Today we honor one of the most iconic moments of World War II (WWII) and one of the most famous photographs of all time, that of the Marines raising the US flag on Mount Suribachi on the island of Iwo Jima. Marine photographer Louis Lowery was with them and recorded the event. American soldiers fighting for control of Suribachi’s slopes cheered the raising of the flag, and several hours later more Marines headed up to the crest with a larger flag. Joe Rosenthal, a photographer with the Associated Press (AP), met them along the way and recorded the raising of the second flag along with a Marine still photographer and a motion-picture cameraman. Rosenthal took three photographs atop Suribachi. The first, which showed five Marines and one Navy corpsman struggling to hoist the heavy flag pole, became the most reproduced photograph in history and won him a Pulitzer Prize. While it is still uncertain, up to this day, the identities of the six men who raised the flag, one thing that is certain is what the photo meant to America in 1945 and what it still means today.

I thought about this in the context of the just released Department of Justice’s (DOJ’s) Evaluation of Corporate Compliance Programs (Evaluation), the intersection of doing compliance and operationalizing compliance at the Board of Directors. I am currently exploring how to make your Board of Directors a more integrated, functional and operationalized part of an effective compliance program through my February podcast series, One Month to a Better Board, which is available through a variety of distribution channels including this site, iTunes, Lybsyn and JDSupra.

In the Evaluation, under the prong of Oversight and Autonomy, it ask the following questions relating to the oversight responsibility of a Board of Directors regarding a compliance program, “What compliance expertise has been available on the board of directors? Have the board of directors and/or external auditors held executive or private sessions with the compliance and control functions? What types of information have the board of directors and senior management examined in their exercise of oversight in the area in which the misconduct occurred?” The clear emphasis of the DOJ Evaluation for Board’s is to actively engage in oversight and not simply sit back and accept what senior management may be feeding them.

It really does not matter what level of senior management expertise is on a Board, what matters is compliance expertise and then engagement. The Wells Fargo fraudulent accounts scandal continues to resonate in this regard. Jeff Spross, in an article entitled “The agonizingly familiar problem with Wells Fargo’s board of directors”, noted, “Wells Fargo was dogged by lawsuits and news reports for years over its poisonous sales practices, but the board only acted after Los Angeles prosecutors, federal regulators, and a pack of enraged senators acted first.”

Further, even with a diverse Board, including multiple former Chief Executive Officers (CEOs) on it and two former banking regulators, it did not “stop the board from falling into some of the same traps that bedevil the American corporate world as a whole. The fact is, boards are often way too cozy with the CEO.” As Spross went on to state, “Officially, the directors on corporate boards are elected by shareholders, and the boards then hire the CEO. In practice, boards tend to exercise pretty tight control over who goes up for election in the first place, and no single person tends to influence the process more than the CEOs themselves — effectively, CEOs often hand pick the people ostensibly meant to oversee them.” He went on to write, “A corporation’s board of directors is supposed to shepherd the long-term well-being of the company, and make sure the CEO is pursuing that same purpose. But in reality, directors and CEOs are more like members of the same tribe, floating freely from company to company, draining corporations for all the shareholder payouts they’re worth.”

Yet who can change the Board’s focus to actually represent the interest of the shareholders rather than that of senior management? Such a change will only come from shareholders who are large enough to make their voices heard; whether as loud knocking and talking activist or quietly on the inside. It is because those large institutional investors see the effects of the lack of Board engagement on their investments and in the case of large entities want better governing decisions at the Board level.

Alexandra Stevenson and Leslie Picker, writing in the New York Times (NYT) Dealb%k column in a piece entitled “Among Some Executives Who Control Trillions, the Power Tie Is a Rare Sight”, wrote California State Teachers’ Retirement System (Calstrs) wants to have their voice heard at the Board level, wants to know what Directors are doing on their behalf and just how could shareholders speak up. Such investors tend to work with senior management to quietly make changes, including in sustainability and the ethics and compliance areas. They cited to Nick Dawson, a co-founder of Proxy Insight, who said, ““there is a clear preference for behind-the-scenes engagement on these issues.” “Asset managers prefer to ensure that management teams are capable of dealing with E.S.G. [environmental, social and governance policies] issues in-house, rather than by applying external pressure”.”

Yet with Wells Fargo, or any of the companies which were embroiled in Foreign Corrupt Practices Act (FCPA) matters which recently settled, where was the Board when the company was busy paying out millions in bribes, in some cases literally across the globe? The Evaluation makes clear that the Board has a role in doing compliance and there should be compliance program expertise at the Board level, which is exercised in an actively engaged oversight responsibility. It is incumbent for these large institutional investors and hedge funds, such as State Street, through its commitment to robust ESG corporate initiatives to make a change in Board attitude.

But it will also be driven by regulators such as the DOJ. For if the DOJ specifies what and how a Board of Directors needs to do to become more engaged in compliance and there continues to be such abject failure at the Board level, they will likely bring the hammer down on a company and its Board. I fear it is this enforcement which may then lead shareholders to require the Boards of companies they invest in to do compliance at the Board level.


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© Thomas R. Fox, 2017