There is no doubt that the upcoming change in Presidential administration will have important implications across a wide range of issue. In some cases, the change will present unique challenges for corporate boards. As boards work their way through these changes and challenges, they will also face an altered corporate compliance oversight environment. In the following guest post, Michael W. Peregrine and Ashley Hoff of the McDermott Will & Emery LLP law firm consider the implications of this changed environment for corporate boards. I would like to thank Michael and Ashley for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is the author’s article.
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Corporate boards across industry sectors should recognize the unique challenges to oversight of corporate compliance that may arise now that the presidential election is over. While there is a trending expectation that the incoming administration may adopt a more relaxed approach to federal corporate fraud enforcement, boards should nevertheless remain vigilant in the face of uncertainty – while continuing to monitor for any future changes or reversals in the government’s overall approach.
A variety of recent media reports have included speculation that the new administration will be less likely to focus on white collar crime, corporate prosecutions and criminal sanctions against corporations. Instead, this speculation suggests the administration will likely prioritize traditional “law and order” issues associated with violent crime, border security and drug trafficking. If such theories hold, the Justice Department’s new approach would be a significant change from the current administration’s approach to federal law enforcement of corporate fraud.
Indeed, for the last four years the Department has pursued a “programmatic overhaul of corporate criminal enforcement,” with particular emphasis on “clarity, consistency and transparency in its policies.” Particular elements of this overhaul have included a renewed emphasis on individual accountability, swifter individual prosecutions, new executive compensation – grounded compliance incentives and disincentives, updated compliance program guidelines, and a new whistleblowing and voluntary self-disclosure paradigm.
A primary goal of the Department’s efforts under the current administration has been to provide a clear roadmap of corporate compliance expectations for corporate leadership, including the CEO, general counsel, board members, and chief compliance officers. Each of these have particular responsibilities (fiduciary, contractual or otherwise) for mitigating risk and supporting the company’s compliance with applicable law. And at many companies, corporate leadership has responded in kind by increasing resources to, and enhancing its monitoring of, corporate compliance programming.
When a new administration takes over leadership at the Justice Department, there is often a reassessment of the policies in place in both the Justice Manual and through controlling Attorney General and Deputy Attorney General memoranda. Initially, it is not unusual for an incoming administration to pause certain policies or make temporary adjustments, returning to previous controls while conducting the reassessment and alignment. There is always the possibility of few or no changes to be made for some time, if at all. As we have seen in previous transitions, much depends on newly established priorities.
Turning to speculation about corporate obligations in light of the transition in the Justice Department, compliance responsibilities may be impacted in at least three ways, should corporate crime and individual accountability no longer remain a top priority in federal law enforcement policies.
The first way is that boards, and executive leadership, will be challenged to maintain appropriate levels of compliance resources and oversight in the event that corporate enforcement policies are relaxed in some categories. Note in that respect that there is no indication that the Delaware courts will relax their own Caremark standards of officer and director compliance oversight responsibility.
The second way is that boards need to be carefully prepared to respond to legitimate questions from management about whether the organization’s risk profile should be adjusted to reflect potentially relaxed regulation, especially with respect to certain proposed business initiatives. This may involve increasingly difficult questions surrounding the risk of violation versus the risk of investigation.
The third, and potentially more serious, way compliance responsibilities may be impacted is that boards may need to confront internal enforcement misperceptions by management team members who may be prone to “push the edge of the envelope”; i.e. managers who might view anticipated policy changes as a “green light” to accept much greater risk in their business strategies.
As former acting Attorney General Rod Rosenstein once observed, these risk-takers are the people who “either do not believe the government will enforce the penalty, or they calculate that the likely benefit of breaking the rule outweighs the potential penalty” (that would result from getting caught). It has always been and will continue to be a balancing act and some are more willing to step out on the corner of the beam. They exist in virtually every large organization.
In response, the board should continue to be motivated to support the General Counsel and the Chief Compliance Officer in their efforts to preserve the integrity of the company’s legal control and compliance education systems. More broadly, boards should continue to encourage management to support corporate citizenship efforts, prioritize response and remediation when learning of misconduct, and promote a corporate culture that underscores ethics and legal compliance.
Conclusion
The ultimate post-election compliance oversight message is this: the challenges arising from the possibility of relaxed regulation can be just as difficult to navigate, but perhaps more subtle in presentation, as those arising from increased regulation.
Consistent with their Caremark obligations, corporate directors and officers will want to carefully steer their organizations through uncertainty while awaiting any corporate enforcement policy changes in order to reach an oversight platform that remains responsive and robust.
Additionally, it is important to be mindful that unless or until the current policies in place are transformed, they remain applicable. Namely, the Principles of Federal Prosecutions of Business Organizations found in Title 9 of the Justice Manual (9-28.000 et seq) abide, along with all current related guidance, until any formal change is announced and implemented. Proceeding with caution in oversight while anticipating any new policy changes is essential.
The authors are attorneys with McDermott Will & Emery LLP. Mr. Peregrine is a Fellow of the American College of Governance Counsel. Ms. Hoff is a former United States Attorney for the Western District of Texas.