The final case on the Board’s expanding obligations regarding compliance oversight is Boeing, which was decided earlier this year. This action is yet more from the continuing fallout of the Boeing MAX 737 disaster. As Mike Volkov has noted “The Boeing 737 MAX scandal is a troublesome and disturbing case where corporate board oversight and responsibility was lacking. The implications of the board’s failure resulted in the killing of innocent passengers and the grounding of Boeing’s 737 MAX. Add to that a $2.5 billion settlement, a criminal case against a Chief Technical Pilot, and continuing safety and technical problems, and you have recipe for continuing disaster at Boeing.”
In this case, shareholders sued Boeing’s board, seeking to recover costs and economic losses associated with the crash of two 737 MAX jetliners. The allegations were that the directors failed to monitor aircraft safety before the crashes and then failed to respond to known safety risks after the first crash. The lawsuit seeks to hold the directors liable for the resulting loss of “billions of dollars in value.”
Here there were not allegations that the Board did not take compliance seriously or did not provide oversight of compliance but that the Board did not react swiftly and forcefully enough when the first MAX 737 crash occurred. The decision from the Court (the Court of Chancery not the Delaware Supreme Court) framed the question before it as follows, “The narrow question before this Court today is whether Boeing’s stockholders have alleged that a majority of the Company’s directors face a substantial likelihood of liability for Boeing’s losses. This may be based on the directors’ complete failure to establish a reporting system for airplane safety, or on their turning a blind eye to a red flag representing airplane safety problems.”
The Court noted that from 2011 until August 2019, the Board had five standing Committees to monitor and oversee specific aspects of the Company’s business: (1) Audit, (2) Finance, (3) Compensation, (4) Special Programs, and (5) Governance, Organization and Nominating. The Audit Committee was Boeing’s primary arbiter for risk and compliance. Specifically, it “evaluat[ed] overall risk assessment and risk management practices”; “perform[ed a] central oversight role with respect to financial statement, disclosure, and compliance risks”; and “receiv[ed] regular reports from [Boeing’s] Senior Vice President, Office of Internal Governance and Administration with respect to compliance with our ethics and risk management policies.” The Court went on to delineate a list of areas the Audit Committee covered, specifically including robust oversight over compliance.
However what the Boeing Board did not do was “implement or prioritize safety oversight at the highest level of the corporate pyramid. None of Boeing’s Board committees were specifically tasked with overseeing airplane safety, and every committee charter was silent as to airplane safety. The Board recognized as much: former director John H. Briggs, who retired in 2011, observed that the “board doesn’t have any tools to oversee” safety.” [emphasis supplied] The Court rather ominously then said “This stood in contrast to many other companies in the aviation space whose business relies on the safety and flightworthiness of airplanes.”
The Court went into a detailed discussion about what the Board did and more importantly did not do after the first MAX 737 crash (Lion Air crash). The Board did not initiate contact with management, did not do initiate any type of independent investigation or apparent do anything more than ‘Shirk Responsibility’. That final phrase comes from a section title from the Court’s opinion and reads “The Board Continues To Shirk Safety Oversight”. [bold in original opinion] (Recovering trial lawyer insight-when a court writes something like that as a section heading, it is very ‘not good’ for the defendant). The Court was equally critical about the Board’s response after the second MAX 737 crash (the Ethiopian Airlines crash). Finally the Court found “The Board publicly lied about if and how it monitored the 737 MAX’s safety.” It really does not get any worse than that for a Board.
The Court’s opinion found that under Marchand, a Board must assess the risk profile of the company and manage the most critical risks all the way up to the Board level. At Blue Bell Ice Cream, it was food safety. At Boeing it is airline safety. At the Boeing Board, there was “no committee charged with direct responsibility to monitor airplane safety. While the Audit Committee was charged with “risk oversight,” safety does not appear in its charter. Rather, its oversight function was primarily geared toward monitoring Boeing’s financial risks.” This lack provided the basis for a Caremark claim as further refined by Marchand, et al.
Moreover, there was no Board monitoring system in place for safety. There was no mechanism to get whistleblower complaints about safety to the Board. Finally there was no independent evaluation by the Board on safety, “when safety was mentioned to the Board, it did not press for further information, but rather passively accepted management’s assurances and opinions.”
Some commentators see this as a decision based upon a new category of risk called “corporate trauma”. Herlihy and Savitt said, “The harsh decision reflects the court’s obligation to accept all the plaintiffs’ allegations as true in considering defendants’ motion to dismiss. Indeed, the court reaffirmed that failure-of-oversight claims remain “the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” But the ruling nevertheless reconfirms the courts’ increasing willingness to subject directors to suit for corporate trauma.” Mike Volkov was more succinct noting, “At bottom, the Chancery Court is raising the stakes on board member accountability.”
The Hughes Court further delineated a Board’s obligations under Caremark. It cannot simply have the trappings of oversight, it must do the serious work required and have evidence of that work (Document, Document, and Document). Marchand required Boards to manage the risks their organizations face. Clovis Oncology requires ongoing monitoring by the Board. Hughes stands for the proposition that have the structures, policies and procedures in place is not enough. The Board must fully engage in oversight of a compliance program. The decision in Boeing is yet a further expansion of Caremark, once again through Marchand. It stands for the proposition that a company must assess its risks and then manage those risks right up through the Board level.
Tag: compliance
The next case on the Board’s obligations regarding compliance oversight is Hughes v. Hu. In this case, the plaintiffs’ claimed that the director defendants consciously failed to establish a system of oversight for financial statements and related-party transactions, “choosing instead to rely blindly on management while devoting patently inadequate time to the necessary tasks.” According to the plaintiffs’ assertions the defendants “breached their fiduciary duties by willfully failing to maintain an adequate system of oversight, disclosure controls and procedures, and internal controls over financial reporting.” Additionally, “The board of a Delaware corporation has a fiduciary obligation to adopt internal information and reporting systems that are ‘reasonably designed to provide to senior management and to the board itself timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning both the corporation’s compliance with law and its business performance’.”
The audit committee failed to meet often as required and when they met, the meetings were short and failed to devote adequate time and attention to the issues, especially in light of the known internal control issues. In addition, the audit committee frequently acted through written consent as opposed to addressing issues during in-person meetings. The outside auditor failed to report on key issues and when it did so, the audit committee failed to respond or follow up.
The court noted, “directors face a substantial threat of liability under Caremark if “(a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.” For both potential sources, “a showing of bad faith conduct . . . is essential to establish director oversight liability.” A plaintiff establishes bad faith by “showing that the directors knew that they were not discharging their fiduciary obligations. Generally where a claim of directorial liability for corporate loss is predicated upon ignorance of liability creating activities within the corporation . . . only a sustained or systemic failure of the board to exercise oversight . . . will establish the lack of good faith that is a necessary condition to liability.” [citations omitted]
Moreover, “a director may be held liable if she acts in bad faith in the sense that she made no good faith effort to ensure that the company had in place any ‘system of controls.’” Significantly directors must “design context- and industry-specific approaches tailored to their companies’ businesses and resources.” Caremark also mandates “a bottom-line requirement that is important: the board must make a good faith effort—i.e., try—to put in place a reasonable board-level system of monitoring and reporting.” Finally, a Caremark claim can be stated by alleging that “an audit committee that met only sporadically and devoted patently inadequate time to its work, or that the audit committee had clear notice of serious accounting irregularities and simply chose to ignore them or, even worse, to encourage their continuation.”
What the court found was that the Company’s Audit Committee met sporadically, devoted inadequate time to its work, “had clear notice of irregularities, and consciously turned a blind eye to their continuation. As detailed in the Factual Background, the Company suffered from pervasive problems with its internal controls, which the Company acknowledged in March 2014 and pledged to correct. Yet after making that commitment, the Audit Committee continued to meet only when prompted by the requirements of the federal securities laws. When it did meet, its meetings were short and regularly overlooked important issues.”
For example, in May 2014, the Audit Committee convened for the first time after disclosing two months earlier that its “disclosure controls and procedures were not effective as of December 31, 2013, due to a material weakness.” The meeting lasted just forty-five minutes. During that time, the Audit Committee purportedly reviewed new agreements governing the Company’s related-party transactions with Kandi USA. Neither the agreements nor the review procedures were produced in response to the plaintiff’s demand for books and records, supporting a reasonable inference that they either did not exist or did not impose meaningful restrictions on the Company’s insiders. Three weeks later, the Audit Committee purportedly reviewed and approved a new policy that management had prepared governing related-party transactions. The Company also did not produce this policy in response to the plaintiff’s demand for books and records, supporting a reasonable inference that it too either did not exist or did not impose meaningful restrictions on the Company’s insiders.
After 2014, the Audit Committee did not meet again for almost an entire year. The committee next convened in March 2015, “spurred by the need to review the Company’s financial results for purposes of the 2014 10-K. The meeting lasted only fifty minutes. During this time, the Audit Committee ostensibly discussed the financial results and purportedly approved a new policy that management had prepared to govern related-party transactions involving the Joint Venture. It is reasonable to infer that the policy did not place meaningful restrictions on management and that the Audit Committee failed to establish its own monitoring system for related-party transactions. It is also reasonable to infer that during this fifty-minute meeting, the Audit Committee could not have fulfilled its responsibilities under the Audit Committee Charter for purposes of nearly a year’s worth of transactions.” The Audit Committee again did not meet for almost an entire year, not meeting until March 2016, again spurred by the need to review the Company’s financial results for purposes of the 2015 10-K. This meeting lasted just thirty minutes.
These chronic deficiencies support a reasonable inference that the Company’s Board of Directors, acting through its Audit Committee, failed to provide meaningful oversight over the Company’s financial statements and system of financial controls. Despite identifying Yu and Lewin as Audit Committee Financial Experts in 2015, the Company later disclosed in the 2016 10-K that it lacked personnel with sufficient expertise on US GAAP and SEC disclosure requirements for equity investments and related-party transactions. The directors charged with implementing a system to oversee the Company’s financial reporting thus lacked the expertise necessary to do so all along. Instead, the Audit Committee deferred to management, which dictated the policies and procedures for reviewing related-party transactions and hired and fired the Company’s auditor, even though management’s actions suggested that it was either incapable of accurately reporting on related-party transactions or actively evading board-level oversight.
The defendants alleged that the Company had the trappings of oversight, “including an Audit Committee, a Chief Financial Officer, an internal audit department, a code of ethics, and an independent auditor.” A plaintiff cannot meet its Caremark burden by pleading that board-level monitoring systems existed but that they should have been more effective. The Court found the plaintiffs’ allegations supported inferences that the Board members did not make a good faith effort to do their jobs. The Court stated, “The Audit Committee only met when spurred by the requirements of the federal securities laws. Their abbreviated meetings suggest that they devoted patently inadequate time to their work. Their pattern of behavior indicates that they followed management blindly, even after management had demonstrated an inability to report accurately.”
An Audit Committee can rely in good faith upon reports by management and other experts. In doing its job, the members of an Audit Committee will necessarily rely on management. But Caremark envisions some degree of board-level monitoring system, not blind deference to and complete dependence on management. The board is obligated to establish information and reporting systems that “allow management and the board, each within its own scope, to reach informed judgments concerning both the corporation’s compliance with law and its business performance.”
Finally, the Board never established its own reasonable system of monitoring and reporting, choosing instead to rely entirely on management. There were no Board meeting minutes to support the company’s rebuttals. As the Court noted, “The absence of those documents is telling because “[i]t is more reasonable to infer that exculpatory documents would be provided than to believe the opposite: that such documents existed and yet were inexplicably withheld.”” The documents that the Company produced indicated that the Audit Committee never met for longer than one hour and typically only once per year. Each time they purported to cover multiple agenda items that included a review of the Company’s financial performance in addition to reviewing its related-party transactions. On at least two occasions, they missed important issues that they then had to address through action by written consent. Clearly, the Board was not fulfilling its oversight duties.
The Hughes Court further delineated a Board’s obligations under Caremark. It cannot simply have the trappings of oversight, it must do the serious work required and have evidence of that work (Document, Document, and Document). Marchand required Boards to manage the risks their organizations face. Clovis Oncology requires ongoing monitoring by the Board. Hughes stands for the proposition that have the structures, policies and procedures in place is not enough. The Board must fully engage in oversight of a compliance program.
When the Delaware Supreme Court says of a Board of Directors collectively signed a company’s Annual Statement “with hands on their ears to muffle the alarms” you can rest assured the Board was seriously negligent in fulfilling its Caremark obligations. The Court’s decision in Clovis Oncology (Clovis or ‘the company’) laid out what a plaintiff must prove to create liability for a Board under the Caremark Doctrine. Not only must a Board have oversight of a corporate compliance function it must also provide oversight of that function.
The facts are so egregious on the monitoring requirement, the entire opinion could have been the basis for the original Caremark Doctrine. As the opinion stated the Board “breached their fiduciary duties by failing to oversee the Roci clinical trial and then allowing the Company to mislead the market regarding the drug’s efficacy. These breaches, it is alleged, caused Roci to sustain corporate trauma in the form of a sudden and significant depression in market capitalization.”
Clovis had no products and no sales but only the hope of the creation, marketing and sale of a new cancer drug, Roci. Clovis “relied solely on investor capital for all operations.” The potential success for Clovis “rested largely on one of its three developmental drugs, Roci, a cancer drug designed to treat a previously- untreatable type of lung cancer. Because of the estimated $3 billion annual market for drugs of its type, Clovis expected Roci to generate large profits if Clovis could secure FDA approval for the drug and shepherd it to market.” To get Roci to market, the company had to first perform clinical trials and then submit those findings to the Food and Drug Administration (FDA).
To perform the clinical trials, Clovis used a standard, well-known drug testing protocol called RECIST. A key component of the RECIST protocol was differentiating on the reporting on confirmed results v. non-confirmed results. During the trial, Clovis deviated from the RECIST protocol by improperly calculating the efficacy measurement based on both confirmed and unconfirmed results without differentiating between the two. As a result, Clovis published inflated performance results, and included this information in raising capital in the private and public securities markets of over $500 million. Clovis also failed to properly disclose the drug’s side effects. Worse yet, Clovis made these same misrepresentations in its initial presentations to the FDA.
After its initial presentation to the FDA, the FDA requested additional information on the test results. It appears at that point the Board was made aware of significantly different results from the confirmed v. the non-confirmed categories. The stock dropped some 80% in a few days, wiping out over $1 billion in capitalization. The fallout of Clovis actions led the FDA to suspend its review of Rico, effectively ending the company’s efforts.
As noted, the Court found that the Board had made certain there was an overall compliance program. However, Caremark has a second prong which requires a Board to “monitor” its compliance program. The Court stated, “To state a claim under this prong, Plaintiffs must well-plead that a “red flag” of non- compliance waived before the Board Defendants but they chose to ignore it. In this regard, the court must remain mindful that “red flags are only useful when they are either waived in one’s face or displayed so that they are visible to the careful observer. But, as Marchand makes clear, the careful observer is one whose gaze is fixed on the company’s mission critical regulatory issues.” For the Clovis Board, the compliance oversight should have been over Roci’s trials, clinical trial protocols and related FDA regulations governing that study.
The RECIST clinical trials protocol was “the crucible in which Roci’s safety and efficacy were to be tested. Roci was Clovis’ mission critical product. And the Board knew, upon completion of the TIGER-X trial, the FDA would consider only confirmed responses when determining whether to approve Roci’s NDA per the agency’s own regulations.” Moreover, the Clovis “Board was comprised of experts and the RECIST criteria are well-known in the pharmaceutical industry. Moreover, given the degree to which Clovis relied upon it when raising capital, it is reasonable to infer the Board would have understood the concept and would have appreciated the distinction between confirmed and unconfirmed responses. The inference of Board knowledge is further enhanced by the fact the Board knew that even after FDA approval, physicians (i.e., future prescribers) would evaluate Roci based on its” clinical trials.
Mike Volkov has stated of the Clovis decision, “The Clovis Court explained that “‘Delaware Courts are more inclined to find Caremark oversight liability at the board level when the company operates in the midst of obligations imposed upon it by positive law yet fails to monitor existing compliance systems, such that a violation of law, and resulting liability, occurs.’” The Clovis Court noted that when externally imposed regulations govern a company’s mission critical operations, the board must exercise a good faith effort to implement an oversight system, which “entails a sensitivity to ‘compliance issues[s] intrinsically critical’ to the company.”
The Clovis decision is another steppingstone in the creation of duties for a Board regarding compliance. Like the Board at Blue Bell Ice Cream, the Clovis Oncology Board had but one compliance obligation. At Blue Bell Ice Cream, it was food Safety. At Clovis Oncology it was compliance around the clinical trials and reporting results of its signature product, the drug Roci. While Blue Bell Ice Cream management did not even report its food safety results to the Board, senior management at Clovis made material misrepresentations to the Board about the results of the clinal trial based upon the melding of unconfirmed results with confirmed results. This case then stands for the proposition that a Board must do more than simply accept what management says about compliance, it must monitor compliance. Here the Clovis management made material misrepresentations to the Board about the results of the clinal trial based upon the melding of unconfirmed results with confirmed results.
Digital Assets: Trading & Compliance for Cryptocurrency
In this episode, Director of Registered Investment Company Services, Allison Fraser and Director of Broker-Dealer Services & Private Funds, John Gentile discuss the latest on digital assets and cryptocurrency. Are they considered securities, what does the SEC’s risk alert mean for digital assets, and how should investment managers be thinking about cryptocurrency trading and compliance?
About Our Guest Speakers:
Allison Fraser provides compliance consulting services to investment advisers, registered investment companies and private investment funds, including conducting annual compliance program reviews and testing, developing risk assessments and preparing for SEC examinations. She also assists clients with drafting policies and procedures and preparing regulatory filings. On behalf of, the Compliance Services division of CSS, Allison served as the Chief Compliance Officer for a family of alternative funds registered under the Investment Company Act of 1940. Prior to joining CSS, Allison served as a Senior Vice President of Compliance at Northern Trust Investments, Inc. (“NTI”), the asset management subsidiary of The Northern Trust Company. In this capacity, she managed and administered the compliance due diligence program for NTI’s Multi-Manager Solutions and Outsourced Chief Investment Officer businesses. Allison also was the Chief Compliance Officer of two registered funds of hedge funds advised by NTI as well as a member of the funds’ Pricing and Disclosure Committees. Before joining NTI, Allison served as the Compliance Director for General Motors Asset Management, where she assisted with the administration of the compliance program for this registered investment adviser.
John Gentile is responsible for overseeing various types of broker-dealer and investment adviser consulting engagements, including conducting SEC/FINRA internal control reviews, anti-money laundering testing, written supervisory policy and procedures testing, and other consultation services. John is a frequent speaker at industry conferences on various compliance topics, including “Effective Supervision,” “Large Firm Testing,” FINRA Supervisory Control Rules” and “Anti Money Laundering Requirements for Broker Dealers under the PATRIOT Act.” In 1987 John joined the SEC as a Securities Compliance Examiner, becoming a Branch Chief in 1991. He became Assistant Regional Director in 1993, supervising a team of 20 broker-dealer managers and examiners. He also planned and conducted financial, operational, and sales practice examinations of the largest broker dealers and was among those responsible for a review of hedge funds’ impact on broker dealer internal controls. Before joining the SEC, John was a Financial Damage Analyst with PaineWebber Inc. Most recently from 2000-2007 John was an Executive Consultant, Broker-Dealer Services, at National Regulatory Services. John has an MBA from Fordham University and a BS in Finance from Central Connecticut State University. From 1995 to 2002, John was also a member of the Securities Industry Continuing Education East Coast Content Committee.
The role of the Board of Directors has always been a key part of any best practices compliance program. The Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have consistently said that a Board’s role is active oversight of compliance. Over the past few years, the civil side of this obligation has become much more prominent, led by developments in case law under the Caremark doctrine, as modified by Stone v. Ritter by the Delaware Supreme Court. In response to demands for greater accountability and corporate accountability, the Delaware courts have been cutting back the Caremark standard and rejecting motions to dismiss filed by defendants. Recent cases are continuing down this path and raising the expectations for Board members exercising their duty of loyalty and duty of care. This week I will be exploring this expanded set of legal obligations laid down by the Delaware Supreme Court.
Mike Volkov has stated, “At the core of board member protection from liability is the well-known Caremark doctrine that requires corporate boards to make a good faith effort to implement a system for compliance program monitoring and reporting. For years, Delaware courts easily rebuffed shareholder derivative suits challenging board members’ performance after a corporate scandal occurred. The Caremark standard was reinforced in Stone v. Ritter, where the court stated director oversight liability requires a showing of either “the directors utterly failed to implement any reporting or information system or controls” or the directors, “having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.”
Under Caremark and Stone v. Ritter, a director must make a good faith effort to oversee the company’s operations. Failing to make that good faith effort breaches the duty of loyalty and can expose a director to liability. But it is more than simply not doing your job as a Board, it is doing so in bad faith. The Court states, “In other words, for a plaintiff to prevail on a Caremark claim, the plaintiff must show that a fiduciary acted in bad faith—“the state of mind traditionally used to define the mindset of a disloyal director.” Bad faith is established, under Caremark, when “the directors [completely] fail[] to implement any reporting or information system or controls[,] or … having implemented such a system or controls, consciously fail[ ] to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.” In short, to satisfy their duty of loyalty, directors must make a good faith effort to implement an oversight system and then monitor it.”
This change began in a case Marchand v. Barnhill and it involved that Texas institution, Blue Bell Ice Cream, the top ice cream manufacturer in the US. In this decision, the Court found that the Blue Bell Board completely abrogated its duty around the single largest safety issues it faced – food safety. That abrogation allowed a listeria outbreak, “causing the company to recall all of its products, shut down production at all of its plants, and lay off over a third of its workforce. Blue Bell’s failure to contain listeria’s spread in its manufacturing plants caused listeria to be present in its products and had sad consequences. Three people died as a result of the listeria outbreak. Less consequentially, but nonetheless important for this litigation, stockholders also suffered losses because, after the operational shutdown, Blue Bell suffered a liquidity crisis that forced it to accept a dilutive private equity investment.”
The job of every Board member is to represent the shareholders, not the incumbent Chief Executive Officer (CEO) and Chairman of the Board. To do so, the Board must oversee the risk management function of the organization. Blue Bell was and to this day is a single-product food company and that food is ice cream. This sole source of income would mandate that the highest risk the company might face is around food. But as the underlying compliant noted, “despite the critical nature of food safety for Blue Bell’s continued success, the complaint alleges that management turned a blind eye to red and yellow flags that were waved in front of it by regulators and its own tests, and the board—by failing to implement any system to monitor the company’s food safety compliance programs—was unaware of any problems until it was too late.”
The plaintiffs reviewed the Board records and made the following allegations:
- there was no Board committee that addressed food safety;
- there was no regular process or protocols that required management to keep the Board apprised of food safety compliance practices, risks, or reports which existed;
- there was no schedule for the Board to consider on a regular basis, such as quarterly or biannually, any key food safety risks which existed;
- during a key period leading up to the deaths of three customers, management received reports that contained what could be considered red, or at least yellow, flags, and the Board minutes of the relevant period revealed no evidence that these were disclosed to the Board;
- the Board was given certain favorable information about food safety by management, but was not given important reports that presented a much different picture; and
- the Board meetings are devoid of any suggestion that there was any regular discussion of food safety issues.
The Board’s response to these allegations is instrumental in understanding how Board’s viewed their obligations regarding oversight of compliance. The Court stated, “the directors largely point out that by law Blue Bell had to meet FDA and state regulatory requirements for food safety, and that the company had in place certain manuals for employees regarding safety practices and commissioned audits from time to time. In the same vein, the directors emphasize that the government regularly inspected Blue Bell’s facilities, and Blue Bell management got the results.”
The Delaware Supreme Court made short shrift of this argument, stating “fact that Blue Bell nominally complied with FDA regulations does not imply that the board implemented a system to monitor food safety at the board level. Indeed, these types of routine regulatory requirements, although important, are not typically directed at the board. At best, Blue Bell’s compliance with these requirements shows only that management was following, in a nominal way, certain standard requirements of state and federal law. It does not rationally suggest that the board implemented a reporting system to monitor food safety or Blue Bell’s operational performance.”
The Board’s next defense was even more inane and was so preposterous, the Delaware Supreme Court labeled it as “telling.” It was that because the Board had received information on the company’s operational issues and performed oversight on operational issues, it had fulfilled its Caremark obligations. This is basically the same argument that every paper-pushing argument for compliance program. We have something on paper, so we have complied is the clarion call of such practitioners. The Delaware Supreme Court also saw through the flimsiness of this argument stating, “if that were the case, then Caremark would be a chimera.” [emphasis in original] This is because operational issues are always discussed at the Board level. Finally, Caremark requires “that a board make a good faith effort to put in place a reasonable system of monitoring and reporting about the corporation’s central compliance risks. In Blue Bell’s case, food safety was essential and mission critical.”
It has long been axiomatic that bad facts can lead to large changes in how courts interpret the law. The Blue Bell case had facts that the Court all but said the Board engaged in bad faith regarding its compliance obligations. The change was only the beginning.
The Astros and Red Sox meet in the ALCS. Is it the Cheater’s Ball? Tom and Jay are back to review some of the top compliance and ethics stories on the Back in the ALCS edition.
Stories
- Who knows what values lurk in the heart? The Shadow know (and your emails as well). The John Gruden firing. ESPN, Sports Illustrated, NYT, WSJ. Tom with a 2-part blog post series.
- Confronting Ethical and Moral Dilemmas: Don’t Go It Alone. Richard Snell in Knowledge@Wharton.
- Evolution of 3rd party risk management. Mike Volkov in Corruption, Crime and Compliance.
- The role of employees in weeding out corp misconduct. David Smagalla in the WSJ Risk and Compliance Journal.
- Ex-Braskem CEO gets 20 months. Kyle Brasseur in Compliance Week. (sub req’d)
- Cooperating (or not) with the SFO. Lloydettte Bai-Marrow in the FCPA Blog.
- Inconsistency in UK and EU banking regs? Deepali Nijhawan in CCI.
- What is tech risk? Carol Williams in Risk and Compliance Matters.
- Ozy from the audit perspective. Francine McKenna in The Dig. (sub req’d)
- ESG channels Watergate (as in follow the money). Lawrence Heim in practicalESG.
Podcasts and Events
- Compliance Week is going ‘Inside the Mind of the CCO’. Participate in the survey here.
- Ethisphere’s World Most Ethical Company awards for 2022 are open for submission. For more information on the Application Process, click here.
- Are you exasperated? Then check, F*ing Argentina. In this podcast series co-hosts Tom Fox and Gregg Greenberg, author of F*ing Argentina explore the current American psyche of being overworked, over leveraged, overtired and overwhelmed. Find out about modern America’s exasperation with well…exasperation. In Episode 1, the dreaded Parent Meeting night at your child’s elementary school. In Episode 2, why F*ing Argentina? In Episode 3, one of the most beloved characters in musical theater, Officer Krupke is exasperated. In Episode 4, the ubiquitous ‘Couples Dinner’. In Episode 5, a tennis journeyman’s lament.
- This month on The Compliance Month, I visit with John Melican, Managing Director at Exiger on his journey to and from the CCO chair. In Episode 1, college and early professional career at NY County DA’s Office. In Episode 2, Melican moves into the corporate world and into compliance.
- What is Design Thinking in Compliance? Check out the newest edition to the CPN, where co-hosts Tom Fox and Carsten Tams discuss the social engineering tool of design thinking and how it creates greater compliance engagement and effectiveness. In Episode 2, we take up co-creation.
- How does a Compliance Bible become a best-seller? Check out Tom’s appearance on the C-Suite Network’s Best Seller TV to find out. Purchase The Compliance Handbook, 2nd edition here.
Tom Fox is the Voice of Compliance and can be reached at tfox@tfoxlaw.com. Jay Rosen is Mr. Monitor and can be reached at jrosen@affiliatedmonitors.com.
Welcome to the only award winning roundtable podcast in compliance. Today, we are thrilled to have our newest panelist Karen Woody join us as a permanent panelist. The entire gang was also thrilled to be honored by W3 as a top talk show in podcasting.
We end with a veritable mélange of shouts outs and one epic rant.
1. Karen Woody talks about the ‘wild west’ of cryptocurrency and the regulatory environment growing up around it. Karen has a shout out domestic tourism in Brown County Indiana.
2. Jay Rosen discusses the morally bankrupt culture at Facebook and how the company can begin to comeback from the abyss. Rosen shouts out to Josh Allen and the Buffalo Bills for being one of the best teams in the NFL this season and advises long-suffering Bills fan Lisa Fine to ‘enjoy the ride’.
3. Matt Kelly discusses the recent speech by SEC Director of Enforcement, Gurbir Grewal in which Grewal previewed an increase in penalties in enforcement by the SEC. Kelly shouts out to Kareem Abdul Jabbar for his evisceration of NBA players in general and Kyrie Irving in particular for their selfish attitudes in failing to get Covid vaccinations.
4. Jonathan Armstrong looks at whistleblowing in the EU. He shouts out to Emma Raducanu for her stunning win in the US Open this year.
5. Tom Fox rants about Waller County and its lack of criminal charges against drivers who intentionally or negligently run over cyclists.
The members of the Everything Compliance are:
• Jay Rosen– Jay is Vice President, Business Development Corporate Monitoring at Affiliated Monitors. Rosen can be reached at JRosen@affiliatedmonitors.com
• Karen Woody – One of the top academic experts on the SEC. Woody can be reached at kwoody@wlu.edu
• Matt Kelly – Founder and CEO of Radical Compliance. Kelly can be reached at mkelly@radicalcompliance.com
• Jonathan Armstrong –is our UK colleague, who is an experienced data privacy/data protection lawyer with Cordery in London. Armstrong can be reached at jonathan.armstrong@corderycompliance.com
• Jonathan Marks is Partner, Firm Practice Leader – Global Forensic, Compliance & Integrity Services at Baker Tilly. Marks can be reached at jonathan.marks@bakertilly.com
The Compliance Life details the journey to and in the role of a Chief Compliance Officer. How does one come to sit in the CCO chair? What are some of the skills a CCO needs to success navigate the compliance waters in any company? What are some of the top challenges CCOs have faced and how did they meet them? These questions and many others will be explored in this new podcast series. Over four episodes each month on The Compliance Life, I visit with one current or former CCO to explore their journey to the CCO chair. This month, my guest is John Melican, former CCO at AMEX Travel and now Managing Director at Exiger.
Melican moved to the corporate world starting at the New York Stock Exchange and then into the financial services world at Bearn Sterns where he was a Managing Director/Principal for three years. It was at Bearn Sterns he began his career in AML work and in compliance. From Bearn Sterns he went to American Express. He talked about moving from a financial services firm to one of the largest multi-national companies in the travel and financial transactions business.
Resources
John Melican LinkedIn Profile
Exiger
Welcome to the latest edition to the Compliance Podcast Network. In this podcast, I am joined by my co-host Carsten Tams, Ethical Business Architect and founder and CEO of Emagence LLC, a boutique consulting firm based in New York City, partners with corporate, academic and NGO clients to develop innovative and evidence-based strategies rooted in behavioral science for solving organizational challenges. Over this podcast series we will explore how Design Thinking can be used to improve your compliance program by increasing employee engagement. In this inaugural episode, Carsten and I will explore why the Design Thinking process can be such a powerful tool for the compliance professional. Highlights include:
1. What is the problem that Design Thinking can solve?
2. What is employee engagement?
3. Why is employee engagement so critical to compliance?
4. How can you design engagement into your compliance program?
Resources
Carsten Tams on LinkedIn
Design Thinking Meets Ethics and Compliance
Human-Centered Design: An Engaging Ethics & Compliance Program Serves Users’ Needs
The Co-Creation Imperative: If You Build It With Them, They Will Engage
Ready, Set, Go: Running A Design Sprint
