See also:
The Emerging Company and the SEC:
      The Significance of the Sarbanes-Oxley Act

The Board of Directors of a public corporation now faces rigorous standards of compliance with laws and regulations affecting how the corporation conducts its operations. “I did not know.” “I assigned that responsibility to our Assistant Controller,” or “Nobody told me” have long ceased to be acceptable defenses for wrongful corporate behavior. While the Board of Directors and the senior officers cannot be familiar with every action taken within the corporation, they are expected to exercise sufficiently-close management attention to preclude any suggestion encouraging subordinates to engage in wrongful activity, to foster an environment where any suspected wrongdoing cannot remain buried for long, and to then take swift and effective action to correct suspected wrongdoing both within the corporation as well as within the community.

When the Board of Directors or senior officers first learn of suspected wrongdoing, what is the proper response? Mark J. Stein, Partner with Simpson Thacher & Bartlett LLP, offers a ten-point list to guide the internal investigation of any suspected corporate wrongdoing.

1 - Immediately preserve and collect all documents that may in any way be connected to the investigation. Issue clear orders that nothing is to be destroyed; relevancy can be determined later.

2 - Assemble all of the facts; this is often an iterative process.

3 - Clearly structure an internal investigation. Who should do the investigation? To whom should the investigator(s) report?

4 - Is the investigation best undertaken by counsel? Should this be under the auspices of corporate general counsel or is independent counsel likely to be more effective and respected by public authorities? Should independent counsel be provided to key officers and employees (and compensated by the corporation)?

5 - Careful control should be exercised over possible rumors (internal as well as external) about the investigation.

6 - Special attention must be given to full compliance with Sarbanes-Oxley requirements and whether there have possibly been violations of these requirements.

7 - The corporation’s independent auditors should be fully apprised of the investigation; their advice and guidance is often invaluable. (In the occasional instance where the auditors may be suspected of participating in wrongdoing, it may be necessary to retain new auditors.)

8 - Statutory and regulatory public disclosure requirements must receive primary attention. Once an internal investigation has exposed information that may affect reported corporate performance/earnings and/or shareholder value in anyway, it must be publicly disclosed promptly. Diligence must be exercised that public disclosures are fully substantiated. However, in many complex investigations, public disclosure should not await a final report if the interim information is relevant, substantive, and not misleading.

9 – As an internal investigation is being concluded, it must address the issue of remediation. Recommended remediation must disclose fully the nature and extent of any wrongdoing that may have occurred, and define what is to be done to make any injured parties — including the public — whole. Naturally, it must identify each person responsible for the wrongdoing, and the corporate sanctions to be levied upon these persons.

10 – Finally, when an internal investigation reveals that statutory and/or regulatory violations appear to have occurred, public authorities must be notified as early as possible. As appropriate, voluntary disclosure once the facts are fully established with the United States Attorney, state Attorney General, and/or the Securities and Exchange Commission (SEC) offer the greatest opportunity to resolve the matter quickly and fair, and avoid undue harm to the corporation and its shareholders. Of course, voluntary disclosure is not a get out of jail free card if seriously unlawful conduct has occurred, but it is the most responsible way to assure the best possible outcome of what may be found to be a bad situation.

It is both the legal as well as the very practical responsibility of the Board of Directors and the senior officers of a corporation to immediately address any suspected corporate wrongdoing vigorously and comprehensively. To delay, conceal, or simply ignore these matters is guaranteed to make a bad situation much worse. In today’s increasingly open and transparent society, corporate wrongdoing is generally known by and frequently disclosed to the public authorities as well as the media by a frightening array of other parties (whistle blowers) if executive management fails to respond quickly and proactively.

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Endnotes:

¹ Securities and Exchange Commission v. Brian Adley et al. (United States District Court for the District of Massachusetts C.A. No. 03-10762 MEL) April 24, 2003.
Andrews Corporate Officers and Directors Liability Litigation Reporter, March 24, 2003. [Return]
² Re Enron Corp. Securities, Derivative & ERISA Litigation, No MDL-1446 (S.D. Texas March 12, 2003) - See 258 F. Supp. 2d 576. [Return]
³ Summary of NASDAQ Corporate Governance Proposals as of September 10, 2003. [Return]
⁴ Sonnenfeld, Jeffrey A., "What Makes Great Boards Great," Harvard Business Review, September 1, 2002. [Return]
⁵ Ibid. [Return]

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We are pleased to acknowledge the constructive contribution of the Directors Roundtable through its program, "Key Issues Facing Boards of Directors: The Revolution in SEC Disclosure & Enforcement" on Wednesday, December 10, 2003, in Boston, Massachusetts USA -- Moderator: Beth I. Z. Boland, Esq., Partner, Bingham McCutchen LLP, Boston, Massachusetts Email: beth.boland@bingham.com

Jack Friedman
Chairman of the Board

Email: karen@directorsroundtable.com

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