governance3Corporate board members face a very tough environment.  Prosecutors are gunning for a criminal case against a board and/or some of its members.  Shareholders regularly sue board members whenever a company suffers a business or legal setback.

The life of a board member has dramatically changed.  No longer is the job a “cushy” way to dabble in business management from high up in the ivory tower and collect lucrative fees.  Directors are dodging bullets every day.  They are inundated with volumes of information and they are responsible for reviewing and using information to manage the business.  The volume of information sent to a board member through improved technology is mind-boggling in scope and in detail.  Sometimes I wonder if it is humanly possible to keep up with all the information.

The Justice Department’s prosecution of the BizJet case and four individuals came as close to a set of facts where board members could have been found liable.  In that case, the board actually was informed of the plan to bribe foreign officials as a way to increase Bizjet’s bottom line revenues.  After hearing of the plan, no one on the board asked a question no one said a word.  Talk about an ostrich putting his head in the sand.  I am reminded of Sergeant Schultz from Hogan’s Heroes – “ I know nothing! I see nothing!”

The BizJet case is too easy to tie to a corporate governance breakdown.  The more difficult situations to analyze are those where the company has an ethics and compliance program on the books, with adequate resources, and a commitment to ensure its implementation, and then suffers a major, systemic violation in a country, multiple countries or a region.governance4

In every case – no matter what facts – rest assured there has been some corporate governance breakdown.  The magnitude may vary but there is no question that some part of the corporate governance machinery malfunctioned.  It is too easy for the board to wrap itself in its procedures and commitment and defend itself with claims that, “We did everything we could possibly do to ensure compliance.”

Such claims are a cop-out.  Instead, the board needs to reexamine exactly what it did, why and where they failed to exercise proper oversight and monitoring of the ethics and compliance program.  It is easy to come in and second guess the board, but the challenge for a forward-thinking board is to identify the problem and remedy the problem.

Some board members will claim that the Chief Compliance Officer was not diligent nor forthcoming about compliance performance and measurements.  Again, that is a cop-out.  The board has a responsibility to look beyond the CCO, to exercise reasonable oversight steps beyond the CCO, and review information from a number of sources, including the CEO and other senior managers.

governanceI have written before on the importance of the board conducting an annual self-evaluation to identify strengths and weaknesses of the board’s overall performance.  In the face of a major compliance issue, the board needs to re-examine in detail its actions or inaction in monitoring the company’s compliance program.  If a board commits to such a process, I expect it will identify deficiencies, including: a failure to obtain adequate information concerning the operation of the compliance program, and the detection of violations; ignoring warning signs of inadequate compliance resources, technological limitations; a breakdown in basic financial controls; and lackluster commitment to the ethics and compliance function.

The board will face a difficult question – in the face of all of these warning signs, why did it fail to act or demand greater accountability?

All too often, corporate board members suffer from a short-sighted focus on quarterly performance.  In today’s marketplace, there are a number of reasons why short-term performance is valued over long-term stability.  Strategic board members need to move the education needle a little bit more towards ethics and compliance as a key indicator of long-term stability.  Board members are the perfect messengers but often succumb to the view that they may have limited influence on the overall operations of the business.  In some cases, board members favor a “group think” over a leadership and educational role in board dynamics.governance2

It is easy to sit back and point the fingers for corporate malfeasance at senior managers.  The list of bad actor CEOs is legendary over the last 30 years of corporate scandals.  The challenge for corporate governance experts and board members is to lead in a real way and elevate the performance and accountability of corporate boards.

Topics:  Board of Directors, Chief Compliance Officers, Compliance, Corporate Governance, Employer Liability Issues, Ethics, Shareholders

Published In: Business Organization Updates, General Business Updates, Criminal Law Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Group Law Firm | Attorney Advertising

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