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.
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