Corporate Compliance Prof Blog

More on CEO Compensation

Apropos of the earlier post on the link between CEO compensation and corporate culture, take a
look at a New York Times article that explains the role of compensation in proving criminal
intent:

The conviction on Friday of L. Dennis Kozlowski, the former chief executive of Tyco, on charges of grand larceny and conspiracy is underscoring what legal experts say is perhaps the most surprising consequence of the explosion in corporate pay during the 1990's: a heightened expectation that executives know how to do their jobs and understand what is happening at their companies.

Indeed, coming after the convictions of other top executives - including Bernard J. Ebbers, the former chief executive of WorldCom, on charges of accounting fraud, and John J. Rigas, the former head of Adelphia Communications, on charges of conspiring to loot the company - the Kozlowski verdict demonstrates that, at a criminal trial, high pay scales can serve as the government's Exhibit A of the defendant's potential knowledge of wrongdoing.

"One of the perils of being paid an enormous amount of money is that people will ultimately conclude that you're worth it," said Robert A. Mintz, a former federal prosecutor who is now a partner at McCarter & English in Newark. "The assumption jurors will reach is that somebody who receives large compensation is playing a critical role at the company, and a defense that you were more cheerleader than ringleader is going to be very difficult for a jury to buy."

There you go.  People assume that CEO compensation is tied to performance, so higher compensation signals higher performance.  Oddly, the defense implicitly argues that the CEO’s were overpaid:

At his trial, Mr. Kozlowski - who in the 1990's was celebrated as one of corporate America's most aggressive deal makers and who, like John F. Welch Jr. at General Electric, had come to personify the company he had transformed - portrayed himself in his testimony as something of a slipshod, from-the-hip manager.

Tens of millions of dollars in payments to him, Mr. Kozlowski testified, had been approved by the board and was discussed informally with a single director, since deceased. He claimed that he failed to pay taxes on the money because he had relied on his accountant and therefore had not been paying attention.

With their verdict, the jury rejected each one of those arguments.

"Most people on juries aren't business owners. They are employees, and their bosses would never tolerate those kinds of excuses," said John J. Fahy, a former federal prosecutor who is now a partner at Fahy Choi in Rutherford, N.J. "To have someone making millions and millions of dollars saying 'I was disorganized; I wasn't paying attention' is something that jurors just can't understand."

None of this reaction, the legal experts said, stems from envy or a belief among jurors that high pay scales are, in and of themselves, evidence of criminality. Instead, it is simply a rational conclusion that executives would not be paid huge sums if they were inattentive or mismanaging the company.

Of course, if the CEO’s are correct, and they were in fact overpaid for their “slipshod”
management style, then that would create internal cultural problems.  So, if CEO’s want to be
paid an absurd multiple above average worker pay, they have a choice.  On the one hand, they can
claim that they “are worth it” because they are the super-CEO, and accept criminal responsibility
for misconduct that such a super-CEO would have recognized and corrected.  On the other hand,
they can admit that they are not the super-CEO (and thus not worth it), and accept the poisoned
corporate culture created by such an admission.  Of course, the latter choice itself raises the likelihood of misconduct, as cynical employees feel free to follow the CEO's lead in cheating the organization, shareholders, and other constituencies.

For Those Who Are Keeping Score . . .

The Wall Street Journal has a nifty chart showing the prosecution status of the Fab Four -- Ebbers, Kozlowski, Lay, and Scrushy.

And the Tyco Verdict Is . . .

Guilty on 22 of 23 counts.  The Wall Street Journal describes the verdict:

Prosecutors said the defendants could face a maximum sentence of 15 years to 30 years, but legal experts said they were likely to be sentenced to considerably shorter terms. Judge Michael Obus set a tentative sentencing date of Aug. 2.

Former Tyco International Ltd. Chief Executive L. Dennis Kozlowski was convicted Friday of masterminding a scheme to loot the giant conglomerate of tens of millions of dollars, giving the government one of the biggest victories yet in its crackdown on corporate fraud.

After 11 days of deliberations following a retrial that lasted nearly five months, a New York state jury found Mr. Kozlowski, 58 years old, and Mark H. Swartz, Tyco's 44-year-old former finance chief, each guilty on 22 of 23 counts, including grand larceny, conspiracy, securities fraud and falsifying business records. The defendants showed no obvious emotion when the verdicts were read, although Mr. Swartz looked at his wife.

Prosecutors said the defendants could face a maximum sentence of 15 years to 30 years, but legal experts said they were likely to be sentenced to considerably shorter terms. Judge Michael Obus set a tentative sentencing date of Aug. 2.

New Report I Can't Afford to Read

The Conference Board has released its “Corporate Governance Handbook 2005: Developments in Best Practices, Compliance, and Legal Standards.”  Here’s an excerpt from the CB’s description of the report:

Responding to requests from business leaders from around the world, The Conference Board today issued its most comprehensive report ever on what companies need to know – and do – to improve their corporate governance and compliance practices.

It calls on corporate directors to redefine their roles with management, strengthen their independence, and improve practices and processes in their companies’ key audit, compensation, and governance committees. The report focuses on best practices covering legal, regulatory, and stock exchange requirements and precedents established by the influential Delaware courts.

. . . .

While most studies examine issues regulation-by-regulation, this report organizes information according to key topics: overall fiduciary responsibilities, the role of the board versus the role of management, the requirements for each committee and how boards go about assessing their own effectiveness. An expanded section deals with the issue of strategy and risk and shows boards how to examine their drivers of performance and evaluate their risks in such a way that everyone throughout the company understands the process.

. . . .

The report spells out evolving director fiduciary requirements involving “care,” “loyalty” and more recently the “duty of good faith” to determine what best practices are. It argues that directors must increasingly stay on top of new and evolving trends in corporate governance in order to satisfy their duties and protect themselves from legal liability.

The report emphasizes that by instituting governance best practices, companies can improve their internal effectiveness and better manage corporate risk. The key to accomplishing this, says the report, is to make certain that the company’s board is managed as well as the company itself is managed. Each board should operate differently according to the company’s stage of development, ownership structure and size, and the mix of skills, and personalities of the individual directors. The “one size doesn’t fit all” rule clearly applies.

The Board goes on to describe the publication as “a Definitive Report on Corporate Governance Practices.”

Two things here.  First, I was going to read the report and perhaps comment on it here, but upon going to the CB web page, I learned that it costs $495 to buy either a hardcopy or a pdf.  At 138 pages, that’s over $3 per page.  Unless it’s printed on gold-leaf, that’s really not in my budget.

Second, a matter of etiquette – does an organization get to decide whether it’s own work is definitive?  Now, I’m not advocating that we adopt Marquis of Queensberry rules here, but I just think it’s not quite cricket to bestow that label on oneself.  After all, even academics cajole or bribe one another to provide laudatory, mostly unjustified quotes for the dust covers of each other’s books.

Reason No. 1,256 to Do Compliance

Here’s another war story for compliance personnel to put in their arsenal.  The Wall Street Journal reports on “circulation schemes [at Tribune Co.] to get advertisers to pay millions of dollars in inflated fees at two of the company's newspapers, Long Island's Newsday and Spanish-language Hoy.”  Beyond the criminal and civil liability for the misconduct itself, this episode has caused considerable collateral damage: “The circulation misstatements have incited skepticism about the veracity of circulation figures across the newspaper industry, analysts say, making it more difficult for many newspapers to raise rates for advertising.”  Looks like newspapers will have to accept a "fraud discount" on their circulation numbers until they eliminate the credibility gap.  Ahhh -- compliance lapses -- the gifts that keep on giving.

German Law Bans Certain Ethics Code Provisions

The Wall Street Journal is reporting about a German labor court ruling that certain provisions in Wal-Mart’s ethics code violate German law:

A spokesman for the labor court in Wuppertal, who asked that his name not be used, said the tribunal ruled against the ban on relationships and against a proposed hotline for employees to report on colleagues' violations of the code.

The basis of the ruling is not clear from the article (and – surprise – I am not a German labor law expert), but the article suggests that the problems were procedural:

Labor representatives from Wal-Mart's 91 German stores sued the U.S. retail giant over the code after it was introduced without their prior approval in March. Under German law, employee-management councils must sign off on a wide range of workplace conditions, from hiring and firing to the position of desks in an office.

The article does not make clear whether the relationships and hotline provisions must receive council approval.  While it is certainly best practice in the US to get buy-in from employees on the company’s code and policies, I’m not so sure about the wisdom of approval over things like hotlines.  (And of course, under Sarbanes-Oxley, one form of hotline is now a federal requirement.)  It leaves open the possibility that employees can use their leverage over compliance matters to extract other concessions from the organization.

Cost of Compliance

Today, in his The Numbers Guy column "How Much Is It Really Costing to Comply with Sarbanes-Oxley," Carl Bialik discusses the ongoing debate over the cost of complying with Sarbanes-Oxley:

Public companies have been complaining about the costs of complying with the Sarbanes-Oxley corporate-reform law since its passage in 2002. The outcry has intensified with the departure of Securities and Exchange Commission Chairman William Donaldson, as companies hope for new rules that might ease what they say is a financial burden.

Putting a dollar figure on how much Sarbanes-Oxley has cost corporate America is extremely difficult, though that hasn't stopped many from trying. Often-cited estimates range from $1.6 million to $4.4 million per company each year. Meanwhile, one researcher estimated $1.4 trillion in stock-market losses due to the bill's passage. But some of the estimates on Sarbanes-Oxley are as questionable as the cooked financial books that led to the measure's passage.

Of course, one of the real risks here is that Sarbanes-Oxley sucks all of the oxygen out of the compliance room.  Either the perception or reality of high Sarbanes-Oxley costs will put tremendous pressure on the overall compliance budget, making resources for other compliance that much harder to get.  It seems that compliance people have a large stake in either (1) making sure that the Sarbanes-Oxley numbers are not exaggerated, or (2) if the numbers are that large, lobbying for sane reforms that make greater room for other compliance.

CEO Compensation Trumps Compliance?

In a column in yesterday’s Wall Street Journal, Alan Murray asks, “Has the backlash against CEOs gone too far?”  His answer:

Not yet, but it could. Despite their now-all-too-obvious flaws, large corporations have been the great wealth generators of the past half-century. While corporate leaders need to be held more accountable -- and their pay brought into line -- they also need to be allowed to lead. Getting the balance right isn't going to be easy.

Along the way, he notes recent criticisms aimed at CEO compensation.  This reminded me of a comment made by someone involved with drafting the recent amendments to the organizational sentencing guidelines: If CEO pay is too out of line, it could so poison corporate culture as to stymie the organization’s ethics and compliance program.  The speaker did not elaborate on this observation, but I took the comment to make the following argument:

At some point, employees might conclude that CEO compensation is irrationally high, meaning that CEO pay is not tied to any reasonable measure of performance.  Meanwhile, rank and file employees live under a compensation system that ruthlessly ties compensation to performance. (Indeed, the job itself is held subject to the organization’s bottom line.)  So as employees see the world, there is a set of rules that applies to employees (performance-based pay) but not to management.  And, the argument goes, this employee cynicism will extend beyond CEO compensation; employees will label all of management’s words as hypocritical.  The result is a culture of cynicism.  And as discussed previously, bad corporate culture can trump any compliance efforts -- cynical employees will discount anything management says, including the compliance message.  In the end, the poisoned culture created by irrational CEO compensation defeats any effort to create an effective ethics and compliance program.

I honestly don’t know what to think of this argument.  It has intuitive appeal – compensation is a subject near and dear to every employee’s heart, and everyone wants to feel that they are being compensated fairly compared to others in an organization.  And cynicism surely festers when people feel like their leaders live by a different set of rules.  But, there seem to be an awful lot of dots to connect between CEO pay and failed compliance.  Also, assuming the dots can be connected, we face the danger of allowing base motives like envy to keep organizations from paying the level of compensation needed to attract top talent.

In the end, any affect of CEO compensation on culture will likely be attributable to factors other than the bare compensation level itself.  Cynicism and resentment about compensation are likely symptoms of other cultural problems.  As discussed in a prior post, culture is built by the many day-to-day actions that tell employees what values the organization truly holds dear.  Employees will see (and judge) executive compensation through the lens of that culture.  So, instead of focusing on CEO compensation as a major determinant of corporate culture, we should better articulate the role of such compensation -- symptom, cause, or both -- in the organization’s overall culture.

KPMG Cooperating with DOJ

As the organizational senetncing guidlines and the Thompson Memo tell us, an important part of compliance is the organization's treatment of any misconduct that comes to its attention.  A story in today's New York Times describes how KPMG is going a long way toward addressing the recent claims of tax shelter abuse:

In a statement, KPMG said it has taken action ''to ensure that those responsible for wrongdoing have been separated from the firm.'' It did not say in the statement how many people were involved, but said the fim take ''full responsibility'' for the unlawful conduct.It said it no longer provides the tax services in question and that it has taken steps to make sure such unlawful conduct doesn't happen again. That includes ''firm-wide structural, cultural and governance reforms'' to ensure ''the highest ethical standards,'' KPMG said.

This is one to keep an eye on -- will KPMG's cooperation and remedial measures be enough to prevent prosecution (perhaps a deferred prosecution agreement, as the DOJ now seems quite fond of requesting)?  A separate story in the Wal Street Journal gives a hint at the government's thinking, which appears to go beyond traditional Thompson Memo condiserations:

Federal prosecutors have built a criminal case against KPMG LLP for obstruction of justice and the sale of abusive tax shelters, igniting a debate among top Justice Department officials over whether to seek an indictment -- at the risk of killing one of the four remaining big accounting firms.

Federal prosecutors and KPMG's lawyers are now locked in high-wire negotiations that could decide the fate of the firm, according to lawyers briefed on the case. Under unwritten Justice Department policy, companies facing possible criminal charges often are permitted to plead their case to higher-ups in the department. These officials are expected to take into account the strength of evidence in the case -- the culmination of a long-running investigation -- and any mitigating factors, as well as broader policy issues posed by the possible loss of the firm.
. . . .
The threat of an indictment could persuade KPMG to settle the case with substantial financial penalties under a deferred-prosecution agreement or other settlement. For Justice Department officials, avoiding an indictment could avert serious damage to KPMG -- an "Andersen scenario" that could cost thousands of employees their jobs and deprive KPMG's hundreds of clients of a choice for accounting services.

ACC 2005 Annual Meeting

The Association of Corporate Counsel has announced the dates, place, and topic of its 2005 Annual Meeting:

Dates: October 17-19, 2005

Place: Washington, D.C.

Topic: Legal Underdog to Corporate Superhero -- Using Compliance for a Competitive Advantage

You've learned about the changing role of in-house counsel. The implementation of many new corporate governance requirements means that many lawyers could be regarded as the corporate police. Join us in 2005, and learn how to soar beyond this status, and become a corporate superstar, by helping your company proactively manage all aspects of compliance, and by using compliance as a competitive advantage.

Corporate governance is only one aspect of compliance. Every day your company faces new risks and challenges, and a broader compliance program can help your company thrive. Real compliance means more than responding to problems-it means identifying and resolving issues before they cost time and money. ACC's 2005 Annual Meeting (October 17-19) will include a full range of practical advice to help you establish programs to identify and manage risk.

Regardless of the size of your law department, where you are in your career, or your role in the law department, at the 2005 Annual Meeting you will find programs that can help you personally do your job better, help your company thrive, and earn the recognition you deserve!

Reminder -- 2005 Best Practices Survey

Quick reminder that there are still two weeks remaining to participate in the South Texas College of Law Corporate Compliance Center's 2005 Best Practices Survey of in-house compliance professionals.  The Survey is online and will conclude June 30, 2005.  So far, we have about 70 respondents, and every reponse helps improve the quality of the data.  And as a carrot, only the survey participants will get the the full results for no charge.

The Survey should take about 20 minutes to complete and covers four topics:

• The Board’s Role in the Compliance and Ethics Program
• Structuring the Compliance Function
• Evaluating the Compliance and Ethics Program
• Compliance and Ethics Training

The Center will not disclose the identity of any person or organization participating in the Survey; the Survey results will be reported only in the aggregate or by demographic category, and no responses will be identified with any participant or organization.  Also, the Survey is being conducted on a secure encrypted connection with no data sent over the Internet in plain text.

If you have any questions about the Survey, please let me know.

What Were They Thinking?

The CNN/Sports Illustrated web site has an amusing (and disturbing) account of what is certainly a leading candidate for the world’s worst compliance training video.  This is the report’s description of the sensitivity training video used for players on the San Francisco 49ers football team:

Impersonating San Francisco Mayor Gavin Newsom, [49ers public relations director Kirk] Reynolds opens last year's video sitting behind the mayor's desk, then goes to Chinatown, where a 49ers team consultant wearing thick glasses and fake buck teeth translates a Chinese-language newspaper in broken English. Next comes a topless, lesbian wedding filmed at a strip club, and a scene at the baseball stadium where Reynolds as the mayor accepts a bribe. It ends with a topless scene in the strip club's dressing room.

And the AP summarizes the video this way:

The 15-minute film leaked to the San Francisco Chronicle features racist jokes, lesbian soft-porn and topless blondes -- and even a scene of Reynolds impersonating San Francisco Mayor Gavin Newsom in the mayor's office.

Wow!  Has Reynolds ever heard of the Wall Street Journal/New York Times test?  I know that some companies hold their compliance materials close to the corporate vest, but that is usually because they treat them as confidential work product or proprietary materials.  Rarely is it because they are afraid the public will learn that the materials appear to mock compliance or actively encourage misconduct.

In his defense, Reynolds does explain the thinking behind the tape:

Reynolds, who resigned days after the tape became public June 1 when it was provided anonymously to the San Francisco Chronicle, said he felt the video was appropriate for the locker room, but not the general public.

OK – I see now.  I don’t get the video because I am just a member of “the general public,” and I don’t work in a locker room.  Apparently, when one crosses the transom into a locker room, one is magically transported into a world where a video that appears to reinforce stereotypes actually dispels them.  He’s right – I just don’t get how this was supposed to work.

The bottom line is that the video has a check-the-boxes feel to it – “Do sensitivity training so we can say we did it, but make it so the players won’t complain.”  Reynolds just about concedes as much in an account he gave to the AP:

I did something for a certain audience that got out of hand. ... It was contradictory to my values and beliefs and contradictory to the team's values. I completely apologize to anybody who was offended.

Compliance is supposed to communicate and reinforce the organization's values, not cater to biases in the workforce.  Believe me, I understand that certain types of employees can resist certain types of training.  (Have you every tried to get a tenured work force consisting of “know it all” law professors to attend compliance training?)  But that should be a challenge, not a cop out.  In the end, wasn’t the 49ers’ travishamockery of a video worse than no training?

The 49ers ownership seems to acknowledge most of this.  The team owners -- Denise and John York -- have denounced the video and say they are ready to move on:

"Ostensibly, the video was created to raise player awareness about how to deal with the media and to demonstrate by example how poor conduct can unintentionally make news," the Yorks' statement said. "Unfortunately, this video is an example in itself."

And their coach is on the same page:

Coach Mike Nolan, left to face the media Wednesday at the 49ers' practice facility, stressed that the video reflected decisions made by an old "regime," and that York has since put the team in the right direction.

   "I will say this: We do a lot of the sensitivity training, and we do it in the right manner. This is an example of how you do not do it," said Nolan, who was hired in January. "That's not what the 49ers will be about."

Well, at least this incident finally provides an example to illustrate what compliance professionals have been saying for years: If your sensitivity training video looks like something TiVo'd from the Playboy Channel, it’s probably not appropriate.

Article of Interest

Another article from the Social Science Research Network:

Signaling Social Responsibility: On the Law and Economics of Market Incentives for Corporate Environmental Performance

Jason Scott Johnston (University of Pennsylvania Law School)

This article analyzes the law and economics of market internalization: the capability of markets to both penalize and reward firms for their environmental, health and safety performance.

As for market sticks, the article maintains that market transactions - both private and public sales of corporate assets as well as transactions in publicly traded securities - are an important avenue through which firms realize comparative advantages in regulatory compliance, and that such transactions have the potential to significantly enhance corporate environmental and social performance. Asset transactions tend to drive environmental cleanup and transfer assets to firms that are better able to know about and comply with relevant regulatory directives. On public securities markets, the very fact that traders are imperfectly informed about firm-specific regulatory risk causes disproportionately large market reaction to the revelation of such risks. The incentive to avoid such large, negative market reactions to the revelation of negative information leads may induce a higher level of compliance than were no such market reaction anticipated. Incentives for voluntary disclosure of negative information are complex, but as is true of financial disclosure, mandatory disclosure requirements may be crucial in allowing firms to make such
credible commitments.

As for the potential positive rewards (in the form of price premia) that SR consumers and investor offer to firms that they perceive to be pursuing CSR, the fundamental problem is that CSR cannot be directly observed by consumers and investors. Unless firms can find a credible signal of CSR, the positive potential of the market may go unrealized. Inevitably, much corporate communication regarding CSR is (from a game-theoretic point of view) cheap talk. There is likely to an uninformative, pooling equilibrium in which only firms in industries with well-recognized, large SR impacts are likely to engage in CSR cheap talk, so that such reports do not generate information on
the relative economic and social performance of firms within the category of firms that report.

The article's policy conclusions include the following:

- The SEC's standard requiring the disclosure only of those environmental regulatory costs and liabilities that are "probable" and "reasonably estimable" is sensible as tracking the market's limitations in coping with risk versus uncertainty, but the SEC's almost complete failure to enforce its rules regarding the disclosure of environmental risks has made it impossible for corporate managers to credibly commit to being one of the "good guys" by voluntarily disclosing such bad news.

- As for the potential for legal liability for false assertions of CSR to deter "bad" companies from pretending to be "good" ones via their CSR communications (thus destroying the uninformative (or babbling) market equilibrium, the optimal liability system involves potential liability (because it gives plaintiffs access to civil discovery that allows for the discovery of information regarding corporate labor and environmental practices that otherwise would be asymmetrically available only to the corporate speaker), but liability that is strictly limited in amount. The market alternative of private, third party certification of CSR disclosures and assertions - a market response to SR consumers' and investors' demand for credible, reliable firm-specific information - is effective only if itself credible. While market reputation clearly helps ensure the truthfulness and credibility of private auditors' CSR reports, the risk of collusion between audited companies and their auditors is just as great when it comes to CSR as it is in the traditional area of financial report auditing. Just as with financial reports, the threat of holding auditors legally liable for intentionally or negligently false CSR audit reports may be necessary for private CSR auditing to generate credible information.

From Your Friendly US Sentencing Commission

It’s here – the document you have all been waiting for.  The U.S. Sentencing Commission 2003 Annual Report, which covers (duh!) Fiscal Year 2003 (October 1, 2002 through September 30, 2003).  There is a lot here, and I am still wading through it.  So, expect coverage in several posts.

For those new to compliance, Chapter Eight of the United States Sentencing Guidelines contains what has become the canonical definition of an effective ethics and compliance program.  The Guidelines offer a sentencing credit to organizations that have such a program, and provide a detailed outline of the steps an organization should take to design, implement, and operate an effective program.  The Guidelines’ seven (or more, depending on who is doing the counting) steps are universally known and widely referred to within the compliance world.  The Report gives this general introduction to the organizational sentencing guidelines (pp. 40-41):

Sentencing guidelines for organizations convicted of federal offenses became effective November 1, 1991.  The organizational guidelines establish fine ranges to deter and punish illegal conduct; require full payment of remedial costs to compensate victims for any harm and the disgorgement of illegal gains; regulate probationary sentences; and implement other statutory penalties such as forfeiture and the assessment of prosecution costs.

The Chapter Eight organizational guidelines apply to all federal felonies and Class A misdemeanors committed by organizational offenders.  The fine provisions of Chapter Eight are limited to offenses for which pecuniary loss or harm can be more readily quantified, such as fraud, theft, and tax offenses.  In addition, the sentencing guidelines for antitrust violations and most bribery and kickback offenses contain specific formulations for calculating fines for organizations.

The organizational guidelines do not presently contain fine provisions for most offenses involving environmental pollution, food, drugs, agricultural and consumer products, civil/individual rights, administration of justice (e.g., contempt, obstruction of justice, and perjury), and national defense.  In those cases in which the Chapter Eight fine guidelines do not apply, courts must look to the statutory provisions of title 18, sections 3553 and 3572, to determine an appropriate fine.

As my first post of information, here is the Commission’s summary of the action under the organizational guidelines during FY 2003 (p. 41):

In 2003, the Commission received information on 200 organizations that were sentenced under Chapter Eight, a 20.6 percent decrease from 2002 and a 16.0 percent decrease from 2001.  Fines were imposed on 134 organizations. The sentenced organizations pled guilty in 91.0 percent of the cases; 9.0 percent were convicted after trial.

EOA 2005 Annual Meeting

The Ethics Officers Association has announced the date and place of its 2005 Annual Meeting: October 25-28, 2005, at the Hyatt Regency Hill Country in San Antonio, Texas.  The EOA has also put out a call for speakers for the Annual Meeting.

While You Are Browsing . . .

Take a look at this post over on White Collar Crime Prof Blog.  The post comments on a Wall Street Journal article that had caught my eye -- the increasing incidence of extra-marital affairs that lead to exectuive downfalls.  It would seem that the secrecy and dishonesty required to maintain these types of relationships in the workplace is in direct tension with the transparency and candor necessary for effective compliance and corporate culture.

More on MassMutual

According to a Wall Street Journal report, the Massachusetts Attorney General has picked up on
the company’s audit committee report to begin its own investigation:

In a statement, Massachusetts Attorney General Thomas Reilly said his office is "reviewing serious allegations of wrongdoing uncovered by the company," following a preliminary review of documents submitted by MassMutual on Monday.

Another Article of Interest

Another scholarly article of interest from the Social Science Research Network:

Deviant or Different? Corporate Governance in Japan and Germany
Corporate Governance: An International Review (May 2005)

Ronald Dore (London School of Economics)

There are good reasons for national differences in corporate governance, differences in the distributional outcomes desired and differences in motivational resources; material sticks and carrots are not the only ways of keeping top managers efficient, honest and dynamic. Yet, too often discussions of corporate governance assume the Anglo-Saxon model to be normal and others "deviant" - a notion to be challenged, but nevertheless the dominant assumption among the "reformers" of corporate governance in Japan and Germany. Most of the "reforms" in those two countries over the past decade have purported to be about making top managers more honest and efficient. In fact their purport has more often been to change distributional outcomes, favouring shareholders at the expense of employees.

Trouble at the Top of the Ivory Tower?

In the short time that this blog has been up and running, tone at the top and organizational culture have been important themes.  A large part of both has been sending the messages that there are no technical violations of organizational policies and norms, and that those policies and norms apply to everyone.  So, it was with great interest that I read a recent e-mail message sent to LAWPROF, a national law professor e-mail list, from Professor William Gregory of the Georgia State University College of Law.  Professor Gregory questioned the recent appointment of Judith Areen, Professor and former Dean of Georgetown University Law Center, as the President-Elect of the Association of American Law Schools.  (The AALS is self-described as “the learned society for law teachers and is legal education's principal representative to the federal government and to other national higher education organizations and learned societies.”) You see, Professor Areen served on the Audit Committee of WorldCom during its recent accounting troubles, and she participated in the settlement where directors paid out of their own pockets.  Professor Gregory has consented to quoting his message in this blog; the message reads in part:

The directors on the audit committee devoted about 3 to 5 hours per year to their duties.  The board and the audit committee were clearly passive in their roles.  A better informed and proactive board might have averted the Worldcom scandal.

Is it appropriate to reward Prof. Areen by selecting her as the President Elect?

Was the settlement or potential of settlement disclosed to the AALS when she was selected?  Will the reputation of the AALS be tarnished if Prof. Areen becomes the AALS President in January 2006?

Admittedly, there are some assumed facts here.  Just because the directors settled does not mean they conceded fault in their oversight duties at WorldCom.  Having been a litigator in my former life, I understand the economic incentive to settle despite a good faith belief in the rightness of one’s position.  However, I want to raise a few questions, and I will open the posts for comments.  If one concludes that the members of the WorldCom Audit Committee bear some fault for the company’s accounting problems, what consequences should that have on their lives outside WorldCom?  Should such a failure in performing oversight duties disqualify someone from other positions of responsibility and oversight?  Does an organization somehow tarnish its image by associating with a former Enron/WorldCom director?

As an aside, let me add my pet theory about board service pre-Enron.  On paper, people saw audit committees populated with deans of national accounting and law schools, and they asked how such qualified people did not know better.  To me, the answer is that many board members treated board service differently than their day jobs.  It reminds me of major league baseball players who participate in celebrity softball games during the off season.  During the regular season, a major league player gives a full effort, playing to win.  At the celebrity softball game, however, the purpose is to have fun.  So, the major leaguers give a half effort, try to not get hurt, and allow everyone to have a good time.

To some, board service was the corporate equivalent of the celebrity softball game.  While working at their day jobs, the board members gave their full effort, bringing their full expertise to bear.  But when performing board duties, they acted like pro ball players at the celebrity softball game – half effort, do not stick your neck out, and do not rock the boat.  After all, why burn the bridges that got you the directorship in the first place?  The message post-Enron, then, is that board service is not the celebrity softball game -- it must be treated like your day job.  And that might explain why boards have recently acted swiftly and harshly upon discovering management wrongdoing.  Board members who would not tolerate such misbehavior at their own firms will no longer do so at the organizations on whose boards they serve.

So, let me know your thoughts on any and all of the above.

Census of Law Professor Bloggers

This morning's PrawfsBlawg has an interesting census of the current law professor blogging population.  They report that 103 law professors currently blog; we have 24 law professors who blog as part of our Law Professor Blogs Network.

PrawfsBlawg notes that of the 103 law professor bloggers, 80.6% (83) are male and 19.4% (20) are female.  The comparable numbers for the 24 members of the Law Professor Blogs Network:  62.5% (15) male and 37.5% (9) female.

Here are the law schools with the most law professor bloggers:

Law Schools with Most Law Prof Bloggers
School	Number of Bloggers
San Diego	7
Cincinnati	4
George Mason	4
Ohio State	4
UCLA	4
George Washington	4
Stanford	4
St. Thomas	4
Chapman	4

More Tough Treatment at the Top

The Wall Street Journal reports that Wal-Mart has rescinded the retirement agreement with its former board vice chair “after an internal investigation alleged that he had misappropriated as much as $500,000 by misusing company gift cards, falsifying expense accounts and receiving reimbursements through the creation of bogus invoices from vendors.”  The article also notes that “[t]he company referred the investigation to the U.S. attorney for the Western District of Arkansas.”  Once again, we see zero tolerance of misconduct by senior company people, sending the message that no one is exempt from compliance.  This is how to set tone at the top.

Diamonds Are a Money-Launderer’s Best Friend

Last week, the Financial Crimes Enforcement Network (FinCEN) issued its Anti-Money Laundering (AML) compliance program rules for dealers in precious metals, stones, and jewels.  The rules flesh out the requirement in section 352 of the USA PATRIOT Act that:

[E]ach financial institution shall establish anti-money laundering programs, including, at a minimum--
(A) the development of internal policies, procedures, and controls;
(B) the designation of a compliance officer;
(C) an ongoing employee training program; and
(D) an independent audit function to test programs.

“Financial institution” is defined quite broadly, including used car dealers, insurance companies, banks, and pawn brokers.  These are the first rules for dealers in precious metals, stones, and jewels.  The rule is actually an “interim final rule,” which an FAQ accompanying the rule describes as follows:

FinCEN is issuing this rule as an interim final rule to give us the flexibility to more narrowly tailor certain aspects of the rule in response to our request within this rule for additional public comment on four discrete issues, while still ensuring that dealers immediately begin to develop anti-money laundering programs. Through the course of the rulemaking process and in developing a final rule, FinCEN has identified several important issues that would affect the scope of the regulation but on which it received little or no public comment.

FinCEN will accept comments for 45 days.

The rule defines three classes of covered goods – “jewel,” “precious metal,” and “precious stone.”  Also, the regulation exempts certain retailers based on either volume of business attributable to the covered goods or whether the retailer’s supply is mainly domestic or foreign.

The required compliance program elements should be no surprise:

AML risk assessment
Policies, procedures, and internal controls
Compliance officer
Education and training
Independent testing

The FinCEN release notes that the AML compliance program must go beyond a narrow focus on the federal requirement to report currency transactions exceeding $10,000.  Rather, the AML compliance program must examine each transaction for signs that the dealer is being used to launder money or further terrorist financing. The FinCEN release and the rule offer some guidance on what additional topics the compliance program should include, citing examples of suspicious conduct as well as conduct involved in recent cases.  For example, it says the following about training:

Appropriate topics for an anti-money laundering program include, but are not limited to: BSA requirements, a description of money laundering, how money laundering is carried out, what types of activities and transactions should raise concerns, what steps should be followed when suspicions arise, and the need to review OFAC and other government lists.

The FinCEN release also explains that the agency is considering whether to require suspicious activity reports, though it encourages dealers to do so:

[D]ealers are encouraged to adopt procedures for voluntarily filing Suspicious Activity Reports with FinCEN and for reporting suspected terrorist activities to FinCEN using its Financial Institutions Hotline . . . .
FinCEN has not at this time proposed a suspicious activity reporting rule for dealers. However, given the importance of ensuring that information relevant to the use of covered products for financial crime or the financing of terrorism is provided to law enforcement, we are considering proposing a suspicious activity reporting rule in the future. We will work closely with law enforcement and the industry as we consider whether such a rule is appropriate.

When the rule becomes final, I will post and update.

Save the Dates

The South Texas College of Law Corporate Compliance Center will be hosting its next compliance conference on Thursday and Friday, November 17-18, 2005.  The program's tentative title is, "The Amended Sentencing Guidelines One Year Out: Legal Issues and Practical Challenges."  The one and a half day program will cover the board's role in the compliance program, training supervisors and managers on their compliance responsibilities, evaluating the effectiveness of an organization's compliance program, and designing and implementing an effective records management policy.  The program will be held at the South Texas campus in downtown Houston.  Please contact me if you have any interest in either participating in or attending the conference.  And stay tuned to this blog for updates.

While You Are in the Neighborhood . . .

take a virtual walk across the street to the White Collar Crime Prof Blog, where they have two interesting posts today.  The first is on a program that will be covering the Andersen case, which is a subject I've covered here.  The second post reviews a New York Times article that asks whether prosecutors have been overreaching in the post-Enron era -- a subject near and dear to compliance professionals' collective heart.  I will occasionally post link to that blog (and it is included as a link in the sidebar at the left), and I suggest that readers who find this compliance blog of interest also visit that site (as I do).