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Blog Archive :: October 2014

Oct 23, 2014

Who is Responsible for Compliance and Compliance Reporting?

We have recently seen a plethora of headlines and news articles on compliance, compliance reporting, and who is responsible for them. Below is a governance perspective of who is responsible and the importance of regular reporting to those responsible persons.

Who is Responsible?

We answered the responsibility question in the inaugural March 27, 2014, post of Acredula for INCompliance: “Corporate compliance for any organization starts at the top with the organization’s governing board.” Most of the recent headlines and lead stories have ignored this very important role of a governing board.

Courts have held that a governing board’s duty of care (i.e., acting with the care that an ordinarily prudent person in a like position would use under similar circumstances) requires the governing board, as the organization’s highest authority, to be responsible for and oversee the organization’s compliance with fiduciary duties, laws, high ethical standards, and other legal and societal obligations. Similarly courts have held that a governing board’s duty of loyalty requires that such responsibility and oversight be conducted in good faith in what the governing board reasonably believes is in the best interest of their organization as whole.

A governing board is permitted to delegate its responsibilities to a committee of board members (often the audit committee for publicly-held companies or a governance or compliance committee for other organizations). However, a governing board may delegate to a committee only for matters within the committee’s designated authority and only if the board reasonably believes the committee merits confidence.

A governing board may also delegate its responsibilities to an officer (typically, for responsibilities as important as compliance, the person serving as chief executive officer). However, boards may delegate to an officer only for matters for which the board reasonably believes the officer is reliable and competent.

For larger organizations, the responsibility and oversight of compliance is typically delegated to the person serving as the organization’s chief executive officer who, in turn, may delegate some of that responsibility to general counsel or a chief compliance officer. However, the person acting as chief executive officer remains solely responsible to the governing board for compliance of the organization even though the chief executive officer may delegate authority to general counsel or a chief compliance officer.

Our experience is that there are two situations in which the risk of a lack of compliance is greatest for any organization:

  • When the chief executive officer or an executive chairperson of the board increases the size of the board to a number greater than the 7 - 11 (generally recommended by most governance experts as the best number for making decisions). Larger boards have to exercise additional prudence to learn “what they don’t know” because it is difficult for a chief executive officer or board chair to keep larger boards well-informed.
  • When a new person from outside the organization becomes chief executive officer and replaces other executives with persons with little or no experience with the organization. Boards have to exercise additional prudence to make sure there a transition that is consistent with the board’s desired strategic direction, including responsibility and oversight for compliance.

New board members should receive orientation and ask questions about previous compliance issues and how current compliance issues are handled. Experience with compliance issues should be included in the criteria for selecting new board members. Likewise, all board members should meet periodically in executive session (as discussed below) with those responsible for the organization’s compliance.

The Importance of Compliance Reporting to the Board

Because of the importance of compliance, we recommend to any organization that its board, or committee responsible for compliance, meet in executive session periodically not less frequently than quarterly with general counsel and any chief compliance. These meetings should discuss compliance issues and reinforce that general counsel and any compliance officer have direct reporting authority to the board or compliance committee for any compliance issue that general counsel or the compliance officer reasonably believe should be known by the board or committee.

We generally recommend that general counsel or the compliance officer follow, as guidance, Rule 1.13 of the rules of professional conduct for attorneys:

If general counsel or a compliance officer for an organization knows facts from which a reasonable person, under the circumstances, would conclude that an officer, employee or other person associated with the organization is engaged in action, intends to act or refuses to act in a matter related to the representation that is a violation of a legal obligation to the organization, or a violation of law which reasonably might be imputed to the organization, and that is likely to result in substantial injury to the organization, then general counsel or the compliance officer shall proceed as is reasonably necessary in the best interest of the organization.

It is too early to tell how the recent headlines and news stories will portray the organizations involved. Suffice it to say that an organization’s most important asset is its reputation, which the organization’s governing board should assume responsibility and oversight for.


Posted by J. Beavers in  Governance Best Practices   |  Permalink


Oct 21, 2014

Factual Scenario Simulations for Boards

To recap our series of posts from March 2014 to date:

  • Three posts on “Corporate Compliance Starts with Good Governance at the Top” dealing with “Fiduciary Duties of Board Members” (March 27, 2014), “Some Special Areas of Concern for Board Members under Their Fiduciary Duties”(April 10, 2014), and “Protections Afforded to Board Members with respect to Fiduciary Duties” (April 24, 2014);
  • A post on “Standards Set by Federal Sentencing Guidelines,” which may be experienced without good governance at the top (May 12, 2014);
  • A post on “Best Practices” as a standard higher than fiduciary duties (May 29, 2014);
  • Two posts on “Board Evaluations” dealing first with “Why they Are Important (June 12, 2014) and then “How to Proceed” (June 26, 2014);
  • A post on “Engaging the Board in Succession Planning among Its Board Members” (July 10, 2014);
  • A post on “Engaging the Board in Strategic Planning” (July 24, 2014); and
  • Three posts on “Expertise Boards,” with the ultimate goal of good governance at the top, “State Law Encourages an Expertise Board for Corporate Compliance” (August 7, 2014), “Categories of Expertise to Consider for an Expertise Board” (August 21, 2014), and “How to Address Gaps in Expertise” (September 11, 2014).

In order to engage the board and its members in any of these governance topics, we recommend extemporaneous simulation of factual scenarios in which the board participates. We’ve found that engaging a board in a simulated factual scenario is more engaging than a traditional PowerPoint lecture format.

Some of the simulations boards have found beneficial include:

  • Penn State: We re-enact a scenario based upon the day-by-day the events faced by the Penn State board over the five-day period of Saturday, November 5, 2011, through Wednesday, November 9, 2011. In this exercise, we challenge the board to review each issue considered by the Penn State board during that period and then vote as a board. The learning objective of this simulation exercise is the importance of protecting one of your organization’s most valuable assets  - its reputation.
  • Adolph Icon: The board receives a letter from an Adolph Icon on the evening prior to a board meeting demanding a meeting with the board at that board meeting. Icon has a biography that includes getting himself elected to boards and their compensation committees, replacing other members of the compensation committee with colleagues and family members, and eventually firing management and assuming control. The learning objective of simulation exercise is the role of the board and of management in dealing with an unexpected solicitation that can have a draconian result.
  • Mass Board Resignation: At the beginning of a board meeting, the CEO announces that a majority of the board had resigned prior to meeting, and legal counsel has advised that the board needs to fill the vacancies. The board is guided in a discussion of what skill sets it wants in new board members and is gently pushed toward building an “expertise” board composed of persons with competencies needed for the future success of the organization rather than a “constituency” board (such as Congress). The learning objective of this simulation exercise is succession planning of the board.
  • Unexpected CEO Resignation: At the beginning of a board meeting, the board chair announces that the organization’s CEO tendered his or her resignation effective yesterday and the board will need to determine what skillsets the board wants in a future CEO and how it will find such a person. The learning objective of this simulation exercise is CEO succession planning.
  • New Board Member Nightmare: Using stick character cartoon figures, a young person is solicited   ¾ and agrees ¾ to become a new board member of a nonprofit organization. This turns into a nightmare when the new board member becomes an ERISA fiduciary, treasurer where the organization failed to file and report employment taxes, and is imposed with Intermediate Sanctions. The learning objective is what questions should be asked, and what red flags should be warnings, before becoming a nonprofit board member.
  • Adolph Shepard Requests for a Members Meeting to Change Control: The board members of a membership organization ¾  such as an insurance company or a member nonprofit organization ¾  receive a letter demanding a copy of the names and addresses of the members with the purpose of calling members’ meeting to consider a proposal for a reverse merger that will result in change in control of the organization. The learning objective is to assess the current capabilities of the board, individual directors, and executive officers in dealing with such an unexpected event and review steps needed to strengthen those capabilities.

      These factual scenarios are not scripted, but instead simply outlined, in order to allow for a natural reaction to the simulation from the board. After completing the simulation, there is a discussion led by an outside facilitator of what the board did correctly and where it may make some improvements. Except for the “New Board Member Nightmare,” these are generally half-day programs. We find it works best if the board (except for the board chairperson) is unaware of the simulation until the beginning of the board meeting.

      If you’d like further information about these extemporaneous simulations, feel free to contact John Beavers at or 614.227.2361 or


      Posted by J. Beavers in  Governance Best Practices   |  Permalink




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