Originally published by tfoxlaw .
Today we begin by honoring the political process and a politician extraordinaire for on this day in 1836, Sam Houston was elected as the first President of the Republic of Texas. One of the most interesting characters from the early-to-mid-19th century, Houston was born in Virginia in 1793, moved with his family to rural Tennessee as a teenager and later ran away and lived for several years with the Cherokee tribe. Houston served in the War of 1812. He practiced law in Nashville and from 1823 to 1827 served as a US congressman before being elected governor of Tennessee in 1827. He was extensively interviewed for Alex De Tocqueville’s seminal work Democracy in America.
A failed marriage led Houston to resign from office and live again with the Cherokee who officially adopted him. In 1832, President Andrew Jackson sent him to Texas to negotiate treaties with local Native Americans for protection of border traders. Houston arrived in Texas during a time of rising tensions between US settlers and Mexican authorities and soon emerged as a leader among the settlers. In 1835, Texans formed a provisional government, which issued a declaration of independence from Mexico the following year. Houston was appointed military commander of the Texas army.
Houston served as the Republic of Texas President until 1838, then again from 1841 to 1844. Houston helped Texas win admission to the United States in 1845 and was elected as one of the state’s first two senators. He served three terms in the Senate and ran successfully for Texas’ governorship in 1859. As the Civil War loomed, Houston argued unsuccessfully against secession, and was deposed from office in March 1861 after refusing to swear allegiance to the Confederacy. He died of pneumonia in 1863.
This political process angle informs your anti-corruption compliance program through the passage of Sarbanes-Oxley (SOX). Yesterday, I was at a presentation, where James Doty, Commissioner of the Public Company Accounting Oversight Board (PCAOB) spoke. One of the questions was put to him was regarding the function of a Board of Directors under SOX, which I thought had some significant implications for Foreign Corrupt Practices Act (FCPA) compliance. He was asked if the Board or its sub-committee which handles audits was a part of a company’s internal financial controls. He answered that yes, he believed that was one of the roles of an Audit Committee or full Board. I had never thought of the Board as an internal control but the more I thought about it, the more I realized it was an important insight for any Chief Compliance Officer (CCO) or compliance practitioner.
In the FCPA Guidance, in the Ten Hallmarks of an Effective Compliance Program, there are two specific references to the obligations of a Board. The first in Hallmark No. 1 , which states, “Within a business organization, compliance begins with the board of directors and senior executives setting the proper tone for the rest of the company.” The second is found under Hallmark No. 3, entitled “Oversight, Autonomy and Resources”, where it discusses that the CCO should have “direct access to an organization’s governing authority, such as the board of directors and committees of the board of directors (e.g., the audit committee).” Further, under the US Sentencing Guidelines, the Board must exercise reasonable oversight on the effectiveness of a company’s compliance program. The Department of Justice’s (DOJ) Prosecution Standards posed the following queries: (1) Do the Directors exercise independent review of a company’s compliance program? and (2) Are Directors provided information sufficient to enable the exercise of independent judgment? Doty’s remarks drove home to me the absolute requirement for Board participation in any best practices or even effective anti-corruption compliance program.
Board liability for its failure to perform its assigned function in any compliance program is well known. David Stuart, an attorney with Cravath, Swaine & Moore LLP, noted that FCPA compliance issues can lead to personal liability for directors, as both the Securities and Exchange Commission (SEC) and DOJ have been “very vocal about their interest in identifying the highest-level individuals within the organization who are responsible for the tone, culture, or weak internal controls that may contribute to, or at least fail to prevent, bribery and corruption”. He added that based upon the SEC’s enforcement action against two senior executives at Nature’s Sunshine Products, “Under certain circumstances, I could see the SEC invoking the same provisions against audit committee members—for instance, for failing to oversee implementation of a compliance program to mitigate risk of bribery”. It would not be too far a next step for the SEC to invoke the same provisions against audit committee members who do not actively exercise oversight of an ongoing compliance program.
Further, the SEC has made clear that it believes a Board should take a more active role in overseeing the management of risk within a company. The SEC has promulgated Regulation SK 407 under which each company must make a disclosure regarding the Board’s role in risk oversight which “may enable investors to better evaluate whether the board is exercising appropriate oversight of risk.” If this disclosure is not made, it could be a securities law violation and subject the company, which fails to make it, to fines, penalties or profit disgorgement.
I believe that a Board must not only have a corporate compliance program in place but actively oversee that function. Further, if a company’s business plan includes a high-risk proposition, there should be additional oversight. In other words, there is an affirmative duty to ask the tough questions. But it is more than simply having a compliance program in place. The Board must exercise appropriate oversight of the compliance program and indeed the compliance function. The Board needs to ask the hard questions and be fully informed of the company’s overall compliance strategy going forward.
Lawyers often speak to and advise Boards on their legal obligations and duties. However the insight I received from the Q&A with James Doty drove home a different, yet very valuable point to me. If a Board’s oversight is part of effective financial controls, then the failure to do so may result in something far worse than bad governance. It may directly lead to a FCPA violation and could even form the basis of an independent FCPA violation.
This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.
© Thomas R. Fox, 2014
Filed under: Best Practices, Compliance, Compliance and Ethics, compliance programs, Department of Justice, FCPA Guidance, James Doty, PCAOB, Sarbanes-Oxley Tagged: best practices, compliance, compliance programs, Department of Justice, DOJ, FCPA, James Doty, PCAOB
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