Category Archives: Corporate Governance

Strong Whistleblower Protections Reflect a Positive Compliance Culture

By Maria T. Vullo

In a recent submission (PDF: 2.36 MB) to Congress, the U.S. Securities & Exchange Commission (SEC) reported that, for fiscal year 2018, the SEC paid the largest whistleblower awards since the institution of its program in 2012 following the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).  Specifically, in FY 2018, the SEC awarded 13 individuals over $168 million collectively for tips that led to actions by the SEC to protect investors.[1]

Other statutes likewise provide financial incentives to whistleblowing.  Under the False Claims Act (FCA), for example, persons who report fraud in government contracting can receive up to 30 percent of the government’s recovery in an action.  Many states, including New York, have enacted state-level equivalents of the FCA.  For many decades, the FCA has contributed to large recoveries to the U.S. Treasury, with an expansion of recoveries in part due to the reporting of violations by whistleblowers. Continue reading

Protecting Attorney-Client Privilege and Respecting Fifth Amendment Rights While Cooperating with the Government

by John F. Savarese and Carol Miller

In 2018, two cases illustrated the potential hazards that can arise when companies’ efforts to cooperate with the government later provide a basis for individuals questioned during internal investigations to claim that their Fifth Amendment rights against self-incrimination were compromised.  While these cases, which we summarize below, have the greatest impact in connection with the representation of individuals in such investigations, companies responding to white collar inquiries need to keep these new developments in mind, particularly in conducting internal investigations and working in a cooperative mode with the government.  Companies and their counsel must be mindful of these issues both to insure that individual employee rights are protected and to protect as much as possible the confidentiality and integrity of the company’s review. Continue reading

How Understanding Organizational Culture Can Help Us Assess Compliance Programs

by Alison Taylor

In 2015, I undertook an extensive literature review and interviewed 23 anticorruption experts and practitioners to explore a simple question: What does organizational culture look like in a corrupt company? My work was a direct challenge to the long-dominant “bad apple” or “rogue employee” explanation of corporate wrongdoing, focusing instead on the organizational and team conditions that undermine integrity. Subsequent corporate scandals—for example, regarding fake accounts at Wells Fargo or car emissions at Volkswagen—have illustrated the importance of overall culture, rather than individual traits, in driving or undermining integrity. Regulatory interest in the importance of organizational culture has increased. This post will explore the implications of my research study for regulators who seek to evaluate compliance programs. Continue reading

Detoxing Corporate Culture: How To Assess Toxic Cultural Elements

by Benjamin van Rooij, Adam Fine, and Judy van der Graaf

All views here represent the authors’ own views and not their organizations.

There is a cultural moment in the world of corporate compliance. Following recent major corporate scandals, there is now growing recognition among corporate boards and beyond  that truly changing corporate misconduct means addressing the toxic elements within cultures.

The central question for companies and regulators is how to assess toxic cultural elements.

Toxic corporate culture exists when organizations, whose chief business and business means are legal, develop structural violations of rules over a period of time.

Our recent paper (PDF: 1.06 MB), published in Administrative Science,  offers an in-depth analysis of what toxic cultural elements played a role in three major corporate scandals: BP’s polluting and unsafe oil exploration practices, VW’s diesel emission cheating practices, and Wells Fargo’s fake and unauthorized accounts schemes. In all three cases, the illegal behavior spanned over a decade and investigators concluded that corporate culture was to blame. Yet in all three cases, no one had yet systematically sought to understand what toxic cultural elements sustained the illegal conduct. We developed an analytical framework to examine toxicity in organizational cultures on three levels: structures, values, and practices (see Table 1 below[1]). Continue reading

Firm Reputation Following Accounting Frauds: Evidence from Employee Ratings

by Christos A. Makridis and Yuqing Zhou

Intangible capital is becoming an increasingly important determinant of firm value. For example, the ratio of intangible capital to the United States’ GNP is totaling 1.7, according to McGrattan and Prescott (2010).[1] Companies are further prioritizing their brand and perception among consumers and the media, which can affect the way they do business by influencing corporate strategy and investment. In this sense, how employees and/or the general public think about a company can ultimately influence the company’s ability to retain and attract talented employees, which is an integral determinant of firm value.[2]

While there are many different circumstances that firms find themselves in, some can be particularly damaging. For example, the public revelation of a cyber security breach can have lasting reputational effects when a company prides itself on privacy and security, as was the case with Equifax and their 2017 breach.[3] Much like data breaches, the public revelation of an accounting fraud can have a lasting effect on a company’s reputational capital. If employees and/or the public do not trust senior leadership, then employee engagement and retention will quickly dwindle. No one wants to work for an infamous company, especially skilled workers, given their ability to find alternative options in the labor market. Continue reading

SEC Adopts Disclosure Rules on Hedging Policies

by Heather L. Coleman, Matthew M. Friestedt, and Marc Treviño

Requires Description of any Hedging Policies or Practices Adopted, Not Specified Transactions; Will Apply to Most Companies Beginning in 2020

SUMMARY

On December 18, 2018, the SEC adopted rules requiring disclosure of policies and practices regarding hedging for directors, officers and employees of U.S. public companies.  These rules require public companies to describe, in any proxy or information statement relating to director elections, any practices or policies they have adopted regarding the ability of its directors, officers or employees to engage in transactions that hedge or offset, or are designed to hedge or offset, any decrease in the market value of equity securities of the public company or its affiliates. The rules cover both equity securities granted as part of compensation and those otherwise held directly or indirectly.

The final rules do not require any company to prohibit hedging transactions or to otherwise adopt hedging policies and do not require disclosure of any particular hedging transactions.

These rules will generally apply to proxy and information statements with respect to the election of directors during fiscal years beginning on or after July 1, 2019, although there is a one-year transition period for emerging growth companies and smaller reporting companies. Continue reading

Perspectives on Regulating Systemic Risk

by Steven L. Schwarcz

Whether the macroprudential regulation enacted to protect the stability of the financial system is sufficient to prevent another crisis is uncertain. Although much of that regulation represents good faith and, in many cases, highly thoughtful efforts to control systemic risk, its primary focus is on banks and other systemically important financial institutions (“SIFI”s). This entity-based approach may be too narrow because it largely ignores other critical elements of the system, such as financial markets.

Furthermore, influenced by political and media pressure to assign blame for the financial crisis, some of the entity-based regulation is itself imperfect. A major focus of that regulation, for example, is on controlling morally hazardous risk-taking by SIFIs that deem themselves “too big to fail” (“TBTF”). Capital requirements epitomize this approach, protecting SIFIs against losses by requiring them to hold minimum levels of capital. However, the ability of capital requirements to control systemic risk is unclear. The cost of capital requirements is also uncertain; some argue they impose no public costs, others argue to the contrary. Continue reading

What Employers Need To Know About California’s New #Metoo Laws

by Elizabeth A. Ising, Stewart L. McDowell, Jason C. Schwartz, Katherine V.A. Smith, Lori Zyskowski, Sean Sullivan, Elizabeth A. Dooley, Alice YN Ha, Jordan E. Johnson, Dustin G. May, Arturo Pena Miranda, and Matthew T. Sessions

On September 30, 2018, Governor Edmund G. Brown signed several new workplace laws, and vetoed others, that arose out of the #MeToo movement.  We briefly review the newly signed legislation and also highlight bills that Governor Brown rejected.  Unless otherwise indicated, these new laws will take effect on January 1, 2019.  Continue reading

CFTC Announces Two Significant Awards By Whistleblower Program

by Breon S. Peace, Nowell D. Bamberger, and Patrick C. Swiber

On July 12 and 16, 2018, the U.S. Commodity Futures Trading Commission (“CFTC”) announced two awards to whistleblowers, one its largest-ever award, approximately $30 million, and another its first award to a whistleblower living in a foreign country.[1]  These awards—along with recent proposed changes meant to bolster the Securities and Exchange Commission’s (“SEC” or “Commission”) own whistleblower regime—demonstrate that such programs likely will continue to be significant parts of the enforcement programs of both agencies and necessarily help shape their enforcement agendas in the coming years.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) authorized the CFTC to pay awards of between 10 and 30 percent to whistleblowers who voluntarily provide original information to the CFTC leading to the successful enforcement of an action resulting in monetary sanctions exceeding $1 million.[2]  Following the introduction of implementing rules, the CFTC’s program became effective in October 2011.  Over the next six-and-a-half years, the CFTC has paid whistleblower bounties on only four prior occasions, with awards ranging from $50,000 to $10 million.  The $30 million award announced last week, thus, reflects a significant increase.  This week’s award to a foreign whistleblower also represents another first for the CFTC’s program and reflects the global scope of the program. Continue reading

Governance and Culture – The Conversation Boards are Having Now

by Ben Morgan and Holly Insley

Corporate governance has long been an area of focus for boards and recent proposals in the UK have ensured that this remains the case.

The Financial Reporting Council consulted in late 2017 on proposed changes to its Corporate Governance Code for quoted companies.  The final text of the changes is expected to be published this summer, for introduction in 2019. 

The focus on governance extends beyond the quoted company arena.  Legislation laid before Parliament in June 2018 will, amongst other things, require large UK private companies to disclose in their annual directors’ report details of the corporate governance arrangements they have operated during the previous year. At the same time, a consultation has been launched on proposed corporate governance principles for large private companies, which the government hopes will be adopted by those companies as an appropriate framework when complying with the new governance-related reporting requirement. Continue reading