Avoiding Scandals – A Matter Of Corporate Governance

Thursday, July 3, 2014 - 14:41

Avoiding Scandals – A Matter Of Corporate Governance

The recent scandals involving major corporations might have been prevented if those corporations had had corporate governance measures in place similar to those adopted by many other corporations. These include those mentioned below.

The general counsel should have easy access to the CEO and be a member of the corporation’s executive committee of C-suite executives. She should also attend all meetings of the board except meetings from which all members of management are excluded, and she or key members of the legal department should serve as the secretaries of board committees and attend all business meetings of top managers.

Of primary importance is the role of the legal department. It is desirable to have a single, unified legal department whose members (or its outside counsel) are assigned clients throughout the organization, including at business locations in countries outside the U.S. This enables the lawyers to develop close and friendly working relationships with their clients. Open communication should be encouraged.

If it appears that it is impossible to develop such a relationship between a corporate employee and members of the legal department because the employee has shielded himself from contact by working within a silo, this should be reported to the general counsel and, if this situation is not remedied, by the general counsel to the CEO or one of her deputies.

The general counsel should be in touch with all lawyers in the company. All available lawyers in the main office of the legal department should meet at least monthly with the general counsel to hear reports about the status of important matters being handled by the various sections of the legal department housed in that office. This will provide an opportunity to draw upon the expertise of all lawyers. 

The entire legal department wherever situated (except those whose current activities prevent them from attending) should attend an annual convention of all members of the legal department where lawyers can get to know one another.     

The ultimate reporting relationship of all lawyers serving the company (including those in foreign countries) should be to the general counsel.  No inhibitions should be allowed to interfere with that relationship.

The greatest challenge that companies face is that of doing business in countries where bribery and corruption are endemic. Before doing business in such countries, the legal department should confirm that it is possible to do business in these locales without falling prey to local customs.  Where local nationals staff a business activity in the foreign country, it is particularly important that they be thoroughly briefed on the applicable anticorruption laws and sign a document in which they agree that their failure to report an actual violation will result in termination.

The company should maintain a hotline for use by whistleblowers to confidentially report suspicions of wrongdoing.

If a company becomes embroiled in a scandal, or learns of facts indicating that it may become embroiled in a scandal, it should follow a pre-approved plan that covers at least the following matters:

  • Identify an official, such as the general counsel or her deputy, who is charged with responsibility for crisis response and assignment of areas of responsibility;
  • Establish lines of communication to keep the CEO and designated members of the board of directors apprised of all material developments;
  • Designate officials responsible specifically for unearthing the relevant facts alleged to have given rise to the scandal;
  • Bestow sufficient authority on those officials so that everyone within the enterprise will understand that cooperation with those officials is mandatory;
  • To the extent appropriate, appoint external advisers, in areas such as government relations, public relations, security holder relations, law, auditing, and cyber communications – all under mandates of confidentiality;
  • Establish procedures for confirmation of the accuracy and completeness of any and all information publicly disclosed on the topic.

The watchwords should be accuracy, responsibility and, where appropriate, confidentiality. A long view of the corporation’s reputation in the marketplace, among all of its various audiences (customers, suppliers, investors, regulators, consumers, etc.), should prevail over short-term considerations.

Just as soon as possible, the board or the CEO should report to the general  public on what was alleged, what actually happened, how the corporation has reacted, and (if appropriate) how the corporation has acted to assure that the facts underlying the scandal cannot reoccur.