Corporate Board Oversight Responsibilities And Liability

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responsibility3The Department of Justice is targeting individuals for criminal FCPA violations.  As I have discussed before, DOJ is bringing strong cases with overwhelming evidence against individual defendants.  They have also demonstrated a willingness to use tactics typically reserved for drug traffickers and organized crime, including undercover officers, informants, and consensual recordings and videotapes.

Corporate boards would be negligent if they do not recognize that the risk against the board and individual board members has increased.  They would be even more remiss if they did not respond to the increased risks.

The BizJet case is instructive on this very point.  The bribery scheme, as described in the government’s proffer of the facts, was disclosed and tacitly approved by the board.  A presentation was made to the board concerning the bribery scheme and the minutes reflected no questions or comments by the board.  If ever there was a case of board malfeasance, bordering on criminal intent, the BizJet case is the scariest example.

I am not suggesting that corporate boards operate like the one involved in the BizJet case but the facts underscore an important point – board members are at risk because of their duty to exercise oversight and monitor corporate actions.

Whenever a corporate scandal hits, shareholders, prosecutors and regulators ask the same question – “who is responsible?”  Inevitably, the focus is on the board and its responsibility to oversee and monitor company conduct.

The legal framework for assessing corporate board conduct is well-established, focusing on the 1996 case, In Re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del.1996), which described the board’s duty “to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists, and that failure to do so under some circumstances may, in theory at least, render a director liable for losses caused by non-compliance with applicable legal standards.”responsibility

The Caremark standard, however, is irrelevant to my point regarding possible civil and criminal liability for the board or a board member.  The issue boils down to corrupt intent and the standard of knowing.  In the FCPA context, as demonstrated in the Bourke case, an individual can be held liable when he or she is aware of “a high probability of [a fact’s] existence, and consciously and intentionally avoided confirming that fact.”  Board members fall under this same standard like senior executives and others with oversight and managing responsibilities.  It is important to remember that civil liability can be established when the facts rise to the level of preponderance of the evidence.

Corporate boards are acutely aware of their exposure when a government enforcement action is initiated.  They supervise the conduct of an internal investigation, appoint a board committee to exercise day-to-day oversight and monitor the investigation to ensure that the company is protected.

The key for improving corporate board performance and reducing the incidence of corporate crime and misconduct is for corporate boards to act proactively with the same commitment and attention before the government enforcement action occurs – on a day-to-day basis.  In such circumstances, fewer corporate investigations would be required and issues could be identified, investigated and remedied through internal corrective processes without any government intervention.  In the end, that is the responsibility of the corporate board and greater commitment and attention needs to be devoted to promoting good governance.

responsibility5The Department of Justice and the SEC are focusing on individuals.  It is only a matter of time until they find the right factual circumstances to proceed against individual board members for failing to exercise proper oversight and control of individuals who engage in bribery.  Corporate boards which act as if they are invulnerable to such risks are only ignoring the reality they face each day – government prosecutors are investigating companies and prosecuting individuals to send the strongest deterrence message they can send.

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Michael Volkov
The Volkov Group Law Firm

The Volkov Group Law Firm specializes in white collar defense, corporate compliance, internal... View Profile »


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