Pondering Your Worst Nightmare
The Importance of Hypotheticals in Corporate Governance
The titles of Boris Feldman's slides are enough to send shivers down the spine of any corporate ethics or compliance officer: "Sex." "Whistleblowing." "Foreign Payments."
At the Business and Organizational Ethics Partnership at Santa Clara University's Markkula Center for Applied Ethics, Feldman helped participants explore the ethical problems that can arise in these and other areas. Feldman is a partner at the law firm Wilson Sonsini Goodrich & Rosati, who specializes in securities litigation and counseling, SEC enforcement actions, and M&A litigation. His talk was entitled, "Your Worst Nightmare: Ethical Hypotheticals for the In-House Ethics & Compliance Team."
Feldman started by listing three "Principles of Survival," followed by three defenses.
The survival principles, Feldman said, will help keep a company out of trouble:
- The Wall Street Journal test: When you're weighing a potential action, ask yourself how it would look if it were made public.
- Everyone wants to blame you: This is particularly true if you are an attorney, whether in-house or external, though it could also apply to others with a compliance role. "When something really goes wrong, people's natural instinct is to say, 'I checked with a lawyer,'" Feldman said.
- Heightened scrutiny and expectations: A CEO may be able to say that a particular question was an accounting issue and he wasn't involved. The head of sales can say he was just responsible for getting a deal done, not for how it was accounted for afterward. But "people expect that, as a lawyer or a compliance officer or as an audit committee member, if you didn't know the facts, you should have found out," Feldman said.
When a problem does arise, Feldman listed three best defenses:
- Disclosure: Getting the facts out won't save you in the case of outright fraud. But in cases of "aggressive accounting decisions," where an accounting decision is second-guessed by outside auditors, or another company in your industry runs into a problem doing something similar, disclosing information will be very helpful in keeping you out of trouble.
- Reliance on experts: If people are pushing back and trying to get you to make a decision you're not certain of, it helps to bring in outside experts. If it's an intellectual property issue, for example, bring in an outside IP expert to offer advice.
- Documentation: Corporate directors have often been discouraged from taking and keeping notes of meetings. But "if there is a lawsuit and the only thing you have in your files is the option grants, that looks terrible," Feldman said. "I think you need to keep enough so that if you were called upon to justify what you did, you could refresh your memory."
Feldman walked participants through a series of hypothetical questions: If your friend tells you confidentially that he or she is in a relationship with another employee at the company, do you have an obligation to investigate or report this? Does the situation change if your friend is the CEO? If one or both of the parties is married? If they travel together on company business?
Feldman said this is often not a legal issue and can be dealt with by the Human Resources Department; in many cases, it would be good to encourage the friend to let the HR department know. He also noted that when company expense reports are involved, that raises the stakes: "I've seen boards fire people for this, saying, 'If you want to have an affair, don't do it on our nickel.'"
Another scenario: What do you do if you learn that a person in China who works for a third party affiliated with your company has made payments to procure business? Do you report this to the SEC or to the Department of Justice?
Feldman noted that many companies, having seen the failures of internal legal departments to identify problems at Enron and other companies, are now very quick to hand off investigations such as these to outside counsel. However, he said, "this is the bread and butter of the compliance person." That internal person should immediately contact the chair of the Audit Committee on the board, but it may well be something the internal compliance officer can investigate. Outside investigations can rack up large bills very quickly, and they are not always necessary.
Margaret Steen is a freelance writer.
Feb 1, 2014
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