From Enron To Lehman Brothers - aacmi

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• The motivations and personality of the whistleblower are not relevant to the truth of the allegations. Whistleblowers with difficult personalities or who have obviously ulterior motives may receive short shrift in any investigation, even though their complaints may be valid. SEC officials made this mistake in ignoring Harry Markopolos’ revelations about Bernie Madoff approximately 10 years before his Ponzi scheme was revealed. 16 • Periodically assess the effectiveness of any employee hotline and provide employee compliance training. • Independent counsel should report to the whistleblower or his or her attorney the status and results of the investigation and the organization should provide annual reports to all employees as to actions taken. • Legitimate employee whistleblowers should receive meaningful monetary rewards. • The whistleblower policy must be communicated effectively. • Milder sanctions should be considered for whistleblowers involved in illegal group activity. • Retaliation claims should be independently investigated. • The director of corporate compliance (if any) should report to the independent directors and become their eyes and ears within the organization. • The tone at the top of the organization must support an ethical, law-abiding culture. The tone at the top should be established not only by the CEO and CFO, but also by the audit committee chair. A key factor in employee willingness to use hotlines is the communication of the results of investigations of hotline tips and the actions taken. 17 Many companies do not adequately communicate this information to the whistleblower. 16 “Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme—Public Version,” U.S. Securities and Exchange Commission, Office of Investigations, Report No. OIG-509, August 2009, p. 250 (www.sec.gov/news/studies/2009/oig-509.pdf). See also Harry Markopolos, No One Would Listen (Hoboken, NJ: John Wiley & Sons, 2010). 17 Ibid. Conclusion and Action Items In summary, most current SOX whistleblower systems are not sufficiently robust to attract potential internal whistleblowers, particularly executive whistleblowers. Internal compliance systems do not have to compete monetarily with available statutory awards since most potential internal whistleblowers prefer not to suffer the disincentives of going public with their information, including waiting many years for any bounties from litigation. However, it is necessary for the SOX whistleblower systems to provide sufficient incentives to potential internal whistleblowers to induce them to provide to the audit committee the information necessary to correct law violations and to reveal significant risk exposures. The following are recommended action items for audit committees: • Audit committees should reexamine their whistleblower and compliance policies to make certain that they encourage reporting of major enterprise risk exposures, fraud, and other illegal activity. • Accounting, auditing, or enterprise risk complaints should be sent by the hotline service directly to the audit committee chair or his or her designee (such as completely independent counsel or other ombudsman). Completely independent counsel refers to a law firm selected by the audit committee that does not receive any significant legal fees from management. • Whistleblower complaints or retaliation complaints from whistleblowers (excluding routine employment-related complaints) should be investigated by completely independent counsel who has forensic capabilities, preferably from a law enforcement background. • Employees (particularly executives) should be permitted to hide their identity by using their personal attorney, forming an entity, or a combination of both, with the company reimbursing the costs incurred if the information is legitimate. • Meaningful rewards should be created for employee whistleblowers if the information is legitimate. A meaningful reward might include an amount equal to the yearly compensation of the employee or a percentage of the savings of the company. However, the audit committee would retain complete discretion of the amount of the reward. 6 Director Notes From Enron To Lehman Brothers www.conferenceboard.org
About the Authors Frederick D. Lipman is a partner with the international law firm of Blank Rome LLP and is also the president of the Association of Audit Committee Members, Inc., a non-profit organization devoted to developing best practices for audit committees. He has been quoted in The Wall Street Journal, New York Times, USA Today, Forbes and other business publications and is the author of four corporate governance books, including Whistleblowers, Incentives, Disincentives and Protection Strategies (John Wiley & Sons, Inc. 2012), Audit Committees (Bureau of National Affairs 2011), Executive Compensation Best Practices (John Wiley & Sons, Inc. 2008), and Corporate Governance Best Practices”(John Wiley & Sons, Inc. 2006). and professional firms. He is the author of several publications, including Corporate Governance Handbook: Legal Standards and Board Practices, the annual U.S. Directors’ Compensation and Board Practices and Institutional Investment reports, Sustainability in the Boardroom, and the forthcoming Risk Oversight Handbook. Recently, he served as the co-chair of The Conference Board Expert Committee on Shareholder Activism and on the Technical Advisory Board to The Conference Board Task Force on Executive Compensation. He is a member of the Network for Sustainable Financial Markets. Prior to joining The Conference Board, he practiced corporate law at Davis, Polk & Wardwell. Tonello is a graduate of Harvard Law School and the University of Bologna. About Director Notes Director Notes is a series of online publications in which The Conference Board engages experts from several disciplines of business leadership, including corporate governance, risk oversight, and sustainability, in an open dialogue about topical issues of concern to member companies. The opinions expressed in this report are those of the author(s) only and do not necessarily reflect the views of The Conference Board. The Conference Board makes no representation as to the accuracy and completeness of the content. This report is not intended to provide legal advice with respect to any particular situation, and no legal or business decision should be based solely on its content. About the Executive Editor Melissa Aguilar is a researcher in the corporate leadership department at The Conference Board in New York focusing on issues of corporate governance, regulatory compliance, and risk management. Prior to joining The Conference Board, she was a contributor for more than five years at Compliance Week, where she reported on a variety of corporate governance topics, including proxy voting developments, executive compensation, risk management, and shareholder activism. Her work has also appeared in Bloomberg Brief: Financial Regulation newsletter. She previously held a number of editorial positions at SourceMedia Inc. Aguilar is a graduate of Binghamton University. About the Series Director Matteo Tonello is managing director of corporate leadership at The Conference Board in New York. In his role, Tonello advises members of The Conference Board on issues of corporate governance, regulatory compliance, and risk management. He regularly participates as a speaker and moderator in educational programs on governance best practices and conducts analyses and research in collaboration with leading corporations, institutional investors, About The Conference Board The Conference Board is a global, independent business membership and research association working in the public interest. Our mission is unique: to provide the world’s leading organizations with the practical knowledge they need to improve their performance and better serve society. The Conference Board is a nonadvocacy, not-for-profit entity, holding 501(c) (3) tax-exempt status in the United States. For more information on this report, please contact: Melissa Aguilar, researcher, corporate leadership at 212 339 0303 or melissa.aguilar@conferenceboard.org THE CONFERENCE BOARD, INC. www.conferenceboard.org AMERICAS + 1 212 759 0900 / customer.service@conferenceboard.org ASIA-PACIFIC + 65 6325 3121 / service.ap@conferenceboard.org EUROPE/AFRICA/MIDDLE EAST + 32 2 675 54 05 / brussels@conferenceboard.org SOUTH ASIA + 91 22 23051402 / admin.southasia@conferenceboard.org THE CONFERENCE BOARD OF CANADA +1 613 526 3280 / www.conferenceboard.ca © 2012 by The Conference Board, Inc. All rights reserved. Printed in the U.S.A. The Conference Board® and the torch logo are registered trademarks of The Conference Board, Inc.
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From Enron To Lehman Brothers - aacmi

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