Conflicting Perspectives on Conflicts of Interest

Conflicting Perspectives on Conflicts of Interest
Case 10.2 Conflicting Perspectives on Conflicts of Interest
In 2009, Richard Parsons, formerly chair of Time Warner, became head of the board of directors of Citibank, that enormous but troubled financial organization. One of Citi’s clients is Providence Equity Partners, a large private equity firm that has significant holdings in MGM, Univision, and other companies. Always on the lookout for new investments, Providence Equity Partners, like other pri-vate equity firms, often needs financing to undertake those investments. Providing such financing is just what Citibank does for a living. Within a year of his arrival, however, Parsons, while remaining chairman of the board at Citibank, became a sen-ior advisor to Providence. He gets paid for this and will pre-sumably also receive bonuses if Providence does well, as is the normal practice. Parsons will thus be chair of a company that is potentially a huge lender to Providence at the same time that he is working for Providence. ( Although it ultimately fell through, Citi was once involved with Providence in a $ 51.5 million acquisitions deal.) Because Parsons has a clear- cut fiduciary duty to Citibank’s shareholders and must put their interests ahead of his or anyone else’s, his financial stake in Providence looks like a paradigm of a conflict of interest— not to mention the fact that Citibank, with all its problems, probably needs the full- time attention of the chair-man of its board. “ Is he so good at rescuing megabanks,” ask business writer Ben Stein, “ that he can do that and another major job at the same time?” Citibank, however, sees no problem. A spokesperson says that the bank would not allow “ even the appearance” of a conflict of interest and that its board of directors has approved what Parsons has done as long as he recuses himself from taking part in any decisions about Providence. One naturally wonders not only why Citibank would permit this situation to arise in the first place but also how effective its proposed handling of it will be. Sometimes Providence needs financing, and Citibank often lends money to firms like it for just that purpose. Parsons says he will not take part in those deci-sions. But are disclosure and recusal enough? Even if Parsons is not in the room, how could a manager at Citibank go against a deal involving his boss? Furthermore, easier terms for Providence mean less money for Citibank’s shareholders, but will Citibank executives really negotiate the best deal for Citi when they know it hurts Providence— and therefore Parsons? Here, the question is how best to avoid, or deal with, a conflict of interest. In other cases, however, it is less certain whether there’s a conflict of interest at all and, if so, what exactly the conflict is. Take the example of Joe Noel and KeyOn Communications, a small broadband provider that serves about 15,000 rural customers in eleven states. After getting hammered during the financial meltdown, its stock climbed in 2009 from 4 cents to $ 2.10— an increase of more than 5,000 percent. Investors bid up the company’s stock on the hope that it would get a slice of the billions that the federal government was planning to dole out to expand Internet serv-ice around the country. “ We certainly weren’t worth [ just] 4 cents,” says CEO Jonathan Snyder. “ We have a real business with real customers and real product, and a business that can generate real cash flow.” In truth, however, the company isn’t generating much, if any, cash, and it’s doubtful it will ever deliver on the high hopes of investors. In fact, the bullish run on its stock was largely fueled by one man, Joe Noel, an analyst for Emerging Growth Research. In a typical online report, he writes, “ You’re going to see this company awarded a lot of money,” a refrain that he was repeating well into 2010. What he doesn’t tell investors is that before he began covering KeyOn Communications, the company awarded him 75,000 shares. However, “ if people ask,” he says, “ I’m very up front about [ my financial stake].” CEO Snyder defends Noel, saying his analysis of the company has been “ pretty evenhanded.” He adds that if Noel is “ not properly disclosing, I don’t think he’s doing it maliciously.” As it turns out, the competition among Internet providers for government support was keen, and in March 2010 all of KeyOn’s applications were turned down, causing the price of its stock to fall back to $ 0.95. But even though independent experts had said all along that the odds were against KeyOn’s getting any broadband money at all, as recently as February of that year Joe Noel was touting the stock as vigorously as ever, writing, “ As we have said many times over the past 6 months— We believe KeyOn will get a significant award,” and pointing to the fact that a number of people had invested in the company based on that belief. This is why Michael W. Mayhew of Integrity Research Associates says that it’s a red flag when analysts have the kind of financial involvement that Joe Noel did. “ The paid- for- research- industry,” he says, “ has a stink to it, of being biased, of maybe even being a scam.” 69 Whether there is a stink or not, is this an example of a conflict of interest?
Discussion Questions
1. Based on the definition given earlier in the chapter, does Richard Parsons have a conflict of interest? If so, explain what it is. If not, explain why not.
2. If Citibank’s board permits Parsons to work for Providence Equity Partners, does this mean that he has honored his fiduciary responsibilities to Citibank’s shareholders? If you were a stockholder in Citibank, what would you think? Why do you think Citibank permitted Parsons to accept the position with Providence in the first place?
3. Are disclosure and recusal sufficient to deal with the situ-ation? Are there any other steps that Citibank might take?
4. Joe Noel clearly had a financial interest in KeyOn’s doing well. But did he have a conflict of interest? If so, what exactly was the conflict? If not, was there anything morally objectionable about his conduct?
5. Should people who discuss or recommend specific stocks online, on television, or in print disclose their own invest-ments in those companies? Is it sufficient for them to do so only “ if people ask”?