Under the US Sentencing Guidelines, the Board must exercise reasonable oversight on the effectiveness of a company’s compliance program. The US Department of Justice (DOJ) Prosecution Standards posed the following queries: (1) Do the Directors exercise independent review of a company’s compliance program? and (2) Are Directors provided information sufficient to enable the exercise of independent judgment? Moreover, the FCPA Guidance requires a CCO to have direct access to the Board or an appropriate sub-committee. The Guidance also requires a tangible commitment from the top levels of an organization, starting with the Board of Directors that the company create an ethical culture.
At the Board of Directors level, a Board Compliance Committee can devote itself exclusively to non-financial compliance, such as FCPA compliance. While many companies have fulfilled these obligations through an Audit Committee, clearly the better practice is to have a separate Compliance Committee. The reason is clear, that compliance has become not only central to any well-run business but it is critical to overseeing a wider variety of risks than the typical Audit Committee has experience with, which is usually only aimed towards financial risks.
The Board Compliance Committee should begin its inquiry with a basic: ‘How do we know it is working?’ In other words, is a company’s compliance program living up to the hallmarks of an effective compliance program in the eyes of the government. Here I lay out four areas of more specific inquiry.
The Board Compliance Committee should obtain information on the processes to carry out the compliance function, rather than details on specific compliance issues. They need to understand that there is a single individual or internal corporate discipline keeping track of the compliance function and making sure that it is being handled properly. They need to understand that there is a system in place that keeps track of compliance requirements.
Another area the Board Compliance Committee interest should be in is the area of hotlines or other internal reporting mechanisms. Here, the Board Compliance Committee needs to know details about both inbound issues and the responses thereto. In the inbound side this means details about who answers the reports, that come in either via email or phone, how this information is triaged and in what time frame. It also requires an understand of whether the reporting system is truly anonymous, with no use of caller-ID or GPS tracking.
The next series of questions deals with the responses to any information which comes to the attention of the company, including such basic inquiries as how are the reports classified and routed? Who gets notified for what types of calls? How the investigative process is divided among various functions or is it outsourced? Finally, what is the response rate and response time?
The Board Compliance Committee must know who is accountable and responsible for each segment of a compliance program. They should obtain assurance that the compliance function has developed a charter that makes it clear to them where obligations fall across management so it can assess accountability. While it is true an effective Board Compliance Committee will allow management do their job running the business on a day-to-day basis, and they understand that their job is to set long-term strategy.
Strategic planning is another area well suited for oversight by a Board Compliance Committee. For such a committee to be both effective and informed it must have an appreciation of where the corporate compliance function stands not only at the present moment, but also has a strategic plan for how the compliance and ethics program can continue to grow. Similarly, Stephen Martin, a partner at Arnold and Porter, has long advocated a 1-3-5-year compliance game plan. However, a Board Compliance Committee should demand the compliance function be nimble enough to respond to new information or actions, such as mergers or acquisitions, divestitures or other external events. If a dynamic changes, you want to get your board’s attention on the changes which may need to happen with the [compliance] program.
Today’s regulatory climate band hyper-transparency in social media make a Board Compliance Committee’s task seem Herculean. But more than simply the regulatory climate, shareholders are taking a much more active role in asserting their rights against Boards of Directors. It is incumbent that Boards seek out and obtain sufficient information to fulfill their legal obligations and keep their company off the front page of the New York Times, Wall Street Journal or Financial Times, just to name a few, to prevent serious reputational damage. A Board Compliance Committee is a good place to start.
Key Takeaways
For more information, check out my book Doing Compliance: Design, Create and Implement an Effective Anti-Corruption Compliance Program, which is available by clicking here.
Show Notes for Episode 6, the Rolls-Royce Global Corruption Enforcement Action
This episode is dedicated exclusively to the Rolls-Royce global corruption enforcement action.
For the Cordery Compliance client alert on Rolls-Royce, see Rolls-Royce case sends a strong signal
For Jay’s post on Rolls-Royce, see Rolls-Royce Takes Global Anti-Corruption to New International Heights + Potential Next Steps for a CCO Whose Company has Bid/Worked with Rolls-Royce
For Mike Volkov’s post on Rolls-Royce, see Serious Fraud Office Makes Big Splash with UK Bribery Act Resolution with Rolls Royce
For Tom Fox’s posts on these topics see the following:
Rants will return next week.
The members of the Everything Compliance panel include:
What are the obligations of a Board member regarding the FCPA? Are the obligations of the Compliance Committee under the FCPA at odds with a director’s “prudent discharge of duties to shareholders”? Do the words prudent discharge even appear anywhere in the FCPA? In webinar, entitled “Reporting to the Board on Your Compliance Program: New Guidance and Good Practices”, Rebecca Walker and Jeffery Kaplan, explored these and other issues.
As to the specific role of ‘Best Practices’ in the area of general compliance and ethics, Walker looked to Delaware corporate law for guidance. She cited to the case of Stone v. Ritter for the proposition that “a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate exists.” From the case of In re Walt Disney Company Derivative Litigation, she drew the principle that directors should follow the best practices in the area of ethics and compliance.
In a recent Compliance Week article, Melissa Aguilar examined the duties of Board members regarding FCPA compliance. The conclusions of several of the FCPA experts that Ms. Aguilar interviewed for the article were that companies which have not yet had any FCPA issues rise up to the Board level are usually the ones which are the most at risk. Albert Vondra, a partner with PricewaterhouseCoopers stated that such companies “don’t have the incentive to spend the resources or take the rigorous approach to their anti-compliance programs. Their attitude is, ‘We’ve got it covered,’ but they don’t”. Richard Cassin, managing partner of Cassin Law, stated that there must be written records demonstrating that the audit committee and that the board members asked questions and received answers regarding FCPA compliance issues. Such documentation demonstrates the Board members have “fulfilled their fiduciary obligations,” Cassin says.
Board failure to head this warning can lead to serious consequences. David Stuart, a senior attorney with Cravath Swaine & Moore, noted that FCPA compliance issues can lead to personal liability for directors, as both the Securities and Exchange Commission (SEC) and DOJ have been “very vocal about their interest in identifying the highest-level individuals within the organization who are responsible for the tone, culture, or weak internal controls that may contribute to, or at least fail to prevent, bribery and corruption”. He added that based upon the SEC’s enforcement action against two senior executives at Nature’s Sunshine, “Under certain circumstances, I could see the SEC invoking the same provisions against audit committee members—for instance, for failing to oversee implementation of a compliance program to mitigate risk of bribery”.
According to Haynes and Boone in its publication, “Corporate Governance and the Role of the Board” a board’s role is not to actually manage the company, but instead to oversee and monitor the management of the company. In the realm of compliance, this means the Chief Compliance Officer. The board has the responsibility to fulfill the role of strategic and business advisor to management of the company. In addition, the board has the role of monitoring the performance of the compliance function, including monitoring the performance of it using customary economic metrics, and by overseeing compliance with applicable laws and regulations. While the board is not responsible for auditing or ferreting out compliance problems, it is responsible for determining that the company has an appropriate system of internal controls. The board should also monitor company policies and practices that address compliance and matters affecting the public perception and reputation of the company. Every company should ensure that it conducts appropriate compliance training for employees and conducts regular compliance assessments. Finally, the board must take appropriate action if and when it becomes aware of a material problem that it believes management is not properly handling.
Alas, there is no reference to prudent discharge in the FCPA itself. However, if I were a remaining member of the Board of China Northeast Petroleum, I might well think more than twice about my prudent discharge of duties to the shareholders as both the DOJ and SEC now might well wish to look into this matter under a Board’s prudent discharge of duties under the FCPA.
Three Key Takeaways
For more information, check out my book Doing Compliance: Design, Create and Implement an Effective Anti-Corruption Compliance Program, which is available by clicking here.
As to the specific role of ‘Best Practices’ in the area of general compliance and ethics, one can look to Delaware corporate law for guidance. The case of In Re Caremark International Inc. was the first case to hold that a Board’s obligation “includes a 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.”
In the case of Stone v. Ritter, the Supreme Court of Delaware expanded on the Caremark decision by establishing two important principles. First, the Court held that the Caremark standard is the appropriate standard for director duties with respect to corporate compliance issues. Second, the Court found that there is no duty of good faith that forms a basis, independent of the duties of care and loyalty, for director liability. Rather, Stone v. Ritter holds that the question of director liability turns on whether there is a "sustained or systematic failure of the board to exercise oversight – such as an utter failure to attempt to assure a reasonable information and reporting system exists.”
According to Haynes and Boone in its publication, “Corporate Governance and the Role of the Board” a director’s business decisions generally qualify for protection by the “business judgment rule.” Under the business judgment rule, courts presume that directors making business decisions acted on an informed basis, in good faith, and with the honest belief that the action taken was in the best interests of the corporation. In lawsuits brought against directors brought by shareholders, courts applying the business judgment rule will determine only whether the directors making the decision (i) were free from conflicts of interest, (ii) appropriately informed themselves before taking the action, and (iii) acted after due consideration of all relevant information that was reasonably available. Under the business judgment rule, the board’s action will not subject board members to liability if the action or decision of the directors can be attributed to any rational business purpose. Directors that meet the criteria of the business judgment rule do not have to worry about having their business decisions second-guessed by a court, even where their decisions result in corporate losses.
A Board’s duty under the Foreign Corrupt Practices Act (FCPA) is well known. In the Department of Justice (DOJ)/Securities and Exchange Commission (SEC) FCPA Guidance, under the Ten Hallmarks of an Effective Compliance Program, there are two specific references to the obligations of a Board. The first in Hallmark No. 1, entitled “Commitment from Senior Management and a Clearly Articulated Policy Against Corruption”, states “Within a business organization, compliance begins with the board of directors and senior executives setting the proper tone for the rest of the company.” The second is found under Hallmark No. 3 entitled “Oversight, Autonomy and Resources”, where it discusses that the Chief Compliance Officer (CCO) should have “direct access to an organization’s governing authority, such as the board of directors and committees of the board of directors (e.g., the audit committee).” Further, under the US Sentencing Guidelines, the Board must exercise reasonable oversight on the effectiveness of a company’s compliance program. The DOJ’s Prosecution Standards posed the following queries: (1) Do the Directors exercise independent review of a company’s compliance program? and (2) Are Directors provided information sufficient to enable the exercise of independent judgment?
There is one other issue regarding the Board and risk management, including FCPA risk management, which should be noted. It appears that the SEC desires Boards to take a more active role in overseeing the management of risk within a company. The SEC has promulgated Regulation SK 407 under which each company must make a disclosure regarding the Board’s role in risk oversight which “may enable investors to better evaluate whether the board is exercising appropriate oversight of risk.” If this disclosure is not made, it could be a securities law violation and subject the company, which fails to make it, to fines, penalties or profit disgorgement.
From the Delaware cases, I believe that a Board must not only have a corporate compliance program in place but actively oversee that function. Further, if a company’s business plan includes a high-risk proposition, there should be additional oversight. In other words, there is an affirmative duty to ask the tough questions. The specific obligations set out regarding the FCPA drive home these general legal obligations down to the specific level of the statute.
Three Key Takeaways
For more information, check out my book Doing Compliance: Design, Create and Implement an Effective Anti-Corruption Compliance Program, which is available by clicking here.