Board Training: Ten Things to Ensure your Board Knows about Ethics & Compliance

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Board Training: Ten Things to Ensure Your Board Knows about Ethics and Compliance

Society for Corporate Compliance and Ethics – September 17, 2014


P R E S E N T E D B Y

Carrie Penman

Chief Compliance Officer and Senior Vice President Advisory Services, NAVEX Global

Michael Kallens

Associate General Counsel & Manager of Corporate Ethics and Compliance, Booz Allen Hamilton Holding Corporation

Diane Brown

Vice President and Head of Operations, Advisory Services, NAVEX Global


Roles and Responsibilities of the Board (Governing Authority) in Ethics and Compliance

• “Be knowledgeable about the content and operation of the compliance and ethics program and exercise reasonable oversight with respect to the implementation and effectiveness of the compliance and ethics program.”

• Provide “direct access” to the ethics/compliance officer.

• “Promote an organizational culture that encourages ethical conduct.”

• Receive “effective training… appropriate to such individuals’ respective roles and responsibilities.”

Source: US Sentencing Guidelines


Survey Question Has your full board received ethics and compliance training in the last two years?

1. Yes, they have had full role-relevant training that includes case studies of issues they may face as board members.

2. Yes, they have taken the same training that all company employees have completed.

3. No, they have only received a briefing on our ethics and compliance program.

4. No, they have not received any training.


Survey Question How engaged is your board or board committee in their oversight responsibilities?

1. Very engaged and knowledgeable.

2. Somewhat engaged but they aren’t sure what to ask.

3. They are polite…

4. Board engagement?

5. I don’t know.


Two Types of Meetings With the Board Briefing isn’t training—and the all-employee training is not sufficiently role-relevant for board members.

• Type 1: Program Briefing (periodically through the year and often only with a committee)

Risk assessment—risk areas (ethics/compliance/reputational); changes in risk; and implementation of mitigation efforts

Benchmarking trends—internal and external

Top or most serious issues and concerns raised through the program

KPIs against your program plan

Executive session

• Type 2: Board Training (every 1-2 years for the full board)

Roles and responsibilities

Role relevant issues they may face

Includes case studies

1.


Board training is like buying commercial time during the Super Bowl: every minute has a price tag. So plan the time to get the most bang for your (and their) buck.

(But don’t apologize for taking their time. This is important stuff.)

Planning for Board Training

2.


A journey through five classic books…

Ensuring Your Board Knows about Ethics and Compliance


The Basics

“…Play fair. Don’t hit people. Put things back where you found them. Clean up your own mess. Don’t take things that aren’t yours. Say you’re sorry when you hurt somebody…”

All I Really Need to Know I Learned in Kindergarten,

Robert Fulghum

When you are dealing with boards and board training you are still dealing with people and basic principles. Talk to them about their roles, risks (including personal risks) and responsibilities in program oversight.

Publisher: Ballantine Books; 15 Revised edition (May 4, 2004)

3.


What Do You Tell Them in Training? Many CCOs assume that boards “know it” already and are afraid to discuss board-specific risks. But in reality, some board members may be too embarrassed to ask. Boards need and want to learn about specific topics like:

• Conflicts of interest—personal and organizational.

• Confidential information and insider trading.

• Bribery and corruption regulations and what they mean for the organization.

• Government/media external relations.

• The regulatory environment specific to the organization’s risk profile.

• Gifts and gratuities in their role.

• Recognizing their unintended influence.

• How to understand and interpreting organization trend data (such as hotline data or culture surveys).

4.


What do you Tell Them in Training? Boards are more savvy about compliance issues and recognizing their own liability so they do want to talk about:

Responsibilities & Liabilities: Their responsibilities—even if they think they already know them—and their personal liabilities.

Oversight Roles: Their role in overseeing serious issues—particularly involving executive misbehavior (e.g. When do they involve outside third parties in the investigation? Who leads? Who speaks externally?)

Best Practices: Current events and how boards have handled situations well—and not so well.

Importance of Culture & Tone From the Top: The impact of organizational culture on compliance with regulations and policies.

Connecting E&C to the Business: Their role in identifying and managing performance pressures, and applying the program to strategic business decisions. Also, their role in development of compensation plans/goal-setting.

5.


• For many board members, ethics and culture are not in their comfort zone.

• “Give me a financial statement any day!”

• When they aren’t really sure what to ask you, you get quiet meetings.

The Challenge with Discussions About Culture…


• What do you think are the company’s cultural weak links?

• How do the company’s financial targets, comp plan, and performance pressures impact organizational culture?

• What can the board do to influence the culture of the organization?

But They Can Get Comfortable if Asked Questions Like:


Preparing for Potential Problems

“The night Max wore his wolf suit and made mischief of one kind…”

“And when he came to the place where the wild things are they roared their terrible roars and gnashed their terrible teeth and rolled their terrible eyes and showed their terrible claws…”

Where the Wild Things Are, Maurice Sendak

Focus on issues/topics that could significantly damage the organization either financially or reputationally. Engage in a discussion of how they would approach such an issue.

Publisher: HarperCollins; 50 ANV edition (December 26, 2012)

6.


Teach them the types of questions to ask the ethics/compliance officer.

Questions to Ask

7.


Ensure They Have a Plan to Deal with Allegations against Execs: David Gets in Trouble, by David Shannon

Use examples of headline-grabbing bad behavior by senior executives and address how the board responded.

• “When David gets in trouble he always says… No! It’s not my fault!”

• He says:

“I didn’t mean to!”

“It was an accident!”

“But she likes it!” (Pulling the cat’s tail)

For example…

Publisher: Blue Sky Press; 1 edition (September 1, 2002)

8.


WSJ Headline: American Apparel’s Charney Faced Ultimatum: Quit or Be Fired

• “Resign immediately as chairman, president and chief executive of the company he founded, or the board would fire him with cause.

• If Mr. Charney chose the first option, he would be retained as a consultant for a four-year term at a fee of $1M a year and paid a multimillion-dollar severance. A shocked Mr. Charney refused to resign and, after a 10-hour meeting, the board stripped him of his chairman's title.

• The board acted based on a continuing investigation, opened in March, that found Mr. Charney, 45 years old, [among other things] allegedly helped arrange the release of naked photographs of a former employee who was suing him and lied on a deposition.

• Per WSJNow, a battle is likely. Mr. Charney is the largest individual shareholder, with about 27% of American Apparel's stock. He doesn't intend to sell it, said a person familiar with the matter.”

WSJ Online June 22, 2014


Mr. Charney’s Version of the Story

“His attorney said the notice of termination contained false and misleading information, both with respect to his job performance and the purported investigation.”

Compliance Week

“We question the legitimacy and thoroughness of any investigation that did not involve any discussion whatsoever with Mr. Charney,” his lawyer wrote, contending that the accusations “involve activities that occurred long ago (if at all) and about which the board and the company have had knowledge for years.”

The New York Times, June 23, 2014


Survey Question Why do you think the board waited so long to take action?

1. Mr. Charney was personally tied to the brand identity of the Company and removing him risked damaging the brand.

2. They believed Mr. Charney was telling the truth regarding the prior allegations of inappropriate behavior.

3. They believed they were protected from liability for Mr. Charney’s actions as long as the matters were settled.

4. The stock price was dropping so now they have to do something.

5. Mr. Charney owns 27% of the stock and they didn’t want a big fight.

6. Some other reason.


If You are Worried About Your Meetings Remember: Everyone Poops, Taro Gomi

Boards are people, too. One of the biggest mistakes ethics officers make is too much deference to board members and senior executives.

• Board members are people with a job to

do just like everyone else. In order to do their job, they need the best possible information.

• Get comfortable talking to, and respectfully challenging, authority.

Publisher: Kane/Miller Book Pub; Ill edition (October 1, 2001)

9.


Biggest Mistakes Ethics and Compliance Officers Make When Dealing with Their Boards

• Too much deference (to authority—executives and board)

• Irrelevance (of information presented)

• Lack of context in the with information presented

• Narrow focus on the Sentencing Guidelines, especially helpline, code, training

• Status reporters (rather than strategic business thinkers)

• Failure to prioritize risks/concerns

• Too much activity reporting; not enough relevant KPIs/results info

• Other scope issues:

Coverage of compliance risk universe

Hotline stats vs. all incidents


Content Delivery

"The sun did not shine, it was too wet to play, so we sat in the house all that cold, cold wet day. I sat there with Sally. We sat here we two and we said how we wish we had something to do."

“So all we could do was to Sit! Sit! Sit! Sit! And we did not like it. Not one little bit.”…The Cat in the Hat! And he said to us, ‘Why do you sit there like that?’”

The Cat in the Hat, Dr. Seuss

Don’t have the “rainy day” version of board ethics and compliance training

The Cat in the Hat story reminds us of the importance of engaging board training:

Publisher: Random House; 1st edition (March 12, 1957)

9 1/2.


Keep Your Board Engaged • Board ethics and compliance training should not be a lecture or data dump.

Be engaging—use voting devices and creative best practices that enhance adult learning.

• Know your board and what will engage them.

• Training for the board should be highly interactive and scenario based.

• Use provocative questions to get them engaged rapidly.

• Encourage extended productive dialogue among the board members.

They shouldn’t “Sit. Sit. Sit. Sit.” They will “not like that.”


Who delivers? There are pros and cons with each option:

Inside resource such as compliance officer or general counsel

Outside resource such as outside counsel or subject matter expert

Who participates? Full board

Any differences for management versus non-management directors

Who Delivers the Training and Who Participates?


There are many lessons learned from other company’s problems and how the boards of those companies responded.

For example…

Use Case Studies from the Headlines and Ask How They Would Respond:


“In an internal investigation paid for by GM and released on June 5, the former federal prosecutor Anton R. Valukas found the company rife with “organizational dysfunction” that allowed the Cobalt’s defect to go unrepaired for at least 11 years.

Since she received the report, Ms. Barra [GM CEO] has ordered the dismissal of 15 employees, including a vice president for regulatory affairs and at least three senior corporate lawyers. GM has also disciplined five other workers.

Ms. Barra has also promised to clean up a culture in which employees avoided responsibility, failed to communicate effectively and routinely closed safety investigations without resolving problems.”

General Motors The New York Times: June 16, 2014


Table of Contents from the Valukas Report (VIII. Recommendations Section)

A. Organizational Structure

B. Cultural Emphasis on Safety

C. Individual Accountability

D. Communications Between and Within Groups

E. Communications with NHTSA [regulator]

F. Role of Lawyers

G. Interactions with Suppliers

H. Data Storage, Retrieval and Analysis

I. Engineering Processes and Databases

J. Product Investigative Process

K. Policies and Training

L. Compliance, Auditing, and Oversight

M. Recordkeeping


Valukas Recommendations

The recommendations section of the report included 13 specific recommendations on Policies and Training.

“Educate employees that shielding senior executives or other employees from information in order to allow them to deny knowledge is not acceptable; on the contrary employees should err on the side of elevating potential safety issues.”

Valukas GM Report (page 273)


Or, Use a Case Study re: One of Your Company’s Recent Press Releases

• An email is sent to all board members of a professional services

organization on a Sunday afternoon signed by a professional scientist in the organization with contact info provided.

• The email advises of research errors on a government contract that was just announced to the media via a company press release.

• The employee advises that he/she alerted their manager at the time the errors were discovered and the manager said the problem would be fixed. But the problem was not fixed.

• The employee offers 24 hours before going to government agency and the media.


Questions for Discussion • Who do you call first?

• Do you respond directly to the employee? If not you, who should contact the employee?

• How do you deal with the time constraint of the threat to take the issue to the government and the media?

• Does the employee have the right to go to the government?

• Does the employee have the right to go to the media?

• Describe your plan of action to address the immediate concerns.

• This case was intentionally written noting that this issue was not raised beyond a direct manager. Are you confident that this would not happen here?


Survey Question

The Washington Post is on the line and the director of the government agency left a message for you to return his call.

Do you take the call?

1. Yes

2. No


Beyond the Annual Training…Keep in Touch Continue the communications throughout the year. Just like best practices in all-employee training, the annual ethics inoculation isn’t enough for boards either:

• Send timely articles

• Send quick information on regulatory changes

• Send short burst videos on relevant board topics/issues

10.


Play NAVEX Exchange Example Here


Questions?


Appendix - Teach them the Types of Questions to Ask the Ethics/Compliance Officer (Sample Questions)

• What information do you get to give you comfort that compliance risks are covered?

• Are there any risks that aren’t being addressed as they should be?

• Do leaders set the right tone? How are they perceived by employees?

• Do we have a “make plan at all costs culture?” Is candor rewarded or punished? What about fear of retaliation?

• How are we at discipline? Are top performers and high level people held accountable to the code of conduct in the same way as other employees?

• Do your businesses/functions have the resources you need to do your job appropriately? Do you feel you have access to the CEO and us whenever you need it?

• What trends in issue types or company locations are you seeing?

• Do you have visibility to individual business unit compliance?

• Do you have sufficient access to benchmarking, best practices, and outside resources to ensure we have adequate knowledge and coverage of emerging risks?

• Is there anything we should know? What keeps you [the ethics officer] up at night?

• If you had another $1 million to spend on the program, what would you do with it?

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