Andrew Greenstein, Managing Director, Associate General Counsel & Assistant Secretary, Knight Capital Group, Inc. Tom Harris, Partner, Haynes and Boone Compliance Training for Board Members Barbara Trencher, Principle, Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C. Michael Meltzer, General Counsel, Sirota Consulting LLP Panelists Moderator Robert F. Roach, Chief Compliance Officer, NYU
Brian Barnard: The Board – Fulfilling the Compliance Oversight Role, Making the Record Andy Greenstein: The Board - Code of Conduct and Compliance Risks Michael Meltzer: Role of the Board in Creating an Ethical Culture Barbara Trencher When the Best Compliance Efforts Fail - Internal Investigations and the Board Compliance Training for Board Members
Brian Barnard: The Board – Fulfilling the Compliance Oversight Role, Making the Record
Andy Greenstein: The Board - Code of Conduct and Compliance Risks
Code of Conduct - Impact on Corporate Culture by Andy Greenstein Knight Capital Group, Inc.
Code of Conduct as Part of an Overall Corporate Compliance and Ethics Program An effective code of conduct is one of the most impactful parts of any corporate compliance and ethics program. It also helps to satisfy the first hallmark set by the Federal Sentencing Guidelines, which recommends the “promotion of an organizational culture that encourages ethical conduct and a commitment to compliance with the law [through the establishment of] standards and procedures to prevent and detect criminal conduct”.
Role of Code of Conduct To educate directors, officers and employees about the corporate values, ethical standards, Company policies and laws and regulations that they must comply with.
Benefits of an Effective Code of Conduct First step in creating an ethical culture Protects your company’s reputation and bottom line Prevents lawsuits and investigations Complies with The Sarbanes-Oxley Act of 2002 (SOX), The Federal Sentencing Guidelines for Organizations, as amended in 2004, and the NASDAQ and NYSE listing standards, adopted in 2003.
Mandates for Code of Conduct SOX: Public companies must disclose whether they have a code of ethics (or code of conduct) that applies to key officers. Companies that have not adopted a code must explain why not. Federal Sentencing Guidelines: Amendments in 2004 provide for reduced penalties for companies that have “effective programs to prevent and detect violations of law”. Establishment of an effective code of conduct is one part of establishing an effective compliance and risk program. NYSE and NASDAQ Listing Standards: Require publicly listed companies to adopt a code of conduct for directors, officers and employees. Slightly different standards for each exchange.
SOX Guidelines Meant to deter wrongdoing and promote: Honest and ethical conduct Full, fair, accurate, timely and understandable disclosure Compliance with applicable governmental laws, rules and regulations Prompt internal reporting of violations of the code of conduct Accountability for adherence to the code of conduct
Items to be Covered in a Code of Conduct Core Values Financial recordkeeping and reporting Unlawful harassment and discrimination Antitrust (fair competition) Anti-corruption (Foreign Corrupt Practices Act) Reporting (hotline) Insider Trading Proper use of Intellectual Property Privacy Confidentiality Conflicts of Interest Gifts and Entertainment Whistleblower protection/non-retaliation policies Consequences of violating the code of conduct Records retention and management Additional company specific risk items
Code of Conduct Administration Post the code of conduct on your company website and disclose its availability in your company’s annual report (if a listed company) Provide an independent hotline for reporting, including anonymous reporting, of suspected violations of the code of conduct Regularly remind employees, officers and directors of the various ways to report suspected violations of the code of conduct Annual acknowledgment by employees, officers and directors of compliance with code of conduct Handling of investigations
Ensuring Code of Conduct Effectiveness Regularly review the code of conduct Conduct training on its subject matter to provide additional knowledge to employees May also provide additional liability protection to the company Regularly monitor and evaluate its effectiveness
Appendix A- End Notes Federal Sentencing Guidelines for Organizations, Chapter 8- Part B- §8B2.1 Effective Compliance and Ethics Program Sarbanes- Oxley Act of 2002, Section 406 15 USC (S)7264 Section 7264, Code of ethics for senior financial officers Securities and Exchange Commission, 17 CFR 229.406- Sec. 229.406 (Item 406) Code of ethics. New York Stock Exchange, Listed Company Manual Section 303A.10 Code of Business Conduct and Ethics NASDAQ Market Rule 4350(n) Code of Conduct
Michael Meltzer: Role of the Board in Creating an Ethical Culture
Contents The Essential Messages –Message 1: Culture is Key »The Formalities of Compliance are Important but Not Sufficient »Culture is Central to Good Risk Mitigation »It results in good business outcomes –Message 2: Culture is An Oversight Function of the Board –Message 3: Culture can be Defined, Shaped and Measured –Message 4: Your Organization is Not Monolithic…. Look beneath the surface Suggestions …. Before You Start Talking –Suggestion 1: Translate Lawyer Talk into Business Talk –Suggestion 2: Relate your Comments to Strategy and Mission –Suggestion 3: Get Practical –Suggestion 4: Talk “Best Practices” For Further Information, Contact: email@example.com
Message 1: Culture is Key §8B2.1. Effective Compliance and Ethics Program (a)To have an effective compliance and ethics program … [ section references omitted ] … an organization shall— (1)exercise due diligence to prevent and detect criminal conduct; and (2) otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law. The Formalities of Compliance Are Important but Not Sufficient For Further Information, Contact: firstname.lastname@example.org
Culture is Key Because if you check all the boxes but continue to have ethical lapses … (i) The process is deeply flawed … the organization is neither protected nor its business advanced; and (ii) you have failed to achieve the sentencing guideline conditions for mitigation Ethical Culture is Central to Good Risk Mitigation For Further Information, Contact: email@example.com
Culture is Key A Recent Study of ~500,000 employees world wide by the Corporate Executive Board* found that integrity has a tangible impact on corporate performance. Findings demonstrate that companies with weak ethical cultures experience 10 times more misconduct than companies with strong ethical cultures. (Surprise!) Findings also show that tangible business benefits are associated with organizations that maintain cultures of ethical conduct. Ethical Org Culture Results Positive Business Outcomes *For further information on CEB’s findings on corporate cultural integrity and the key attributes for addressing cultural integrity risk, see: www.executiveboard.com/legalandcompliance www.executiveboard.com/legalandcompliance For Further Information, Contact: firstname.lastname@example.org
Culture is Key “I gave into the pressure,” said [name removed for privacy] in a statement that was read by one of her attorneys while she sobbed out of control. “I should have blown the whistle. I disgraced my family, my friends, for fear of not being part of the team.” Account of statement at sentencing of Enterasys Networks executive who cooperated with the government prior to receiving federal prison sentence in which the sentencing judge, Paul Barbadoro, specifically made mention of the corrupt corporate culture at the Cabletron Systems spinoff But it Can Be Positive or Negative! For Further Information, Contact: email@example.com
Culture is Key “…no accidents, no harm to people, and no damage to the environment." But it can Not Simply Be “Declared” Guess Who? For Further Information, Contact: firstname.lastname@example.org
(answer…) For Further Information, Contact: email@example.com
Message 2: Culture is An Oversight Function of the Board Ensuring that your organization has a culture of ethical conduct is a top responsibility for Directors and feeds in to other aspects of their role. Greenberg, Michael (ed.), Directors as Guardians of Compliance and Ethics Within the Corporate Citadel: What the Policy Community Should Know (Rand Corporation, 2010), p. 15 Culture is a due diligence issue for Boards. Foley Lardner LLP report: Board Oversight of Corporate Culture 2007 National Directors Institute “... your corporate culture runs your business 90 percent of the time-- especially when you're not there, and is an important ingredient in the company's performance “ And, while … “Corporate culture is the responsibility of the CEO “…. The CEO oversight is a core function of the Board! Edward McVaney, Former J.D. Edwards CEO speaking at the Vail Leadership Institute Center for Corporate Change, 2004 For Further Information, Contact: firstname.lastname@example.org
Message 3: Culture Can Be Defined, Shaped and Measured Organizational Culture is “… internalized … core corporate values … companies are to be held accountable to these standards. 1 Culture is an abstraction … to make sense out of the relationship between behaving individuals … [ i.e., what people do in fact] … and the setting in which this behavior occurs. 2 “… the standards and values that define how people in an organization are expected to behave especially in their relationships with each other”. 3 When people come together with a shared purpose, a culture is formed. 4 “... a set of distinctive spiritual, material, intellectual and emotional features … of a social group, and that it encompasses, in addition to art and literature, lifestyles, ways of living together, value systems, traditions and beliefs”. 5 Some Definitions: For Further Information, Contact: email@example.com
Culture Can Be Defined, Shaped and Measured Grounded in internalized shared values Driven by leadership Descriptive of behaviors that distinguish groups one from the other Observable behaviors - it is always “de facto” In sum … For Further Information, Contact: firstname.lastname@example.org
Culture Can Be Defined Shaped and Measured Because culture describes belief systems and behavior patterns- it is predictive of outcomes. Because culture is driven by leaders, it can be shaped. Because culture is descriptive, distinguishable and observable, it can be measured (as an absolute, or comparatively, longitudinally, and against goals and norms). And Therefore … For Further Information, Contact: email@example.com
Message 4: Organizations are Not Monolithic Belief Systems and behaviors will vary and morph: Geographically By business lines or units Among age groups Within work groups Between different managers in the same department! Over time After organizational changes, especially existential After leadership changes … You cannot assume the organization acts as a whole- segmentation helps uncover bright spots and problem areas For Further Information, Contact: firstname.lastname@example.org
Organizations are Not Monolithic Look under the surface for important messages….. For Further Information, Contact: email@example.com
Organizations are Not Monolithic Culture of Compliance Items (% Favorable) Blue = 5 most favorable departments on item Red = 5 least favorable on items 38 33 Look under the surface for important messages….. For Further Information, Contact: firstname.lastname@example.org
Organizations are Not Monolithic % Favorable Top 10% Bottom 10% Average * Look under the surface for important messages….. For Further Information, Contact: email@example.com
Suggestion 1: Translate Lawyer Talk into Business Talk Stop talking like you’re in court or sharing war stories with your colleagues. Your board does not want to know the name of the case and they don’t care that this Circuit is more liberal than that Circuit. You’ll lose them quickly if you speak on that level. But have that detail available, perhaps in handouts, because there is always one person who will want to drill down… you can satisfy that person, and your personal need to obsess over details, with a written summary of the particulars that support your recommendations For Further Information, Contact: firstname.lastname@example.org
Suggestion 2: Relate Your Comments to Strategy and Mission Compliance is not only about risk mitigation and staying out of jail; how does creating a company known to be ethical and in fact engaging in ethical behaviors further the mission and strategy of the organization…. How does it fit into your organization’s values? Rather than: “is this a good or bad behavior” Consider: “Is this behavior productive?” Productive for the organization (for example): Consonant with the mission Creating sustainability (using long term thinking) Enabling Transparency Inclusive, Diverse treatment of others Honesty and Integrity For Further Information, Contact: email@example.com
Suggestion 3: Get Practical Recommend actual practices and policies that translate the legal principals that you have made relevant to mission, vision and values, into practical measures that are actionable by the board Have a proposed plan ready to present And a process to implement your recommendations… Be ready to discuss the budget implications. For Further Information, Contact: firstname.lastname@example.org
Suggestion 4: Talk “Best Practices” Your board is likely to be comprised of senior leaders, in some cases who are on multiple boards and may be senior execs in their own companies. So be prepared to answer such questions as: what do other companies of like size in our industry, region, organizational structure and situation do? What would you consider “best practices” and how do you know they are the best? For Further Information, Contact: email@example.com
Appendix I.Surveys vs. Audits II.Footnotes III. Other References For Further Information, Contact: firstname.lastname@example.org
Benefits & Limitations of Surveys Vs. Audits Shows Actual Activity that Has Occurred Assesses Processes and Communications Around Activities Potential endorsement from internal and external auditors Benefits of AuditsBenefits of Surveys Shows Impact of Activities on People Shows variability among occupations and divisions Shows where attention should be focused Cues about what you need to do Does not indicate impact on people Does not address requirement to create a culture of compliance Limitations of AuditsLimitations of Surveys Does not address the execution of many specific compliance mechanisms Does not directly measure behavior For Further Information, Contact: email@example.com
Footnotes 1.Pitts and Sherman, United Nations BLIHR project. Chip Pitts, Stanford Law School, former CLO Nokia, Chair, Amnesty International, partner Baker & McKenzie and co-author of the book “Corporate Social Responsibility: A Legal Perspective”. John F. Sherman, III, Esq., Senior Fellow at the John F. Kennedy School of Government at Harvard, and the recently retired Deputy General Counsel of National Grid. 2.Proshansky and Seidenberg, 1966 3.Sirota, Mischkind and Meltzer, The Enthusiastic employee (Wharton School Publishing, 1995), p. 266 4.Thorsen, Debra, “A Definition of Corporate Culture”, Ezinearticles, com. 5. UNESCO, Universal Declaration on Cultural Diversity (2002) For Further Information, Contact: firstname.lastname@example.org
Other References Paine, Lynn S., Value Shift (McGraw Hill, 2003) Kraut, Allen I., Organizational Surveys (Jossey-Bass, 1996) Schein, Edgar H., Organizational Culture (American Psychologist, February, 1990, pp. 109-119) Greenberg, Michael (ed.) Directors as Guardians of Compliance and Ethics Within the Corporate Citadel: What the Policy Community Should Know (Rand Corporation, 2010) Smith, Neil, “Is there a Culture of Secrecy Behind Corporate Responsibility?” (CSR Wire, September 13, 2010) Heskett, James and Sasser, W. Earl, “Ten Reasons to Design a Better Corporate Culture, December 22, 2008, Harvard Business School Working Knowledge Review of Faculty Research For Further Information, Contact: email@example.com
Barbara Trencher When the Best Compliance Efforts Fail - Internal Investigations and the Board
INTERNAL INVESTIGATIONS: KEY STRUCTURAL ISSUES Barbara Trencher Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C. September 30, 2010
WHAT IS THE SCOPE OF THE INVESTIGATION? Specific allegations: –tailored investigation Vague allegations: –Preliminary inquiry focusing on key documents and witnesses –Decide subsequently whether scope should be broadened
WHO IS THE CLIENT? Company management; committee of the board; board of directors as a whole Choice of client raises important corporate governance issues Central issue: –Do allegations encompass senior management? –Are allegations confined to mid-level or lower- level employees or agents?
WHO CONDUCTS THE INVESTIGATION? As a general rule, attorneys conduct investigations Outside investigative counsel: –Allegations involving senior management In-house or outside counsel: –Allegations involving low or mid-level employees –Additional concerns when in-house counsel is used In some cases, outside counsel should have limited or no prior ties to company
BEST PRACTICES FOR THE INVESTIGATION Preserve and gather relevant documents Interview employees –Upjohn warnings Independent representation for employees