Corporate Boards Must Act Now To Mitigate The Fallout Of Officer Misconduct

Over the past year, the media has been rife with stories of multi-million-dollar settlements of alleged sexual harassment claims, cautionary tales of gross failures of corporate ethics, and various consumer relations disasters. Like the lessons learned from the Watergate Scandal of the 1970s, corporate boards are quickly learning that the cover-up can be worse than the crime. Huge hush payments to silence victims of officer misconduct inevitably become public, often with disastrous public relations consequences. Attempts to minimize the scope of corporate scandals cause both corporate insiders and the public to lose faith and confidence when it is later revealed the problem was much worse than initially disclosed.

All too often when such disasters hit, regulators, stockholders, and the public at large are heard asking “where was the board of directors when all this was going on?” Common, and indeed expected, refrains to this question from board members include is “we didn’t know” or “we had no idea of the scope of the problem.” These are answers that are no longer credible.

Although the line between oversight and over-intrusion is often fuzzy, recent scandals demonstrate that too many corporate boards take too much of a hands-off approach, in turn allowing wrongdoing to build and eventually explode. All corporate boards should be acting to create, ensure, and to preserve ethically compliant corporate cultures in an effort to avoid the company falling victim to disruptive and damaging scandals. However, if and when a corporate scandal does occur, such proactive measures can also help ensure the business is not consumed in that scandal’s backdraft.

“In many instances, the events that cause the most problems simply cannot be predicted.”

Below are some relatively easy steps corporate boards can and should be taking:

The easy and obvious answer to this problem is for corporate boards to demand greater accountability from senior management. However, this may seem to undermine the board’s role of setting ethical and compliance standards, and putting in effective monitoring so that problems cannot be covered up or disguised from the board.

Boards should not allow senior management or the legal department to settle any claim or lawsuit without their knowledge and approval when the basis for the claim is an allegation of personal misconduct by an officer, director, or a senior level executive. While settlement of routine litigation is normally within the purview of management, claims of misconduct directed against senior level executives will almost always have wide implications. Board involvement with these claims insures the board is aware of risky situations, and can limit the use of corporate resources to cover-up misconduct that warrants separate board action.

Boards can no longer rely upon, or even voice, the excuse that “he or she is an owner and there is nothing we can do.” That lame defense ignores fiduciary duties owed to the entire corporation, as well as obligations to the other owners, employees, and customers who depend upon an ethically functioning business.

• Boards have to become more diverse. Studies have consistently shown that the composition and backgrounds of the group making decisions affects the quality of the results of those decisions. In short, the more diverse the group making the decisions, the better the outcome of those decisions.

For example, in August of 2012, a team of researchers from the Credit Suisse Research Institute published a report based on their analysis of over 2,000 companies around the world from 2005 to 2011. The researchers were expressly looking for whether there was any relationship between gender diversity on corporate boards and the financial performance of the underlying corporation. The researchers ultimately found that companies with one or more female board members yielded better average returns on equity, and showed better average growth as compared to their less diverse peer boards. Increased board diversity can also increase a board’s collective understanding of, and sensitivity to issues including harassment and discrimination in the workplace.

The evidence reviewed by the Credit Suisse researchers also suggested that more balance in terms of gender diversity on corporate boards resulted in less volatility and more balanced performance through each business cycle.

Boards need to track and become aware of emerging new risks. This can include working corporate culture reviews or presentations into board meetings, and/or creating board subcommittees tasked with reviewing internal issues relating to morale and/or allegations of misconduct. By proactively taking the pulse of the company, board members can help avoid surprise scandals.

• While crisis planning and PR disaster drills may be of some marginal value, they are never enough. In many instances, the events that cause the most problems simply cannot be predicted. Instead, company boards should drill on improving group decision making.
Modern corporate boards should not allow itself to be hijacked by a strong willed; controlling executive whose behavior is unacceptable in the day and age. Boards must at all times be the moral compass of the organization and be ready and able to change course to make it through whatever storm may blow its way.

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Mark J. Neuberger is a counsel and litigation lawyer with Foley & Lardner. His practice involves the representation of management in all areas of employment law. Angelica L. Boutwell, an associate and litigation lawyer with Foley & Lardner’s Miami, Florida, office, focuses her practice on commercial litigation and business disputes and corporate governance and related disputes.