Today guest blogger Judy Warner, managing editor of NACD Directorship, shares her thoughts about the implications of the new whistleblower program and the board’s oversight role in corporate compliance.
Harry Markopolos writes emphatically about the need to compensate corporate whistleblowers in his book, No One Would Listen: A True Financial Thriller, released this year by John Wiley & Sons.
The independent fraud investigator feared for his life for nearly a decade as he sought to expose Bernie Madoff’s $65 billion dollar Ponzi scheme to the government, the media—anyone who would listen. That all changed when Madoff confessed to his sons, and, in effect, turned himself in, exposing a financial fraud that resulted in his conviction and the loss of individual fortunes many times over. The Dodd-Frank Act creates a new whistleblower program, with new protections and potentially large cash rewards for individuals, like Markopolos, who provide information about securities law violations to the SEC.
Under the terms of the new law, the Commission will pay a whistleblower between 10 and 30 percent of any monetary sanctions in excess of $1 million dollars that the SEC recovers as a result of the whistleblower’s assistance.
A story by Marcia Coyle in The National Law Journal, published July 19, 2010, on www.law.com, reports that some corporate attorneys see the new program as a bounty and warns that even companies with robust compliance programs face increased risk. “You could have a perfect compliance program and still have no legal defense,” said FCPA specialist Richard Cassin of Cassin Law (www.cassinlaw.com) in Singapore. “We kind of depend on prosecutorial discretion. The Department of Justice (which shares enforcement authority with the SEC) will come down less hard, but still, when companies have employees who go rogue, companies are strictly liable. I don’t like it because I think it’s a disincentive to maintain a good, robust compliance program, and to self-report violations.”
Markopolos will speak specifically about the implications of the new whistleblower program and the board’s oversight role in corporate compliance at the NACD Directorship Forum on November 9 in New York City. To register, visit directorship.com/events.
Judy Warner is managing editor of NACD Directorship, the official magazine of NACD. A journalist for more than 30 years, Warner now manages the creation of all Directorship products, including its magazine, events, website, and newsletters. Warner joined the Directorship team in 2007 from ComAve, LLC, an independent marketing consulting firm she founded and ran for eight years. Warner was formerly the New England bureau chief and editor for Adweek magazine and a senior editor for Marketing Computers. She began her journalism career in the newsroom of The Boston Globe.
My nephew, a marketing and business undergraduate in the UK, recently applied for a summer internship with a large soft drinks manufacturer. He got the interview but was alarmed to be asked this question: “Do you have a Facebook fan page [learn more] with more than five hundred people signed up?” He has a Facebook page, and many friends, but he hasn’t attempted to create a fan site—and that counted against him.
The company, of course, wanted access to large groups of twenty-somethings so they could push their products to their target market at the touch of a button. Joe is as addicted to texting and tweeting as any young adult, but, when it mattered, his lack of social media savvy cost him a job opportunity. Be sure the same thing doesn’t happen to you in your board career.
Neil Braun, a corporate board member of NACD, director of IMAX, and newly appointed dean of the Lubin School of Business at Pace University, believes that digital media expertise is now an essential board competency, especially for directors who sit on the boards of consumer products companies. (Here’s a quick look at why B2Bs & B2Cs use social media.)
Neil believes that good directors add value to the company by truly understanding the industry and what customers want. “It goes way beyond Twitter or Facebook,” he says. “Your customers can make or break your company by using Yelp or Foursquare to damn you—or attract a giant crowd.”
Neil’s contention is that risk governance isn’t possible without acute social media awareness—and that directors cannot be a strategic asset to their companies unless they “get it.”
Last month, I was interviewed by BusinessWeek (read the article or listen to the podcast) about the role of corporate directors in risk management. As the financial crisis forces the issues related to risk management front and center, many of us in the corporate director community have got to get prepared to expand our roles in overseeing and managing risk.
What are the warning signs no director should ignore?
Unusual financial results –both positive and negative. If there’s been a sudden downturn or vast improvement in the financial performance of the company, directors should probe management about the reasons for it and make sure the answers they get are both plausible and acceptable.
Faulty accounting estimates – when management assumptions underlying numbers estimates just don’t seem to add up. The accounting estimates – loan losses, aspects of fair market value accounting, tax reserves – are all good places for boards to “stress test” by looking at the numbers and their related assumptions. Adjusted numbers or faulty assumptions are critical red flags.
Rationalization – circumstances where there is a significant discrepancy between what happened and what you thought would happen, alongside attempts to try to rationalize that this doesn’t really make sense. Don’t ever be afraid to challenge rationalization.
Surprise factor – typically, when results are dramatically different from what the board has been led to believe they would be, directors question whether management really has a handle on the business. This surprise should also lead you to question whether there is something going on that you haven’t been told about.
Lack of independence – this tends to lead toward bias and lack of objectivity. One example of this problem is that which occurred in the Delaware Court of Chancery case re: Emerging Communications. There, the board member advocating a transaction, the CEO and chair, had a conflict of interest. The board formed an independent special committee that included someone with financial expertise, but the court found that this director relied too passively on the advisor’s opinion on the transaction, despite the member’s own valuation expertise as an investment banker.
Lack of competitive data – a lack of knowledge about what others are doing – primarily other companies in the same industry. Management should always be keeping abreast of key competitors, industry peers and others – rather than taking an insular view.
Abnormal results – when the company’s results differ notably from others in the industry, it is worth taking a second look. It is not always a bad thing to significantly outpace your industry, but it is definitely something to be aware of. This can be an indicator of higher risk/reward trade-offs.
Unclear strategy – an apparent disconnect between strategy and risk. Most of the key risk factors relate to the company’s strategy, yet many directors seem to not fully understand the strategy, or to have been engaged in strategy development and review in a way that would give them a good understanding of some of the risks that may emanate from that strategy. Make sure a clear strategy is always front and center.
As a board member, it is critical to ask questions until you are genuinely satisfied with the answers; at a certain point, it may even be a good idea to bring in a third party to make assessments. The bottom line is that as board members we have a responsibility to conduct the proper due diligence and stay attuned to the alarm bells before a situation arises.