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A job in corporate America used to mean a comfortable existence, with a reasonable expectation of job security. Unfortunately, times have changed. The current corporate environment is a legal and compliance “minefield,” one which even the most seasoned executives must tread carefully. New federal laws, the creation of internal compliance departments, the use of external audit teams, the media, and the recent economic downturn contribute to this problem.
New Federal Laws
Following Enron’s collapse and other corporate and accounting scandals, the United States government sought both harsher punishments for white collar criminals and tougher controls on corporate activity. It thus enacted the Sarbanes-Oxley Act (“SOX”). SOX established new standards for all public companies, their boards, their management, and public accounting firms.
SOX forces public companies to implement compliance programs regarding ethical issues, and it rewards those that do with leniency if a compliance problem arises. Essentially, if a company adopts an effective compliance program, it will receive amnesty or a reduced sentence if it is later found guilty of a crime. Yet the corporate response has not been equal. While some companies create meaningful compliance programs, other companies create haphazard programs or programs that are merely cosmetic.
Even worst—from an executive’s standpoint—some companies create compliance programs that can best be described as “calculated cooperation.”1 Because a company can avoid prosecution by cooperating with the government, when trouble arises, a corporation may elect to “scapegoat” individual executives to end a government inquiry. This “reverse whistleblowing” may lead to a company unfairly placing blame on an individual when it should be placed on the company itself.2 Now, if an executive is questioned regarding possible misconduct, his days at his current job are likely numbered. The top decision-makers may be far too concerned with extracting themselves and the corporation itself to be overly concerned with relevant facts.
“Informer” Culture
The proliferation of rules and procedures for internal investigations do little, if anything, to protect an executive’s rights. Many internal investigations concern business conduct that was not only legal but actually encouraged just a short time ago. Now, executives not only must reevaluate how to meet expectations set under more favorable conditions, but they must also do so while complying with new internal rules, which may be anything but clear.
Compounding the problem are internal compliance officers. With the passage of SOX, compliance officers went from positions of nothing3 to that of “rock stars” overnight.4 Job titles, salaries, and perks provided to compliance officers and to in-house counsel leads to pressure to identify ethics and conduct violations and then to make a public show of rooting out the alleged transgressors. These officers feel a need to justify their salaries and to illustrate the supposed effectiveness of compliance programs.
Further, the informer culture that is encouraged by hotlines and other self-reporting expectations—such as ethics rules that subject employees to termination for failing to report violations—are also to blame for placing executives in precarious situations. Excessive monitoring of employees reduces trust and leads to a “Big Brother” environment. Lower-level employees may fear that failure to report a possible concern could lead to discharge. These employees then allege ethics violations against their superiors regarding trivial matters. Such allegations may create a cloud of suspicion over an executive that may persist even after the executive has been cleared of any wrongdoing.
External controls add even more pressure. The media’s interest in corporate wrongdoing is high, and the press is quick to respond to news of malfeasance or mismanagement. But an even more troublesome force concerns the constant surveillance of corporations by gatekeepers. With the enactment of SOX, public corporations have been placed under constant surveillance by outside directors, lawyers, and auditors. These gatekeepers must monitor companies and their officers and directors or face discipline. Subtly conveying suspicion is insufficient; outside auditors must “aggressively seek out” illegal conduct.5 Now, an executive cannot view a corporate attorney or an accountant as a helpful guide. Instead, the executive must realize that these gatekeepers are keeping a watchful eye for any possible violation.
Economic Concerns
Finally, the recent economic downturn impacts corporate executives in meaningful ways. Researchers predict that executive turnover will grow as corporations navigate the economic crisis this winter.6 Board members may be quick to sacrifice management to show investors that the company is fighting perceived problems and to give the appearance of a fresh start. For example, during the height of a scandal regarding internal spying, Hewlett-Packard Co.’s general counsel resigned. Michael Holston, the firm’s outside counsel who assisted the company navigate the spying scandal (and a former criminal prosecutor), stepped in as a replacement, “focusing on such issues as government compliance, ethics and privacy.”7
Additionally, board members seeking to bring in a new officer may look for any reason to justify a termination (and to avoid paying a golden parachute payment). Now, companies often do not need to find that an executive committed an illegal act or failed to perform required job duties; instead, a board may discharge an executive based solely on concerns regarding the executive’s lifestyle. For example, Boeing Company discharged chief executive officer Harry Stonecipher for having an affair with another executive, even though Stonecipher’s actions were legal and any misconduct was unrelated to his performance as chief executive officer.8 Executives must now be watchful of not only how they perform their job, but also of whether their personal activities could lead to a termination.
Bottom Line
The current corporate environment is a legal and compliance minefield, one with a high danger potential. This climate requires executives to navigate the workplace cautiously, and with strong personal counsel. Treading carefully and selecting well-versed, experienced counsel will help an executive successfully transverse the corporate minefield.
To speak with an employment lawyer regarding employment-related concerns, contact Steve Kardell of Clouse Dunn LLP. Kardell, Board Certified in Labor and Employment Law, has practiced employment law for over thirty years. During this time, he has helped dozens of high-level executives resolve issues with their employers. He is presently an Adjunct Professor of Law at SMU Dedman School of Law (Courses: Corporate Governance and Compliance; Law Technology).
1 David Hess and Christie L. Ford, Corporate Corruption and Reform Undertakings: A New Approach to an Old Problem, 41 Cornell Int’l L.J. 307, 330 (2008).
2 William S. Laufer, Legal Issues and Sociolegal Consequences of the Federal Sentencing Guidelines: Corporate Prosecution, Cooperation, and the Trading of Favors, 87 Iowa L. Rev. 643, 657 (2002).
3 David Hess, A Business Ethics Perspective on Sarbanes-Oxley and the Organizational Sentencing Guidelines, 105 Mich. L. Rev. 1781, 1808 (2007) (finding that, in the mid-1990s, over half of the surveyed companies that indicated an officer was “in charge” of compliance reported that the officer spent less than ten percent of his time on ethics and compliance issues).
4 Inside Counsel, Compliance Conundrum; Technology: A Blessing and a Curse (May 2007) (Jeffrey Hurd, general counsel and chief administrative officer for AIG Global Investments Group remarked, “Compliance officers are the new rock stars.”).
5 Larry Cata Backer, In the Wake of Corporate Reform: One Year in the Life of Sarbanes-Oxley—A Critical Review Symposium Issue: Surveillance and Control: Privatizing and Nationalizing Corporate Monitoring After Sarbanes-Oxley, 2004 Mich. St. L. Rev. 327, 416 (2004).
6 NewswireToday, Liberum Research Releases A New Executive Turnover Report (Feb. 4, 2009), http://www.newswiretoday.com/news/46012/.
7 Benjamin Pimentel, HP names new legal counsel in scandal’s wake, S.F. Chron., Feb. 9, 2007, at C1.
8 Stephen Taub, Stonecipher Post-Mortem: Powerful Boards, And HR’s Role, Compliance Week (2005), http://www.complianceweek.com/article/1634/stonecipher-post-mortem-powerful-boards-and-hr-s-role.
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