Within hours of disclosing the resignation of its CEO, critics

assailed Best Buy for not revealing the “personal conduct” investigation into

Brian Dunn's alleged relationship with a subordinate earlier.

“In these situations transparency is critical. The fact that

you don't initially disclose makes everyone look bad,” Charles Elson, head of

the Weinberg Center for Corporate Governance at the University of Delaware, told

the Wall Street Journal.

True, transparency is critical, but what about privacy and

facts? Situations such as this one require a high level of sensitivity,

thoroughness, and fairness.  An

allegation is made.  A comprehensive and

professional investigation is initiated. 

Data and testimony are collected and analyzed.  At what point does the demand for

transparency outweigh the need to protect individual privacy and the need to

make informed conclusions based on documented facts?

These are dilemmas that compliance officers—and in cases

involving high-profile individuals, the board of directors—face every day.    Unfortunately,

there is an extensive history of issues that boards have had to deal with over

the past few years.  Rather than

chronicle the many flagrant and bizarre accounting and behavior scandals that

gave rise to Sarbanes-Oxley, we can simply take a look at a handful of

incidents that have occurred post-Sarbanes-Oxley to see that it is futile to

attempt to regulate human behavior.

For example, early in 2005, Thomas Coughlin, vice chairman

of Walmart resigned his lucrative and powerful post when it was revealed that

he had misappropriated up to $500,000 of company funds, mostly in the form of

gift cards that he gave away to friends and family members.  Around the same time, Boeing CEO Harry Stonecipher

resigned when allegations of an inappropriate relationship with a subordinate

surfaced.   Irony was at play in this

case as Stonecipher had been recruited out of retirement in order to restore a

high sense of ethics and integrity to Boeing, following the ouster of his

successor CEO Phil Condit in connection with a serious procurement breach

involving a federal government employee. 

That scandal also cost the Boeing CFO and other executives their jobs.  Stonecipher, who had been lauded by many

inside the company and externally, as a role model of ethical behavior and

conduct, only brought further disgrace to the organization when his personal

misconduct overshadowed the sense of appropriate business conduct he was diligently

working to instill at the company.

As these cases involve senior level executives, the time that the compliance officer ponders these dilemmas alone is probably short. It should be a matter of standard protocol to notify the governing body very soon once even mildly credible allegations about a senior executive surface.

Imagine the required actions and thought processes in play

for the compliance officer.  How much

information do I need?  How credible are

the witnesses?  Is there any tangible

proof?  Who is on a need-to-know

basis?  How do I protect the privacy of

the accuser?  The accused?  The witnesses or testifiers? How soon do we

disclose the facts outside the company?  What damage will be done to the individual's

career?  What damage will be done to the

organization's reputation?  As these

cases involve senior level executives, the time that the compliance officer

ponders these dilemmas alone is probably short. 

It should be a matter of standard protocol to notify the governing body

very soon once even mildly credible allegations about a senior executive surface.

Compliance officers are human as well.  In addition to all of the questions listed

above, it is also quite likely that the compliance officer has a few more

questions floating just at or beneath the level of professional

consciousness.  These questions, which

will never be spoken aloud, are of a much more personal nature:  What will happen to me if I investigate the

CEO?  Who will support me?  Will this harm my career or reputation?  Will it help my career or reputation?  Is there a graceful way out of this

quagmire?  Do I need a lawyer?  The compliance officer will eventually do the

right thing by relying on professional standards and moral values to protect

the organization, but a defined and documented set of procedures for dealing

with issues involving high-profile executives will make that journey much

smoother and quicker.

Another high-profile case-study in compliance officer

conflict is the sexual harassment claim against former Hewlett-Packard CEO Mark

Hurd.  While some of the facts and

circumstances seem hauntingly similar to the Best Buy case, the manner in which

the scandal was handled by HP was far different than what Best Buy has shown so

far.  In the HP case it appeared that

there was reluctance to pursue the investigation until the woman claiming

harassment filed suit.  Once the matter

did come to light, it appeared that the board was more interested in making the

issue, and Mark Hurd, go away, rather than staying the course of a thorough and

professional investigation and then dealing with the harassment charges and the

violator in a strict and stringent manner. 

The HP board was widely criticized for the substantial exit package it

gave Hurd and then further criticized when he joined competitor Oracle. In

their haste to get him out of the company, the board neglected to have him sign

a non-compete agreement.

ETHICS CASE PREP

What to Do With a High-Profile Ethics Case?

Ascertain that the allegation is potentially credible (don't rush to any conclusion or frivolous action on the basis of conjecture, speculation or unfounded complaint).

Notify the Governing Body immediately (typically the Audit Committee of the Board of Directors).

Propose a draft work plan to the Governing Body including necessary outside resources.

Ensure preservation of internal documents and information.

With the assistance and advice of outside counsel, help the Governing Body determine what and when to disclose to shareholders (this is where the balancing act between transparency and privacy is most acute).

With the assistance of Public Relations and/or Investor Relations, have a talk-track ready for the Board or senior executives to respond to inquiries. Make sure it is clear what is to be made public and what cannot be shared as consistency of message will engender trust. Avoid any appearance of cover-up or withholding information.

Stick to the facts and do subsequent timely disclosures as additional significant information is known.

—David Frishkorn

In the Best Buy case, the person being investigated chose to

resign prior to the completion of the investigation.  It appears that the board then went public

with the news of the resignation and the underlying root cause—inappropriate

personal conduct not related to the financial reporting or controls of the

organization—as quickly as it could. 

This would appear to be sufficient disclosure given that the

investigation was not yet concluded. 

Still, plenty of questions abound. Would it be appropriate

to feed scintillating conjecture to the media prior to completion of the investigation?  Or, is it even ever appropriate to disclose

such personal details?  It's not just

Dunn's privacy that needs to be respected. 

There is the staff member in question, her family, his family, and others

in the company who have cooperated with the investigation.

Regulation Fair Disclosure requires that all shareholders

have access to information that may affect their investing decisions, but there

is no clearly defined trigger point of precisely when and what to disclose.  There is a fair amount of guidance, however,

to help identify the proper disclosure point and a fair amount of judgment

involved in assessing the unique facts and circumstances of each situation.  

We've now learned that the Best Buy founder and chairman, Richard Schulze, was aware of the CEO transgressions weeks before informing the audit committee.  So, given the circumstances in this case, it would appear that the audit committee acted responsibly with care and diligence via a professional and timely investigation.  And it appears it disclosed an appropriate amount of information at the appropriate time, prompted perhaps a bit prematurely by the CEO's resignation, and given that the committee's investigation was initially delayed due to the now former chairman's  less-than-timely transparency.