.1 million in 2009, $7.3 million in 2010, and $6.5 million in 2011.
As a Troubled Asset Relief Program recipient, AIG must comply with executive compensation requirements overseen by the U.S. Department of the Treasury. AIG said its pay structures for executive officers were prescribed by law.
AIG did not immediately respond to a request for comment.
The post <a href="http://www3.gmiratings.com/home/2013/01/aigs-senior-managers-earned-multi-millions-post-bailout/">AIG Managers Earned Multi-Millions Post-Bailout</a> appeared first on <a href="http://www3.gmiratings.com/home">GMI Ratings</a>.
Read more posts on <a href="http://www3.gmiratings.com/category/blog/corporate-governance/">GMI Ratings »</a>

AIG Managers Earned Multi-Millions Post-Bailout

<keyword id="1738613" type="UNKNOWN" weightage="60" keywordseo="Mobile-Insights">Mobile Insights</keyword> is a daily newsletter from <a href="https://intelligence.businessinsider.com/welcome?utm_source=House&amp;utm_medium=Edit&amp;utm_term=MI&amp;utm_content=link&amp;utm_campaign=BIIMobile">BI Intelligence</a> delivered first thing every morning exclusively to <a href="https://intelligence.businessinsider.com/welcome?utm_source=House&amp;utm_medium=Edit&amp;utm_term=MI&amp;utm_content=link&amp;utm_campaign=BIIMobile">BI Intelligence</a> subscribers. <a href="https://intelligence.businessinsider.com/welcome?utm_source=House&amp;utm_medium=Edit&amp;utm_term=MI&amp;utm_content=link&amp;utm_campaign=BIIMobile">Sign up for a free trial of BI Intelligence today</a>. 

<a href="http://www.rimmkaufman.com/blog/rkg-digital-marketing-report-q2-2013-released/10072013/" target="_blank" title="RKG: Digital Marketing Report q2">Tablet Cost-Per-Clicks Near The Desktop</a> (RKG) This is not necessarily surprising, since the screen real estate of a tablet approximates the desktop's. Smartphone ad rates still badly lag the desktop, partly as a result of smartphones' continued traffic surge, leading to a glut in supply. <a href="http://www.rimmkaufman.com/blog/rkg-digital-marketing-report-q2-2013-released/10072013/" target="_blank" title="RKG: Digital Marketing Report q2">Read &gt;</a>
<div class="image-container" style="width:620px"><div class="image"><a href="http://www.rimmkaufman.com/blog/rkg-digital-marketing-report-q2-2013-released/10072013/">RKG</a></div></div> 
<a href="http://www.bloomberg.com/news/2013-07-10/pandora-drops-as-analyst-warns-of-apple-advantage-in-cars.html" target="_blank" title="Bloomberg: Pandora Drops as Analyst Warns of Apple Advantage in Cars">Analysts Think Apple Has The Edge Over Pandora In Cars</a> (Bloomberg) They think that Apple's new iTunes Radio will gain listener's favor in connected cars. However, their analysis seems to assume a mutually exclusive environment (car manufacturers may not want to lock customers into the Apple operating system, and in any case <keyword id="107171" type="CITY" weightage="60" keywordseo="Pandora">Pandora</keyword> will be available on iOS in the Car) and puts a lot of confidence in Apple's still-unreleased in-car product against a much-beloved service. <a href="http://www.bloomberg.com/news/2013-07-10/pandora-drops-as-analyst-warns-of-apple-advantage-in-cars.html" target="_blank" title="Bloomberg: Pandora Drops as Analyst Warns of Apple Advantage in Cars">Read &gt;</a>
<a href="http://venturebeat.com/2013/07/11/firefox-os-receipt-simulator/" target="_blank" title="VentureBeat: Firefox OS apps now have a new tool for money-making ">Firefox OS Apps Get A Monetization Tool</a> (VentureBeat) The new Firefox OS simulator includes a new feature for receipts. <a href="http://venturebeat.com/2013/07/11/firefox-os-receipt-simulator/" target="_blank" title="VentureBeat: Firefox OS apps now have a new tool for money-making ">Read &gt;</a> 
<a href="http://www.macrumors.com/2013/07/14/apple-aggressively-hiring-for-smart-watch-project-looking-toward-late-2014-launch/">More News Emerges Regarding Apple iWatch</a> (Financial Times via MacRumors) Apple is hiring new talent aggressively in order to ready the iWatch, but it may not be ready until late next year, reports the FT. Earlier this month it was revealed that Apple had hired Paul Deneve, former CEO of fashion house Yves Saint Laurent. <a href="http://www.macrumors.com/2013/07/14/apple-aggressively-hiring-for-smart-watch-project-looking-toward-late-2014-launch/">Read &gt;</a> 
<a href="https://pages.appcelerator.com/Q22013DeveloperSurveyReport.html%20%20" target="_blank" title="Appcelerator: Developer Report">Developers Turn To Tablets As Their Next Major Platform</a> (Appcelerator) Nearly as many developers want to build for <keyword id="6361927" type="UNKNOWN" weightage="60" keywordseo="Tablets">tablets</keyword> as smartphones, a nod to tablets' increased popularity and prevalence. From the looks of it, most of those apps will be built on the iPad, which is only surpassed by the iPhone in terms of its popularity among developers. <a href="https://pages.appcelerator.com/Q22013DeveloperSurveyReport.html%20%20" target="_blank" title="Appcelerator: Developer Report">Read &gt;</a> 
<div class="image-container" style="width:620px"><div class="image"><a href="https://pages.appcelerator.com/Q22013DeveloperSurveyReport.html">Appcelerator</a></div></div> 
<a href="http://www.nytimes.com/2013/07/15/business/attention-shopper-stores-are-tracking-your-cell.html?_r=0">Retailers Track In-Store Shoppers Via Wi-Fi</a> (The New York Times) Nordstrom began tracking customers in-store as they logged on to Wi-Fi networks, and other retailers are doing the same. The main purpose is to track their paths through stores, and offer them coupons based on location. <a href="http://www.nytimes.com/2013/07/15/business/attention-shopper-stores-are-tracking-your-cell.html?_r=0">Read &gt;</a> 
<a href="http://english.hankyung.com/news/apps/news.view?c1=&amp;newscate=1&amp;nkey=201307150718011">Samsung Regains Apple Chip Business Lost During Patent Dispute</a> (The Korea Economic Daily) According to the report, mobile application processors or A9 chips supplied by Samsung will go into an Apple device to be launched in the second half of 2015. <a href="http://english.hankyung.com/news/apps/news.view?c1=&amp;newscate=1&amp;nkey=201307150718011">Read &gt;</a> 
<a href="http://www.mmaglobal.com/smartgraphic/mobile-retail-opportunity-are-you-ready?ns_campaign=comscore_general&amp;ns_source=social&amp;ns_mchannel=social_post&amp;ns_linkname=link_name&amp;ns_fee=0&amp;piCId=77724" target="_blank" title="Mobile Marketing Association: Mobile Retail Infographic">The Mobile Retail Opportunity</a> (Mobile Marketing Association) An infographic by <a href="http://www.somoglobal.com/">Somo</a> for the MMA, with research partners <a href="http://www.comscore.com/" target="_blank">comScore</a> and <a href="http://www.gmi-mr.com/solutions/mobile-surveys/">GMI</a>. 
<div class="image-container" style="width:620px"><div class="image"><a href="http://www.mmaglobal.com/smartgraphic/mobile-retail-opportunity-are-you-ready?ns_campaign=comscore_general&amp;ns_source=social&amp;ns_mchannel=social_post&amp;ns_linkname=link_name&amp;ns_fee=0&amp;piCId=77724">Mobile Marketing Association</a></div></div>

Tablet-Based Ads Close The Gap With Desktop Ad Rates

<ul class="summary-list"><li>Nearly half of likely voters in key battleground states own cryptocurrency or are considering investing in it, according to a new poll. </li><li>The poll, commissioned by a crypto-focused PAC, surveyed voters in Arizona, Georgia, Nevada, Pennsylvania, and Wisconsin. </li></ul>People who either own cryptocurrency or are interested in purchasing it could impact close races in key battleground states, a new poll asserts. And crypto-friendly candidates in races that might only be decided by a percentage point or two stand to benefit significantly, said said Bobby Kaple, a senior advisor to GMI PAC, which helped commissioned the poll of 1,000 likely general election voters."If you look at those margins, to be able to connect with the crypto voter on crypto issues could unlock just enough to support to win one of these tight races," Kaple said said. Nearly half of likely voters surveyed in September in the battleground states of Arizona, Georgia, Nevada, Pennsylvania, and Wisconsin own cryptocurrency or are considering investing in it. A subset of nearly one in five already own crypto. Of them, 45% of respondents said they would vote for or lean toward Democratic candidates, while 44% said they'd vote for or lean Republican."This core of 17% who already own cryptocurrency is an extremely competitive group of voters that both Democrats and Republicans have been pitching in recent elections," pollsters wrote in a report shared with Insider. "[That] is a sizable number in races that are likely to be determined by small margins." Kaple noted that in 2020, President Joe Biden defeated former President Donald Trump in Pennsylvania by 80,000 votes. In November, more than 800,000 Pennsylvanians who own crypto are expected to vote.On balance, views on crypto defy partisanship. Thirty-three percent of Democrats said they have a favorable view of crypto, compared to 30% of Republicans who said the same. On a similar note, a separate <a href="https://morningconsult.com/2021/12/08/cryptocurrency-regulation-polling/">Morning Consult poll</a> found that roughly equal shares of Democrats and Republicans say there are too many regulations on crypto. About one-third of voters who own crypto are people of color, compared to a fourth of the overall electorate. Kaple said any politician who speaks about crypto will have an opportunity to swing voters over."You have both parties right now locked in a battle to connect with younger Black and Hispanic men to sway groups of voters," he said. "Those two groups own crypto at a much higher rates, so connecting with them on those crypto issues could be the key to unlocking support and winning these tight races." In a separate <a href="https://www.pewresearch.org/fact-tank/2022/08/23/46-of-americans-who-have-invested-in-cryptocurrency-say-its-done-worse-than-expected/">Pew Research Center survey</a>, about one in five Black, Hispanic or Asian Americans said they invested in, traded or used crypto, compared with less than one in seven of whites who said the same. Meanwhile, more of than half of surveyed voters said Congress should modernize existing laws to fit new technologies like cryptocurrency and other digital assets to ensure companies stay here and keep jobs in the United States. "What we're seeing from these numbers is that the crypto voter has the opportunity to reshape the American electorate and how people vote," Kaple told Insider. The poll was commissioned by the GMI Policy Institute and GMI PAC, an issue advocacy organization focused on crypto-related issues, and conducted jointly by the Global Strategy Group and Fabrizio, Lee &amp; Associates.The name of the crypto-focused PAC, which was <a href="https://www.theblock.co/linked/132171/crypto-leaders-launch-political-action-committee-to-back-congressional-candidates">launched in January</a>, is a nod to the popular crypto slang "GMI," or "gonna make it."

Cryptocurrency voters could impact midterm races in key battleground states: poll

By John Vizikas, Research Analyst
On Friday, Daniel Vasella’s chairmanship at Swiss drug maker <keyword id="69388" type="COMPANY" weightage="60" keywordseo="Novartis">Novartis</keyword> ended with the conclusion of the company’s annual general meeting. Vasella’s tenure ended amid a rash of shareholder criticism regarding the now infamous “Vasella Golden Handshake,” which came to light only a week before the AGM.
Under the now-cancelled non-compete agreement, Novartis would pay Dr. Vasella 72 million Swiss francs ($77 million) over a period of six years for consulting services to the company while prohibiting him from working for any competitor.
During a nationally televised live broadcast, a contrite Dr. Vasella admitted in front of enraged shareholders and the Swiss nation that it was a mistake to have negotiated such a deal in the first place. He also said that he was wrong to have believed that shareholders would give him the benefit of the doubt, since he had announced that most of the money would be used for philanthropic purposes.
Heightening the drama is a Swiss referendum to be held on March 3 that, if passed, would give shareholders more power in determining executive pay and would require companies to be more transparent about their pay practices.
While the general public and many shareholders were surprised that such an agreement between Novartis and Dr. Vasella could ever come into existence, GMI Ratings has emphasized for years that executive compensation at Novartis has been and continues to be misaligned with shareholders’ interests.
Not only does GMI currently give Novartis a below-average “D” rating for its pay practices, but, as early as 2008, GMI reported that Swiss activist investor group Ethos was pressuring major Swiss corporations, including Novartis, to align executive compensation more closely with shareholders’ interests.
At the 2009 AGM, Ethos called on Novartis shareholders to actively support its resolution requesting an advisory vote of the remuneration report. The resolution was defeated at the AGM amid stiff opposition by the Novartis board, but it managed to receive over 31% of ‘yes’ votes. Eventually the company decided to introduce a “say-on-pay” vote at the 2011 AGM after a board-supported resolution calling for say-on-pay was approved at the 2010 AGM.
Even though the adoption of say-on-pay was a move in the right direction, Novartis continued to demonstrate that its executive pay was out of step with shareholders’ interests and expectations. In 2011, GMI flagged Novartis for Remuneration after 38.3% of votes were cast against approval of the company’s compensation system at the 2011 AGM.
Opposition to Novartis’ compensation practices was once again headed by Ethos, which stated that not only was executive pay not aligned with shareholders’ interests since “the variable remuneration of executive management is too high compared to the fixed remuneration,” but also that “the various incentive plans are not described in sufficient detail to allow the establishment of a clear link between remuneration received and achievement of pre-defined performance targets.”
In our view, Novartis has had a history of sub-par disclosure and remuneration practices even before the Vasella Golden Handshake outraged an entire nation. It remains to be seen if Novartis can become both more transparent about its pay practices and more responsive to shareholder demands. Unfortunately, the first signs are not encouraging. On Sunday, Swiss publication “Der Sonntag” reported that Novartis was exploring whether or not the company should file criminal charges against the leaker of Novartis’ secret bank account for violating Swiss bank secrecy law. After all, disclosure of the account forced the company to reveal details regarding Dr. Vasella’s non-compete clause. Nevertheless, it is now a certainty that the referendum will indeed pass.
The post <a href="http://www3.gmiratings.com/home/2013/02/novartis-vasella-golden-handshake-no-surprise/">Novartis: Vasella Golden Handshake No Surprise</a> appeared first on <a href="http://www3.gmiratings.com/home">GMI Ratings</a>.
Read more posts on <a href="http://www3.gmiratings.com/category/blog/corporate-governance/">GMI Ratings »</a>

Novartis Is A Classic Case Of A Company Where Executive Compensation Is Misaligned With Shareholders' Interests

<div class="KonaFilter image-container display-table"><div><div class="image"><a href="https://www.flickr.com/photos/ogier300/2811379885">Jason Langlois via flickr creative commons</a></div></div></div>
Starbucks has taken heat for <a href="http://www.businessinsider.com/why-starbucks-doesnt-recycle-cups-2014-4">failing to offer recycling</a> at many of its stores. <a href="http://www.bloombergview.com/articles/2014-04-07/why-starbucks-won-t-recycle-your-cup">As noted by Bloomberg View's Adam Minter</a>, the chain is far behind its goal of offering recycling at all of its company-owned stores by 2015, with the option only available in 39% as of the company's <a href="http://www.starbucks.com/responsibility/global-report">2013 Global Responsibility Report</a>.
In fact, Starbucks is way behind on many stated environmental goals. The company reduced energy consumption in its company-operated stores by only 7.1% between 2008 and 2013, far from its goal of 25% reduction by 2015. The company's 2013 report further noted that it was behind track in purchasing renewable energy to offset its electricity use. As of 2013, Starbucks also only sold 1.8% of beverages in personal tumblers compared to a goal of 5% by 2015.
While these missed goals may suggest the coffee behemoth is an environmental failure, the truth is starkly different.
In fact, Starbucks is better than most industry peers when it comes to environmental impact, according to corporate watchdog <a href="http://www3.gmiratings.com/">GMI Ratings</a>.
"Starbucks Corporation's environmental ratings is around the 90th percentile when compared to U.S., Global, and Industry Peers," GMI senior research analyst Greg Ruel wrote in an email citing data provided by <a href="http://www.trucost.com/">Trucost plc</a>. "The company's carbon emissions, water use, and supply chain impact are all favorable compared to peers of a similar market cap, like Chipotle Mexican Grill and the Yum! Brand chain. Waste disposal, normalized for revenue, is average when compared to Chipotle, Yum! Brands and McDonald's."
"[E]ven HAVING the kinds of aims that are listed in its Global Responsibility Report is not just unusual, it's exemplary," <a href="http://www3.gmiratings.com/home/2012/03/starbucks-corporate-citizenship/">former GMI CCO and senior research analyst Paul Hodgson wrote in 2012</a>.
John Kelly, Starbucks' senior vice president for global responsibility and public policy, was quick to point this out in a recent conference call with Business Insider. 
"The purpose in originating these goals was to be very aspirational. We are more interested in being aspirational, innovating, listening to our partners, listening to our customers than in what it looks like if we fall short," Kelly said, noting also that company leaders "certainly set out to achieve the goals."
Caveats aside, it's interesting to see why Starbucks is struggling to hit some goals.
When it comes to recycling, as Minter discussed, the company has found it hard to establish an efficient system in many markets, a problem it blames on local politics.
Reducing energy has proven hard given Starbucks' expanded product offerings.
"Starbucks's business has changed very significantly," Jim Hanna, Starbucks director of environmental impact, said during the same conference call. "If you look at the acquisitions we've made as a company, purchasing La Boulange, the bakery company, purchasing Evolution Fresh, and really incorporating those new businesses and the new platforms into our stores, what we've seen frankly is a lot more warm pastry sales and a lot more warm food sales, increasing refrigeration needs within the stores, and frankly just more business going into the square footage of the stores."
While increasing sales in reusable cups has proven difficult, the company has gotten "a good lift" from offering cheaper containers and from redesigning stores to promote ceramic mugs for in-store consumption. 
The company has had more success in other areas. Here's the scorecard from Starbucks' 2013 report:
<div class="KonaFilter image-container display-table"><div><div class="image"><a href="http://globalassets.starbucks.com/assets/98e5a8e6c7b1435ab67f2368b1c7447a.pdf">globalassets.starbucks.com</a></div></div></div> 
We also asked about Starbucks' <a href="http://psiareview.org/2012/11/02/the-starbucks-delusion/">controversial failure to hit its 2010 goal </a>to raise and donate $10 million to alleviate the world water crisis through sales of Ethos Water, which it purchased in 2005. The company went on to raise only $6.2 million by 2010 and <a href="http://www.valenciavoice.com/2011/01/starbucks-ethos-falls-short-of-charitable/">blamed the economic crisis </a>among other things.
It turns out the company has now belatedly hit its target, setting aside $12.3 million for water donations. It does not have a new target.
While Starbucks is doing relatively well when it comes to the environment, GMI says the company has bigger problems in another area that the corporate watchdog tracks: social impact.
As noted by Ruel:
Social Ratings for Starbucks Corporation are in the bottom five percent when compared to all peers in the U.S. and globally. Our key areas on concern when monitoring restaurants are community relations, labor practices, and discriminatory employment practices. Over the past three years, the company has been party to a number of investigations and settlements according to filings and news reports. Issues with product concerns, labor practices, tax evasion, stakeholder abuse, and discriminatory business practices have significantly hampered the company's ESG [environmental, social, and governance] Rating.
Most recently, the company has conducted three separate product recalls in 2014. In November 2013, Starbucks stated that it would restate fourth-quarter results to show an operating loss of $2.12 billion to reflect damages related to its dispute with Kraft Foods. Just prior in July 2013, a lawsuit was filed against New York Starbucks claiming repeated discrimination against deaf customers. In 2012, international issues included a claim by UK lawmakers that executives weren't paying their share of taxes and Chile's labor department blacklisted Starbucks local units over labor practices, preventing them from bidding to supply local government offices for two years.
In the area of workplace safety, Starbucks has not yet implemented OHSAS 18001 as its occupational health and safety management system, nor does it actively disclose its workplace safety record in its annual report or other reporting vehicle. Starbucks poses a much greater social risk than industry peers, issues which have the potential to hamper long-term sustainability.
You win some, you use lose some, <a href="http://www.businessinsider.com/category/howard-schultz">Howard Schultz</a>.
We've asked Starbucks for comment on GMI's social analysis and will add any that we receive.
Disclosure: I worked as a Starbucks barista in 2009.

Starbucks' Biggest Environmental Failures Are Still Better Than Most Companies

By Kap Su Sol, Research Analyst
The latest annual corporate sustainability <a href="http://solability.com/pdfs/ESG%20Korea_2013.pdf?utm_source=SolAbility+Research&amp;utm_campaign=c9204031ad-ESG_2013_12_6_2013&amp;utm_medium=email">survey</a> of <keyword id="5565" type="COUNTRY" weightage="60" keywordseo="South-Korea">South Korea</keyword> published by SolAbility is an interesting read. It rightly points to the interplay between South Korea’s nominally comprehensive, but ultimately loophole-ridden regulatory framework and the pervasive power of the country’s family-controlled conglomerates, or chaebols.
According to the SolAbility survey, most respondents single out CEOs and top <keyword id="13778" type="ENTERTAINMENT" weightage="60" keywordseo="Management">management</keyword> as the key driver of sustainability. What is notable by its absence is mention of the role of corporate <keyword id="6379291" type="UNKNOWN" weightage="60" keywordseo="boards">boards</keyword>. However, this is not a surprise. Thanks to their own political and economic clout and existing regulatory ambiguities, the chaebols, can dodge regulatory efforts and outside pressure to strengthen sustainability initiatives.
Though it is legally required of public corporations to fill half their boards with outside directors, current regulations do not draw a clear distinction between an “outside” versus an “independent” director. As a result, chaebols can still fill their boardrooms with what are essentially management allies. The result is that corporate leadership, the majority of who are scions of the chaebols’ founding families, do not have a strong incentive to initiate sustainability practices because of the lack of public accountability. Additionally, the ambiguous Korean regulatory climate and poor enforcement regime remain road blocks.
A case in point is the recent fatal gas leak at a semiconductor plant of Samsung Electronics Co., Ltd. On Jan. 27-28, Samsung, the world’s largest memory chip maker, concealed two separate leaks of hydrofluoric acid gas from authorities for 26 hours until a contract worker died from exposure and three others were injured. The incident revealed that Samsung had been outsourcing safety management of the acid to a contractor who in turn outsourced parts of its job to a spin-off. Samsung did not immediately report the leaks because it did not want to get stripped by the government of a higher environmental/safety rating, which had been exempting the company from more rigorous safety inspections.
In all fairness, the progress South Korea has made in corporate <keyword id="56788" type="UNKNOWN" weightage="60" keywordseo="Governance">governance</keyword> and sustainability should not be downplayed. The term “corporate governance” only came into the country’s lexicon in the late 1990s when the country began to restructure its economy amid the Asian financial crisis. The concept of “sustainability” is still in its infancy. However, the world’s 11th largest economy has yet to fully develop its own ESG identity. Good corporate governance and sustainability are inseparable. For South Korea, improving public accountability of corporate boards and strengthening the regulatory landscape is a good start towards achieving corporate sustainability gains.
The post <a href="http://www3.gmiratings.com/home/2013/02/corporate-sustainability-korea-a-review-of-the-solability-2013-survey/">Corporate Sustainability Korea – A review of the SolAbility 2013 survey</a> appeared first on <a href="http://www3.gmiratings.com/home">GMI Ratings</a>.
Read more posts on <a href="http://www3.gmiratings.com/category/blog/corporate-governance/">GMI Ratings »</a>

Korea's Chaebols Are A Corporate Governance Fiasco

<div class="image-container float_right" style="width:401px"><div class="image"></div><a href="http://www.flickr.com/photos/r_o_y_a_n/5311062206/">buhny via Flickr</a></div>By Sonja Ryst, Research Analyst
JPMorgan Chase (<a href="http://seekingalpha.com/symbol/jpm" title="">JPM</a>) released a 132-page report on Jan. 16 that detailed the “London Whale” story surrounding a $2 billion investment fiasco. On the same day the New York financial services firm said its <a href="http://www.sec.gov/Archives/edgar/data/19617/000001961713000077/a8-k.htm">board</a> approved compensating CEO <keyword id="153519" type="PERSON" weightage="60" keywordseo="Jamie-Dimon">Jamie Dimon</keyword> $11.5 million for his work in 2012, or around half as much as in the prior year, taking into consideration both the continued strong performance of JPMorgan as well as its recent investment losses, including Mr. Dimon’s responsibility as CEO.
We noted on January 15 that several of the independent directors on JPMorgan’s <a href="http://www3.gmiratings.com/home/2013/01/several-jpmorgan-directors-long-serving-and-well-paid/">board</a> have supervised Mr. Dimon for many years. They also earned as much compensation in exchange for their services as some bank employees do. The following is a round-up of media commentary about the board’s recent decision:
“The pay cut was actually a message from the board to regulators and worried investors that it was a strong watchdog over the nation’s largest bank, according to several people with knowledge of the matter.” The New York <a href="http://dealbook.nytimes.com/2013/01/16/morgans-board-uses-a-pay-cut-as-a-message/">Times</a>.
“JPMorgan has gone soft on Jamie Dimon over the so-called whale trade. . . The more than $10 million docked from Dimon’s pay will sting, but the board could do more – like removing one of his hats.” Reuters <a href="http://blogs.reuters.com/breakingviews/2013/01/17/jpmorgan-board-goes-soft-on-jamie-dimon-over-whale/">Breakingviews</a>.
JPMorgan said “employees were overwhelmed by the complexity of their bets, risk managers were ill-equipped and leaders including Chief Executive Officer Jamie Dimon weren’t aggressive enough in responding. . . (Michael) Cavanagh, who has worked with or for Dimon since 1993, led the management task force that produced the report. Dimon promoted him from chief financial officer to run the treasury and security services division in June 2010, and again last July to co-head the corporate and investment bank. . .Joe Evangelisti, a spokesman for the bank, said Cavanagh answered to the independent committee of the board, which also conducted its own review.” <a href="http://www.bloomberg.com/news/2013-01-16/jpmorgan-halves-dimon-pay-says-ceo-responsible-for-lapses-1-.html">Bloomberg</a>
“First and foremost, profits rose 53% to $5.7 billion. Revenue was in line with expectations. To no lesser degree: the self-examination stemming from the “London whale” trading debacle seems to be having the desired effect. . .That is: Chief Executive Jamie Dimon appears safe.” <a href="http://articles.marketwatch.com/2013-01-16/commentary/36364565_1_london-whale-bruno-iksil-chief-executive-jamie-dimon">Marketwatch</a>
“The problem isn’t that the report is incomplete, lacks analysis or fails to hold people responsible for the mess. . .Given how badly the trade went, it is amazing how right the response by the New York company has been, at least by <keyword id="42111" type="COMPANY" weightage="60" keywordseo="Wall-Street">Wall Street</keyword> standards.” The Wall Street <a href="http://online.wsj.com/article/SB10001424127887323783704578246150938584648.html">Journal</a>
The post <a href="http://www3.gmiratings.com/home/2013/01/media-commentary-mostly-skeptical-of-jpmorgans-whale-report/">Media Commentary Mostly Skeptical of JPMorgan’s Whale Report</a> appeared first on <a href="http://www3.gmiratings.com/home">GMI Ratings</a>.
 
Read more posts on <a href="http://www3.gmiratings.com/category/blog/corporate-governance/">GMI Ratings »</a>

Everyone's Pretty Skeptical Of JPMorgan's Whale Report

Kap Su Seol, Research Analyst
<keyword id="6355311" type="COUNTRY" weightage="60" keywordseo="Japan">Japan</keyword>’s biggest film studio, Toho Co. Ltd.’s Feb. 21 acquisition of Toho Real Estate Co., Ltd. offers a sneak preview of how battle lines are being drawn between the country’s corporate powers and governance advocates. Toho, owners of 58% of Toho Real Estate, bought the remaining shares for 16.6 billion yen. Toho turned its once-majority held affiliate into a wholly-owned unit for a bargain price. The parent’s own conservative appraisal put the value of the affiliate’s real-estate assets at 64 billion yen. Prospect Asset Management, a Tokyo-based activist fund which owned about 5.6% of Toho Real Estate, estimated the value of the unit’s top two assets alone at 93 billion yen. The activist fund protested the bid and failed. In Japan, there is little legal recourse for minority shareholders like Prospect Asset in this scenario.
In the 1960-1980s, it was not unusual for Japanese conglomerates to spin off affiliates into public companies while still maintaining controlling ownership stakes. Though very inefficient, these arrangements, called keiretsu, or networks of affiliates, were quite lucrative. These affiliates not only operated as part of their parents’ keiretsu networks, but also paid them high dividends. The keiretsu system, inherently susceptible to conflicts of interests, is a severe impediment to outside shareholder rights.
The global Great Recession of 2008-2010 has heightened the already urgent need for Japan to restructure its economy. In response to this pressure, many Japanese corporate giants have begun to acquire affiliates to revamp their capital bases. According to Tokyo Stock Exchange, in 2010 alone, 37 of a total of 68 companies that were delisted were merged into their parents. In 2011, 28 out of the 52 delisted companies were absorbed into their parents, and in 2012, 21 out of 56.
Prospect Asset’s failed protests were still meaningful because they openly challenged the keiretsu network within the broader context of corporate governance and minority shareholder rights. Prospect Asset was not alone. Since October 2012, other minority shareholders have banded together in opposition to a joint bid for Japan’s largest cable TV operator J: Com by KDDO Corporation and Sumitomo Corporation. The two companies together control about 70% of J: Com and have plans to turn it into a 50/50 joint venture after the purchase.
It is likely that more and more minority shareholders will challenge the old-guard networks in Japan. Without a doubt, reforming the keiretsu system is pivotal to Japan’s broader national agenda to restructure its economy. Optimally, the country’s lawmakers and regulators would support activist owners by introducing new regulations that rigorously protect minority shareholders’ rights.
The post <a href="http://www3.gmiratings.com/home/2013/02/keiretsu-another-obstacle-to-japans-comeback/">Keiretsu: Another Obstacle to Japan’s Comeback</a> appeared first on <a href="http://www3.gmiratings.com/home">GMI Ratings</a>.
Read more posts on <a href="http://www3.gmiratings.com/category/blog/corporate-governance/">GMI Ratings »</a>

Japan Must Reform A Corporate Practice That Keeps Screwing Investors

<div class="KonaFilter image-container display-table float_right"><div><div class="image">Bobby Yip/ReutersA real-life Transformer.</div></div></div>US companies are undergoing a massive shift, from the top down, and it isn't going to change anytime soon.The very way companies are approaching their business has shifted, said Mike Thompson of S&amp;P Global Market Intelligence, and it's changing the companies and the markets.Thompson argues that because of slower economic growth and mounting pressure from investors, S&amp;P 500 companies have gone on a binge of cost-cutting and short-term engineering that has produced results, but has also shifted how they are being run.<h2>Changing DNA</h2>It starts at the top, said Thompson, who runs S&amp;P GMI's Investment Advisory Services."It's almost as if <a href="http://www.businessinsider.com/wall-street-couldnt-be-happier-about-activist-investing-2015-8">activist investors have passed along</a> their DNA to managements," Thompson told Business Insider. "If you look at the S&amp;P, the DNA of these CEOs and C-suite operations is more about remaking the company to meet goals and the expectations for the company. If you want to beat off activist investors, you end up becoming one."Instead of continuing to invest in the business and focus on growing over time, according to Thompson, managements are trying to <a href="http://www.businessinsider.com/activists-buyback-pressure-winning-2016-3">undercut possible disruptions</a> by showing constant earnings growth and streamlined companies.<div class="KonaFilter image-container display-table"><div><div class="image on-image">Associated Press/Wong Maye-EIn this April 19, 2007, photo, a lab officer cuts a DNA fragment under UV light from an agarose gel for DNA sequencing.</div></div></div>This activist-style, short-term attitude is exactly what Blackrock CEO Larry Fink <a href="http://www.businessinsider.com/blackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2">decried in a letter to all S&amp;P 500 CEOs</a> at the start of 2016. Thompson said that these larger firms are most susceptible due to their size."Revenue growth is predicated on economic growth and innovation," he said. "We don't have that sort of economic growth, and, let's be honest, big companies <a href="http://www.businessinsider.com/fewer-us-startups-is-bad-news-for-economy-2015-12">simply aren't that innovative</a>. So instead these big companies shift their focus."<h2>Cutting to the bone</h2>Facing the need to improve performance, said Thompson, companies turned first to what was easiest: cutting costs."Companies have cut costs in ways that I have not seen before," Thompson said. "The extremes companies are going to in order to cut costs are incredible. It's nothing short of stunning."These cuts have come in two simple ways, Thompson said."Literally, there's a worksheet for this, " said Thompson. "Executives go through a worksheet of their companies and identify geographies and layers, and see what could be cut."On the one hand, there is layers. This would be cutting out parts of a supply chain that could be streamlined. Or, for example, in the case of Wall Street, the <a href="http://www.businessinsider.com/bank-layoffs-are-coming-2016-3">automation</a> and <a href="http://www.businessinsider.com/juniorization-is-helping-wall-street-cut-costs-2016-3">juniorization of the banks</a> has allowed costs to stay lower while keeping efficiency around the same.<div class="KonaFilter image-container display-table float_right"><div><div class="image">BI Intelligence</div></div></div>The second type of cuts have come from geographies. Again using a financial example, banks have and continue to <a href="http://www.businessinsider.com/digital-disruption-of-retail-banks-2015-10">shut down physical branches</a> in favor of <a href="http://www.businessinsider.com/digital-banking-is-the-future-2015-2">more digitized banking</a>. You can also shift the companies' geographic footprint."They continue to skim down the labor costs," said Thompson. "In the US, for example, you can get material differences between San Francisco and New York versus other, cheaper places around the country."This isn't necessarily a bad thing, Thompson said. Efficiency can be helpful. "Companies are figuring out how to provide the same product or service, just differently, for less," said Thompson.On the other hand, the cuts have become radically deep."There's only so much meat on the bone. You can't keep cutting like that. At some point you're going to have to do something different," he said.<h2>Unprecedented engineering</h2>Now cost-cutting can only go so far to provide the sort of performance Thompson told us about. With that avenue nearly played out, they have also resorted to financial engineering."With this kind of economy, you're bound on selling more and you focus then on engineering," Thomspon said. "And the amount of engineering we're seeing right now in these companies is simply remarkable."Thompson said this engineering of higher earnings per share has shown up in <a href="http://www.businessinsider.com/buybacks-disappearing-could-mean-recession-2016-3">the explosion of buybacks</a>, "If you can't meet the top-line number for your earnings, you just buy back shares and shrink the denominator."This isn't just limited to buybacks. According to Thompson, large companies are also finding ways to bring down costs to boost the bottom line."There's a trend going on where you see the S&amp;P's effective tax rate decline and decline," said Thompson. "This tells you that companies are finding ways, whether it's through shell companies or inversion or something, to pay less."This is true, as the effective tax rate for S&amp;P 500 companies is somewhere around 29%, <a href="http://www.businessinsider.com/us-company-effective-tax-rate-below-statutory-rate-2015-10">much lower than the statutory rate</a> of 39%, and this number has been on the decline for over 40 years.<div class="KonaFilter image-container display-table click-to-enlarge"><div><div class="image"><a title_source="Goldman Sachs" title_caption="" class="zoomin" href="https://static-ssl.businessinsider.com/image/57081c659105841c008bb9b5-960/screen shot 2016-04-08 at 5.02.04 pm.png"></a>Goldman Sachs</div></div></div>All of these moves - buybacks, shell tax havens, and more - are on a "broad continuum of financial engineering.""These companies are saying 'we're going to get those numbers no matter how,' and they've done it through cuts and engineering," Thompson told Business Insider.<h2>Not ending anytime soon</h2>When asked if this is just a passing fad or something more, Thompson was direct."I don't see any change coming to it," he said. "If you get the economy to suddenly kick up its growth that could take some pressure off, but I don't imagine that's going to happen."Additionally, he said, because "the current generation in the C-Suite" at many of these companies has been ingrained with the practice for so long, it's doubtful to end. <div class="margin-top"> <h3>NOW WATCH: <a href="http://www.businessinsider.com/amazing-spacex-rocket-landing-2016-4">Watch SpaceX pull off its most impressive rocket landing to date</a></h3> <div> <div> <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="thbGRvMjE6cuKno6K5vU3gLQSnXRSkj3" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div> </div> </div> </div>

US companies are undergoing a transformation so huge it's 'nothing short of stunning'

<div class="KonaFilter image-container display-table float_right"><div><div class="image on-image"> Bill Pugliano/Getty ImagesJack Dorsey.</div></div></div>There is an interesting line in Square's recent IPO filing that reveals that CEO and founder Jack Dorsey's companies appear to be profiting from one another<a href="http://www.sec.gov/Archives/edgar/data/1512673/000119312515343733/d937622ds1.htm">The S-1 filing states</a> that West Studios LLC, a marketing firm in which Dorsey has "direct ownership interest," received $1.2 million from Square for "consulting services."Not only that, but West Studios purchased 375,000 shares of Square's common stock, which ws exercised in full in 2014.This isn't the first time West Studios has popped up in one of Dorsey's companies' SEC filings.Check out this passage from <a href="http://www.sec.gov/Archives/edgar/data/1418091/000119312513390321/d564001ds1.htm">Twitter's IPO S-1 filing in 2013</a>:Jack Dorsey, one of our directors, has a direct ownership interest in West Studios, LLC. In 2011 and 2012, we incurred $0.3 million and $1.9 million, respectively, of expense for marketing and communication services rendered to us by West Studios, LLC. No expense was incurred in relation to this arrangement in the six months ended June 30, 2013. There was no outstanding payable balance to West Studios, LLC as of June 30, 2013.The traditional defense of these kind of relationships between directors at companies and service providers where they are also directors is as follows: Working at a startup is chaotic. Startups often don't have the time or the resource to conduct lengthy agency reviews (and they may not even know how to conduct an agency review.) And not all big agencies want to work with startups. If the CEO or a senior director at the company already knows an agency that can work with them straight away to get things up and running, that's great. There may be a potential conflict of interest, but it has been fully disclosed, and not huge amounts of money are changing hands here.Nevertheless, for West to pop up not once, but twice, in Dorsey's S-1 filings is likely to raise some eyebrows.<h2>So what is West Studios? And why is it getting all this money from Jack Dorsey's companies?</h2>West isn't a well-known marketing agency. It doesn't have a website. Trade web side <a href="http://www.adweek.com/agencyspy/we-hear-whats-going-on-at-west-studios/53200">AgencySpy has previously described it as "secretive."</a>Business Insider has contacted West, Square, and Twitter for comment on this article. Twitter confirmed it no longer has a relationship with West. Square declined to comment. We'll update the post once we hear back from West.Until then, here's what we know.West is a small (~50 people say they work with the company on LinkedIn) San Francisco-based agency <a href="http://adage.com/article/creativity-news/apple-katalyst-martin-agency-alums-launch-s-f-shop/229447/">founded by former Apple VP of marketing communications Allison Johnson in 2011</a>. Johnson reported directly into Steve Jobs at Apple and oversaw the launch of memorable ad campaigns like "Mac vs. PC" and "There's an app for that."Here's a video of Johnson talking about her time at Apple.Dorsey provided some of the initial funding to launch the agency, although it's not clear exactly how much of a stake he has in the business. <a href="http://www.adweek.com/agencyspy/we-hear-whats-going-on-at-west-studios/53200">AgencySpy suggested in 2013 he had "distanced" himself from the company</a> since launch. <a href="http://techcrunch.com/2014/09/24/jack-dorseys-advertising-agency-couldnt-make-a-more-pretentious-website-if-it-tried/">Ray Chambers, the founder of Malaria No More, was also an initial investor.</a>Here's how West describes itself, as per a job post on the agency's LinkedIn page for a role in its New York office:West provides strategy, design, growth, and creative expertise to early stage companies who are ready to scale their markets and achieve their maximum potential. Our Partners are typically high-profile, well-funded companies with seasoned founder teams and good traction with a loveable product. We provide a fully supported "CMO-in-Residence" team to design and build the strategy, structure, processes and talent necessary to create a world-class marketing engine that drives exponential growth.Our approach is highly collaborative, where every team member contributes to the design, development, and implementation of world-class marketing outcomes. The West process is fueled by creative tension between business, market, and customer requirements, and steered by an entrepreneurial understanding of "start up" urgency and resource constraints.West Studio's clients have included Jawbone, Rdio, Tumblr and artificial intelligence company Anki, a source tells us the agency has also worked with Path - and, of course, Twitter and Square.<h2>West's involvement with Twitter and Square</h2>In 2011, when Dorsey was serving as Twitter's executive chairman, he went on to oversee the company's marketing functions, following the swift departure of marketing head Pam Kramer after just three months in the role.According to <a href="http://www.businessinsider.com/jack-dorsey-first-time-as-twitter-ceo-2015-10">a report from Business Insider's Alexei Oreskovic earlier this month</a>, Dorsey hired West Studios to produce Twitter's first and only TV commercials. A source told Business Insider the arrangement (the fact that Dorsey appointed a company he has a financial stake in) "raised eyebrows and caused whispers within the company."Here's a playlist of those 15-second TV ads.In 2012, after a period of turmoil in which Dorsey reshuffled executives at the company, changed the product, but also failed to be communicative enough with his staff, he was "quietly shown the door," the source told Business Insider. Twitter no longer has a relationship with West.Now Dorsey appears to have set up a similar arrangement between West Studios and Square.Dorsey isn't doing anything wrong or illegal. Yet the arrangements between West Studios and Twitter and Square do suggest a conflict of interest. When companies buy services from agencies they're supposed to make their appointments based on the value that agency will be able to provide. Appointing a company that your CEO is invested in could raise a problem for internal marketing departments: it could present some political tensions if the marketing boss wanted to get rid of the agency from the roster.<h2>This is not the first time the founder of a tech company has set up cozy deals with his own vendors.</h2>Back in 2013, Business Insider's Jim Edwards reported that <a href="http://www.businessinsider.com/groupons-cozy-deals-with-lefkofskys-marketing-logistics-and-law-firms-2013-2">Groupon's founder and then-executive chairman and temporary co-CEO Lefkofsky had a financial interest in several companies that had relationships or companies with Groupon. </a>He was a director in marketing services company InnerWorkings, which Groupon paid $2.5 million to in 2011 and a further $1.3 million to in 2012. And Lefkofsky was a director at Echo Global Logistics, to which Groupon paid $600,000 to in 2012. Groupon also paid $695,000 to Lefkofsky &amp; Gorosh in 2011, a law firm owned by his brother.<div class="KonaFilter image-container display-table"><div><div class="image on-image">Getty ImagesEric Lefkofsky, Groupon CEO.</div></div></div>At the time, those arrangements caught the eye of corporate governance watchdog GMI Ratings. <a href="http://www.businessinsider.com/groupon-never-mind-the-audit-committee-what-about-the-board-2012-7">GMI's Paul Hodgson called the company out</a>. He said the interlocking directorships formed "a governance nightmare" that "raises serious questions about the ability of this board to perform its duties effectively."We asked <keyword id="35666" type="COMPANY" weightage="100" keywordseo="advertising">advertising</keyword> industry observer, Pivotal Research senior analyst Brian Wieser, he thought of the relationship between Dorsey's lesser-known third company West and his two better-known ones. Wieser said that as long as there are disclosures around the relationships (which there are) there isn't likely any reason to be concerned.He added: "Agencies can be viewed as extensions of marketing departments, and with early stage companies the line can be blurry between what services might be best managed in-house vs. through agencies. Often, it is a matter of finding the individuals who are best situated to do specific work."More importantly, not every agency actually wants to work with a startup, given the uncertainty around whether the company can pay in full in cash, and what the ultimate scope of the relationship will involve.Wieser said : "In that context, if a CEO of such a start-up company has a relationship with an agency - whether through personal relationships or an equity position or both - it doesn't seem unreasonable to choose to work with that agency." <div class="margin-top"> <h3>NOW WATCH: <a href="http://www.businessinsider.com/amazing-facts-about-twitters-jack-dorsey-ceo-2015-10">The full story of Twitter CEO Jack Dorsey is much more awesome than you realize</a></h3> <div> <div> <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="gyZ2ptdTozPFw5g_VY4mVcCrCjDI1DMb" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div> </div> </div> </div>

Jack Dorsey has a secretive marketing agency that doesn't even have a website and has counted both Square and Twitter among its clients

Yesterday, Citigroup announced that it's CEO Michael Corbat would be paid $11.5 million for 2012.Today, <a href="http://www.nytimes.com/2013/02/22/business/citi-changes-terms-of-executive-bonuses.html?adxnnl=1&amp;adxnnlx=1361542395-Kz2UtgT8PknmoQ4egp6B3g">Dealbook</a> has written about the fall-out from that announcement.
The verdict: Shareholders are still upset about the way <keyword id="6372865" type="CITY" weightage="60" keywordseo="Citi">Citi</keyword> is calculating <keyword id="6420527" type="POSITION" weightage="60" keywordseo="executive">executive</keyword> pay, despite assurances that a new calculation method would attach a larger portion of executive bonuses to bank performance.
Shareholder reaction here is more important than at any other bank on <keyword id="42111" type="COMPANY" weightage="60" keywordseo="Wall-Street">Wall Street</keyword>. You may remember that last April, Citi's board voted against then-CEO Vikram Pandit's <a href="http://www.businessinsider.com/vikram-pandit-compensation-2012-10">pay package totaling about $15 million.</a> These votes are non-binding, but they send a pretty serious message either way.
Pandit (despite having take $1 as <keyword id="6356362" type="PERSON" weightage="60" keywordseo="compensation">compensation</keyword> for one year), was a pretty well-paid CEO. According to <a href="http://www.bloomberg.com/news/2012-10-16/pandit-steps-down-as-citigroup-s-chief-as-corbat-takes-over-1-.html">Bloomberg</a>, Pandit was paid about $261 million in the five years since he became CEO, including profits the sale of his hedge fund, Maiden Lane, to Citi.
The board was hoping that with a new CEO, and after the agitation of the past year, there would be some change at Citi — and there was some change, but it doesn't sound like enough.
<a href="http://www.nytimes.com/2013/02/22/business/citi-changes-terms-of-executive-bonuses.html?adxnnl=1&amp;adxnnlx=1361542395-Kz2UtgT8PknmoQ4egp6B3g">From Dealbook:</a>
Nell Minow, a shareholder advocate at GMI Ratings, said the new approach was “far from perfect, or even good, but it’s less terrible than it used to be.” Citi’s board members will continue to approve base salaries, cash bonuses and deferred stock given to top Citi executives, the same way they were in the past. But now a new segment of the pay, called performance share units, will be linked to the new metrics. For 2012, Mr. Corbat was awarded $3.1 million in performance share units. That amounts to 27 percent of his total $11.5 million pay package.
 A spokesperson for the huge pension fund, CalPERS (California Public Employees’ Retirement System) didn't sound jazzed either.
“We’d like to make sure that the incentive structures aren’t focusing on revenues and returns without thinking about risk, because that’s how we got ourselves into the financial crisis,” said Ms. Simpson.
<a href="http://www.nytimes.com/2013/02/22/business/citi-changes-terms-of-executive-bonuses.html?adxnnl=1&amp;adxnnlx=1361542395-Kz2UtgT8PknmoQ4egp6B3g">Read the full story at Dealbook</a><a href="http://www.nytimes.com/2013/02/22/business/citi-changes-terms-of-executive-bonuses.html?adxnnl=1&amp;adxnnlx=1361542395-Kz2UtgT8PknmoQ4egp6B3g"></a>

There's Still Turmoil Over Executive Bonuses At Citigroup

<div class="image-container float_right click-to-enlarge" style="width:347px"><div class="image"><a title_source="Photo by Kevork Djansezian/Getty Images" title_caption="Groupon's founder and executive chairman, Eric Lefkofsky." class="zoomin" href="http://static1.businessinsider.com/image/4ffed0bf69bedd9134000017-960/eric-lefkofsky.jpg"></a></div>Photo by Kevork Djansezian/Getty Images<keyword id="384914" type="PERSON" weightage="60" keywordseo="Groupon">Groupon</keyword>'s founder and executive chairman, <keyword id="1025489" type="PERSON" weightage="60" keywordseo="Eric-Lefkofsky">Eric Lefkofsky</keyword>.</div>Groupon's founder and executive chairman, <a href="http://investor.groupon.com/releasedetail.cfm?ReleaseID=744280">Eric Lefkofsky, just took on the role of temporary co-CEO</a> as the company searches for <a href="http://www.businessinsider.com/andrew-mason-out-as-groupon-ceo-2013-2">a replacement for Andrew Mason</a> in the top job. Lefkofsky shares the role with Ted Leonsis, a Groupon board member who is a venture capitalist and owner of several sports teams.
Lefkofsky has some interesting business relationships with Groupon that go beyond his positions as a director and its new interim CEO. He's not just the founder, or the man who originally tapped Mason for the job. He's also has interests in several companies that have close relationships or contracts with Groupon that, for a long time, have represented a conflict of interest for the company, as disclosed in its SEC filings.
Lefkofsky takes not a dime in cash for his services on the board.
He doesn't need to. In 2011, his investment group, Green Media, made about $314 million when it <a href="http://mashable.com/2011/06/02/groupon-cash-out/">cashed out of the Groupon stock</a> it held ahead of the IPO. Lefkofsky continued to hold 128 million shares of Class A stock and 1 million shares of Class B stock, according to <a href="http://www.sec.gov/Archives/edgar/data/1490281/000104746912005013/a2209099zdef14a.htm">Groupon's most recent proxy form</a>, which gave him and Groupon's two other founders (Mason and Bradley A. Keywell) 57.4% control of the company's voting stock. But according to documents filed with the SEC, Groupon uses companies linked to Lefkofsky for its marketing, logistics and legal services. <a href="http://www.sec.gov/Archives/edgar/data/1490281/000149028112000015/grouponq210-q.htm">Groupon even admitted in a recent 10-Q</a> that this — and Lefkofsky's other non-Groupon business dealings — represents a potential conflict of interest that may hurt the company. It said:
[Lefkofsky's] investments may be in areas that present conflicts with, or involve businesses related to, our operations. There can be no assurance that our business will not be adversely affected as Mr. Lefkofsky devotes less time to our business in the future.
A similar disclosure was repeated in <a href="http://www.sec.gov/Archives/edgar/data/1490281/000149028113000008/groupon201210-k.htm">the company's most recent 10-K</a>.
Usually, when companies buy services from ad agencies, shipping companies and law firms they choose based on price and whether the vendor has the best offering for the company. Choosing vendors that your chairman is invested in raises an obvious potential problem: It can be hard to fire a company that screws up when that company belongs to the boss.
<a href="http://www.businessinsider.com/groupon-has-cozy-deals-with-its-chairmans-marketing-logistics-and-law-firms-2012-8">Groupon told us back in August</a> that the expenses were small and expected to decrease or vanish in the future, and that Lefkofsky's companies were chosen because Groupon needs to scale quickly to avoid losing market share.
The payments are indeed not material to Groupon's business. And, to be clear, Lefkofsky is not doing anything wrong or illegal.
But the deals are another example of Groupon's occasional tone deafness regarding its public image. (Another example: when <a href="http://allthingsd.com/20110714/groupon-retracts-wildly-profitable-statement-in-latest-sec-filing/">Lefkofsky had to retract a statement claiming Groupon</a> would be "wildly profitable" when it wasn't.) The sums involved are peanuts for both Groupon and Lefkofsky — yet they require an embarrassing disclosure to the SEC that the company's founder and chairman and now CEO may be engaged in a conflict of interest. Here are the Lefkofsky companies that Groupon uses, and how much they cost the company. The data comes from <a href="http://www.sec.gov/Archives/edgar/data/1490281/000149028112000015/grouponq210-q.htm">Groupon's 10-Q</a> filings and its <a href="http://www.sec.gov/Archives/edgar/data/1490281/000104746912005013/a2209099zdef14a.htm">proxy form</a>:
<ul>
<li>InnerWorkings: marketing services, gift cards and promotional procurement. Lefkofsky is a director of the company and has an ownership stake in it. Groupon paid InnerWorkings $2.5 million in 2011, and has paid another $1.3 million this year.</li>
<li>Groupon says: InnerWorkings is one of the biggest print brokers in the U.S., the expenditures were of a one-time nature and the company expects InnerWorking's assignments to decrease. IW got the job because Groupon needed the materials quickly and was familiar with the company. </li>
<li>Echo Global Logistics: transportation and supply chain management. Groupon paid Echo $600,000 this year. (To complete the incestuous circle, Echo also uses InnerWorkings for print jobs and owns stock in Echo which it has sold over the years, according to <a href="http://www.sec.gov/Archives/edgar/data/1350381/000114420412044085/v318112_10q.htm">InnerWorking's 10-Q</a>. And it's not just Lefkofsky. Two of Groupon's other directors, Peter A. Barris and Bradley A. Keywell, are or have been directors of Echo with ownership stakes. Barris has a similar link to InnerWorkings.)</li>
<li>Groupon says: Echo handles payments for small-pack shipping for Groupon Goods, Groupon's new discount retail operation. Echo is a freight broker that reviews, audits and pays the company's bills. The majority of that $1.3 million is pass-through payments. </li>
<li>Lefkofsky &amp; Gorosh: law firm owned by Lefkofsky's brother, Steven. Groupon said it paid L&amp;G $695,000 in 2011 and expects to continue to use the firm in the future.</li>
<li>Groupon says: The fee is such a tiny percentage of Groupon's overall legal fees that it is a stretch to insinuate something negative is going on. L&amp;G worked on a class action settlement and does not expect to ever spend significant sums with the firm.</li>
</ul>
The links have caught the eye of corporate governance watchdog GMI Ratings. In April, <a href="http://www.businessinsider.com/groupon-never-mind-the-audit-committee-what-about-the-board-2012-7">GMI's Paul Hodgson called the company out</a>. He said the interlocking directorships formed "a governance nightmare" that "raises serious questions about the ability of this board to perform its duties effectively."

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