The prosperity of any company is highly dependent on the board of directors as they are tasked with the responsibility of ensuring that the interests of the company as well as those of its shareholders are maintained. In basic terms it can be stated that directors take up the role of fiduciary agents. Moreover, occupying the stated position means that they own the company, their position is determined by the shareholders, and they are mandated to keep the affairs of the company in check. Regardless, no company has the capability of maintaining a profitable streak without directors who have traits of honesty and drive for performance (Rodriguez-Fernandez, 2016). The stated characteristics identify the important role that directors play in any corporate system. The duties identified to directors are based on common law as well as impartial principles.
In the case of the de novo community bank, the same principles and responsibilities were assigned to the board of directors. The banking institution after being granted its charter to trade in the NASDAQ by the Federal Reserve meant that the directors were to operate in compliance with the federal law (Stettinius, Logan & Colley, 2003). The Jack Wright case portrayed a common problem that occurs in various publicly owned organizations. The banking institution at hand had portrayed potential in not only growing beyond the community but also to become a significant participant in the banking industry. The problems with the bank began when it wanted to ensure it solidified its position in the ranks of “well-capitalized” banks as termed by the Federal Reserve and other oversight agencies (Stettinius, Logan & Colley, 2003). However, to achieve this action, the bank needed equity capital; the opportunity presented itself in the form of a wealthy local who was impressed by the bank's performance.
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According to Jack Wright, the opportunity could not have come at a better time. The complication was precipitated when the wife of one of the founding directors came to acquire some inheritance. Observing the stellar performance of the bank, she independently decided to invest in it by buying some shares (Stettinius, Logan & Colley, 2003). According to the Securities and Exchange Commission (SEC), insider trading is defined as the buying or selling of shares or security by an individual who has access to material that the public is not aware of about the security (Agrawal & Copper, 2015). Its illegality is highly dependent on when the individual makes the trade. Moreover, its illegality can be brought about in the form of giving out information to others. The role of the SEC, in this case, is to protect the investments of the public from being affected by such activities (Agrawal & Copper, 2015). Nevertheless, the bank’s shares grew substantially, by approximately 20%, after the notification of the wealthy investors intended action reached the public. If the SEC were to investigate the situation the director and his wife would have been charged for insider trading (Peni & Vähämaa, 2012). This is the reason as to why the bank’s legal counsel was adamant on the information of the investment not being shared until it was completed.
The complications with the shares arose when the director at fault did not report the matter to the SEC and the board of directors until the final stages of the security purchase. According to the case study, the director had 48hours to present the scenario to the SEC via the SEC Form S-4 (Stettinius, Logan & Colley, 2003). The forms are also termed as the Registration Statement under the 1933 Securities Exchange Act (Agrawal & Copper, 2015). Their main purpose is to provide information that can be regarded as being essential upon the registration of a company’s securities. The purpose of this form is to assist the SEC in its objectives of making company information more accessible to investors. In this case, the director’s wife was not identified to the wealthy investor thus complicating the situation. The complications were further amplified when the director failed to disclose the information to the board of directors. The news of the filling took all the parties involved by surprise and the wealthy investor backed out possibly on the count that fraudulent activities. Before the SEC was involved in the case, the chair of the board was tasked with investigating the issue. Though the results identified that the director was not aware of his wife’s actions, it raised many questions among the board members (Stettinius, Logan & Colley, 2003). Among the most controversial was the punishment that was to be implemented. The director had strong ties to the community and any action on his side would result in the rift that would affect the community. Then again, the action had to be punished as a deterrent to others.
Moreover, doubt rose over the issue when the board of directors recalled being warned not to share the information about the investment plans with anyone. They reasoned that the director should have warned his wife on making any investments with the bank until the transaction was complete (Stettinius, Logan & Colley, 2003). Then again they identified themselves with him stating that he may not have been aware of the inheritance and how she may have wanted to use it. Coupled with the fact that he was willing to return the bought shares at their original price to the seller, it identified his remorse for both his and his wife’s actions (Stettinius, Logan & Colley, 2003). As stated in the beginning, the role director is to ensure the prosperity of the company and that in mind, this director failed to achieve this action. Moreover, the director exposed the community bank to unnecessary risks in the form of penalties from the SEC for lack of adhering to regulations such as the submission of Form S-4, criminal investigations that may have damaged the banks repute, and finally, created distrust among the board members.
Conclusion
After the full investigation conducted by Jack Wright, it was clear that action had to be taken. However, how it would be implemented was the dilemma. The board of directors in their discussions came to four pending issues. The first was stated earlier being what form of punishment was to be implemented without affecting the community’s influence on the bank. Secondly, was the credibility of the director, though he displayed impartial actions such as self-reporting, his lack of experience with corporate governance was in question. The third issue was whether the board of directors had confidence in his participation in company activities. Finally, the lack of restitution to the bank and its shareholders was addressed as they resorted to find the needed balance. These are some of the many problems that board of directors encounter, in this case, they were limited to act as the director’s influence in the community was deep, and any action on their side would damage the bank's performance. This would be going against their core values, yet again the shareholders needed restitution for the action of the director’s wife as well as his for not reporting the matter under the speculated period.
References
Agrawal, A., & Cooper, T. (2015). Insider trading before accounting scandals. Journal of Corporate Finance , 34 , 169-190.
Peni, E., & Vähämaa, S. (2012). Did good corporate governance improve bank performance during the financial crisis?. Journal of Financial Services Research , 41 (1-2), 19-35.
Rodriguez-Fernandez, M. (2016). Social responsibility and financial performance: The role of good corporate governance. BRQ Business Research Quarterly , 19 (2), 137-151.
Stettinius, W., Logan, G., & Colley, J. (2003). Corporate Governance: The Jack Wright Series (2) Legal Obligations of Directors . Charlottesville, VA: University of Virginia.
