Or more to the point, was he thinking at all? We’re talking about Rajat Gupta, operating at the highest echelons of multinational business, who finds himself charged by the Securities and Exchange Commission with illegally passing inside information to Raj Rajaratnam, the Galleon Group founder about to go on trial on charges of insider trading. Mr. Gupta, a Harvard Business School graduate and former head of McKinsey & Co., has been a board member of the likes of Goldman Sachs, Proctor & Gamble, and American Airlines.
What did he do? Well, he of course is innocent until proven guilty, and according to media reports, his lawyer says he has done nothing wrong. But the SEC says otherwise. It alleges Gupta gave the Rajaratnam advance information about earnings at both Goldman and P&G. On top of that, the SEC maintains that Gupta called the Galleon head with the inside scoop of the Goldman Board’s approval of Warren Buffett’s $5 billion investment in the firm. The allegations speak to multiple phone calls between the two men, enabling Galleon to reap millions in profits. What must be particularly troubling for both is that the SEC says it has recordings of numerous telephone conversations.
Let’s presume for a moment that the allegations are factual. A relevant question is, is this a black eye on the companies on whose boards Gupta sat (by the way, the reports say he resigned months ago from the Goldman board, and recently from P&G). My answer, based on the information available, is “no.” Certainly, if the allegations are true, a statement by SEC Director of Enforcement is on point: “Mr. Gupta was honored with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets.” But what could or should have been done to prevent wrong doing at the board level?
We know well the importance of a company’s board of directors in keeping a close eye on what the CEO and senior management team do, and on the company’s system of internal control. We recognize the importance of compliance officers, risk officers and internal audit functions. But who keeps an eye on the board, especially when their actions are outside the inner workings of the company itself? We can look to what happened years ago at HP, when a board member leaked information to the media, which resulted in the pretexting fiasco.
There are no immediate answers, other than to continue to ensure full vetting of director candidates, and maintaining effective board and internal audit processes to best identify and manage potential misbehavior. With the thousands of directors of major companies acting with extraordinary integrity and ethics and in the best interests of their companies and shareholders, I believe we don’t have much to worry about. But it is worth more thought going forward.