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Blog Archive :: May 2014

May 29, 2014

Corporate Compliance Starts with Good Governance at the Top

This is the fifth and final post in this series on corporate compliance issues for governing boards. In the preceding four posts, we discussed fiduciary duties and federal sentencing guidelines. In this post, we will wrap up the series with a discussion on best practices.

Best practices are higher standards than those set by state law fiduciary duties, federal sentencing guidelines and a maze of other laws including:

Federal securities law requiring directors to have certain knowledge regarding registration statements filed with the Securities and Exchange Commission (SEC), creating liabilities for wrongdoing as a control person, requiring reports of purchases and sales of the company's securities, requiring disgorgement of profits from any short-swing transaction in the company’s securities and requiring oversight of the audit process and other requirements created by the Sarbanes-Oxley Act of 2002 (SOX). Federal securities laws also include the Securities Exchange Act of 1934 (Exchange Act) and the rules of the New York Stock Exchange (NYSE) and the NASDAQ Stock Market (NASDAQ) for their listed corporations.

Federal tax law creating liability for certain corrupt practices regarding foreign officials and for allowing unreasonable compensation.

State securities law, which despite  traditionally regulating the substance of transactions not historically regulated by federal securities laws, are under revision to expand some of the executive accountability provisions of SOX to corporations not covered by SOX.

State law regarding nonprofit organization fiduciaries, such as UMIFA and other laws creating fiduciary or other standards for nonprofit organization managers.

Rules regarding regulated industries, such as insurance and banking regulations for management and the safety and soundness of insurers, banks and their holding companies, and SEC rules regarding securities dealers, investment advisers and investment companies.

Rules of professional conduct such as those for attorneys, accountants and internal auditors that apply not only to directors who are attorneys, accountants or internal auditors, but more importantly to the company’s attorneys, accountants and internal auditors and their relationship with the board.

Boards should strive to exceed just being compliant with laws. They should focus on best governance practices and should evaluate their practices periodically.

This should start with an evaluation of the board’s governance operations and practices, beginning with those evidenced by the organization’s and the board’s governing documents. Governing documents should be reviewed against pre-selected sources of best practices that serve as benchmarks, identifying for the board (or an appropriate committee) those operations and practices that meet or exceed the benchmarks, and those that are deficient in comparison with the benchmarks. With respect to those that are deficient in comparison with the benchmarks, considerations for improving those operations and practices should be recommended to the board or committee. Finally, work with the board or committee and its general counsel and other appropriate officers on integrating any desired improvements into the board’s governing documents and practices.

Practices to be Evaluated

Generally, boards should use an outside facilitator familiar with board practices and sources of benchmarks to guide the evaluation. Practices that may be evaluated include:

I. Governing Board

  1. Role of the board
  2.  Composition
    (1) Number of directors
    (2) Outside and independent directors
    (3) Expertise
    (4) Age and tenure
    (5) Former CEO
  3. Nomination and election
    (1) Classification
    (2) Nominations
  4. Leadership
    (1) Independence
  5. Proceedings
    (1) Frequency of meetings
    (2) Access to agenda
    (3) Call for meetings by outside directors
    (4) Attendance
    (5) Outside or independent director meetings
    (6) Location
    (7) Notices and information
    (8) Minutes
    (9) Actions by written consent
  6. Conflicts of interest
    (1) Conflicts of interest
    (2) Change in status
  7. Board compensation
    (1) Annual retainer
    (2) Meeting fee
  8. Training
    (1) New directors
    (2) Continuing education

II. Committee Independence and Responsibilities

  1. Audit committee
  2. Compensation committee
  3. Nominating committee
  4. Governance/Corporate Compliance Committee
  5. Other committees

III. Executive Compensation

  1. Independent oversight
  2. Peer data
  3. Documentation
  4. Cash composition
  5. Performance pay
  6. Change in control and severance pay
  7. Review to avoid encouraging unreasonable risks
  8. Limitation on evergreen employment contracts
  9. Transparency of compensation in the income statement

IV. Role of Management

  1. CEO’s authority and responsibilities
  2. Access of non-CEO management to the board

V. Other Practices or Policies

  1. Strategy and Risk assessment
    (1) Board responsibilities
    (2) Management responsibilities
  2. Conflict of interest policy
  3. Business conduct policy
  4. Diversity practices
  5. Ethics program
  6. D&O protection
    (1) Governing document provision
    (2) Indemnification agreement
    (3) D&O insurance
  7. Succession planning
    (1) The board
    (2) Management
  8. Whistleblower policy
  9. Document retention policy

Identifying Benchmarks to Evaluate the Board’s Current Practices Against

The next step is to identify and select the sources of best practices to be used as benchmarks. We recommend including: ongoing IRS and Treasury initiative for improving governance of tax-exempt entities; recent principals promulgated by the National Association of Corporate Directors; governance issues identified as important by institutional investors; and governance changes required by bankruptcy courts for approval of recent reorganizations.

There are many sources for best practices, including:

NYSE and NASDAQ Rules for Publicly-Traded Companies

Policies of Institution Investors

  • Council of Institutional Investors “Corporate Governance Policies” (updated December 21, 2011); and “Statement in Support of Defined Benefit Plans,” “Statement on Best Disclosure Practices for Institutional Investors,” “Statement on Financial Gatekeepers,” “Statement on Guiding Principles for Trading Practices,” “Commission Levels, Soft Dollars and Trading Recapture,” “Statement on Independence of Accounting and Auditing Standard Setters,” “Statement on Principles for an Effective and Efficient Proxy Voting System, “Statement on the Value of Corporate Governance.” 
  • Teachers Insurance and Annuity Association–College Retirement Equities Fund (TIAA-CREF) Policy Statement on Corporate Governance, 6th edition (2011)
  • California Public Employees’ Retirement System (CalPERS) “Global Principles Of Accountable Corporate Governance,” (2011)
  • Ohio Public Employees’ Retirement System (OPERS) “Corproate Governance 2011 Annual Report" (February 2012)

Policies of Applicable Trade Associations

Service Providers


Non-Profit Sites

  • Sample Conflict of Interest Policy and Glossary of Terms for exempt organizations under Internal Revenue Code section 501(c)(3) available in “Instructions for Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code” on the IRS website

Identifying Practices for Improvement

The comparison of the board’s current operations and practices with the benchmark will identify those that are deficient in comparison. The next step is recommending to the board or committee considerations for improving those operations and practices. Finally, the board or committee will need to coordinate with its general counsel and other appropriate officers on integrating any desired improvements into the board’s governing documents and practices.

This concludes the series of posts on corporate compliance issues for governing boards. Stay tuned for more related issues in future posts. If you would like to request a reprint of all the posts in this series, email


Posted by J. Beavers in  Governance Best Practices   |  Permalink


May 12, 2014

Corporate Compliance Starts with Good Governance at the Top

This is the fourth post in this series of posts on corporate compliance issues for governing boards.  In the preceding three installments, we discussed fiduciary duties. This time we will turn our concentration to the standards set by federal sentencing guidelines for organizations if there is a breach of these fiduciary duties.

Standards Set by Federal Sentencing Guidelines

Federal sentencing guidelines penalize organizations found guilty of breaches of fiduciary duty or violations of law constituting felonies or Class A misdemeanors, yet provide for significant reductions in penalties for organizations that maintain compliance programs to detect and correct such breaches of duty or violation of law. According to “An Overview of the Organizational Guidelines” by the Deputy General Counsel of the United States Sentencing Commission (USSC Overview):


While organizations cannot be imprisoned, they can be fined, sentenced to probation for up to five years, ordered to make restitution and issue public notices of conviction to their victim and exposed to applicable forfeiture statutes. Data collected by the Sentencing Commission reflects that organizations are sentenced for a wide range of crimes. The most commonly occurring offenses (in order of decreasing frequency) are fraud [which includes breach of fiduciary duty], environmental waste discharge, tax offenses antitrust offenses, and food and drug violations.


The organizational sentencing guidelines apply to for-profit corporations, partnerships, limited liability companies, labor unions, pension funds, trusts, nonprofit organizations and governmental units. According to the USSC Overview, “Guidelines are designed to further two key purposes of sentencing: ‘just punishment’ and ‘deterrence’.  Under the ‘just punishment’ model, the punishment corresponds to the degree of blameworthiness of the offender, while under the ‘deterrence’ model, incentives are offered for organizations to detect and prevent crime.”


An organization can be subject to criminal liability whenever an owner, director, officer, employee or other agent or representative of the organization commits an act within the apparent scope of his or her employment, even if the agent or representative acted directly contrary to company policy and instructions. An entire organization, despite its best efforts to prevent wrongdoing in its ranks, can still be held criminally liable for the illegal actions of any of its agents or representatives. However, the degree of liability can be mitigated if the organization had an effective compliance program in place at the time of the breach of fiduciary duty or violation of law. According to the USSC overview, an “effective compliance program” contains standards and procedures reasonably capable of reducing the prospect of breaches of fiduciary duty or violations of law through:


  • Oversight by high-level personnel
  • Due care in delegating substantial discretionary authority
  • Effective communication to all levels of employees
  • Reasonable steps to achieve compliance, which include systems for monitoring, auditing and reporting suspected wrongdoing without fear of reprisal
  • Consistent enforcement of compliance standards, including disciplinary mechanisms
  • Reasonable steps to respond to and prevent further similar offenses upon detection of a violation

Accordingly, the American Bar Association’s Corporate Directors Guidebook, 5th Ed. (ABA Guidebook), provides that “directors should periodically satisfy themselves that an appropriate process is in place to encourage attention to legal compliance issues and claims against the corporation and the timely reporting of significant legal or other compliance matters to the board or an appropriate board committee.”


According to the ABA Guidebook, organizations “should have formal written policies designed to promote compliance with law and corporate policy, which should be periodically monitored for effectiveness, particularly if the corporation operates in an industry subject to laws and regulations that demand special compliance procedures and monitoring." Although public companies initially assigned compliance oversight to the audit committee, the trend has been to form a separate compliance or legal affairs committee because of the burdens already on the audit committee.


The seven key elements of an effective compliance program according the Sentencing Commission and Office of Inspector General are:


  1. Designation of a Board-Level Compliance Committee and a Compliance Officer as an Executive Officer.  Doing so satisfies the most important requirements of the USSC Overview:  oversight by high-level personnel. Following the trend of public companies, we recommend that the board-level compliance committee be a committee separate from the audit committee and composed of persons with background or experience to evaluate legal and compliance matters. As discussed below, the compliance committee should report matters that may affect financial reporting to the audit committee and material matters to the board as a whole.  The compliance officer should be an executive officer with reporting responsibilities to the CEO, general counsel (either inside or outside) and the compliance committee.
  2. Written Charters Policies and Procedures. Policies should be developed that address: written charters of the compliance committee; reporting channels, authority and responsibilities of the compliance officer (including when to report to the compliance committee directly, when to report to the general counsel and when to report to the CEO); whistle-blowing procedures and protections; standards of conduct; and written policies and procedures that promote the organization’s commitment to compliance and address specific risk areas of the organization
  3. Conducting Effective Training and Education. Regular, effective education and training programs should be developed and implemented for all employees, especially programs on identifying compliance violations internally and whistle-blowing procedures.
  4. Effective Lines of Communication.  A process should be developed, such as a hotline to receive complaints and the adoption of procedures to protect the anonymity of complainants and protect whistle-blowers from retaliation. We recommend that whistle-blowing procedures be handled by the compliance officer or general counsel and if an appropriate response is not received from either of them then referred to the compliance committee.
  5. Enforcing Standards through Well-Publicized Disciplinary Guidelines. A system should be in place to respond to allegations of improper/illegal activities and enforce appropriate disciplinary action against employees who have violated internal compliance policies, applicable statutes, regulations or federal health care program requirements.
  6. Auditing and Monitoring. Audits and/or other evaluation techniques should be used to monitor compliance and assist in the reduction of identified problem areas. The compliance committee, compliance officer, CEO, CFO and general counsel should each have a direct reporting responsibility to the audit committee to report any matter that may affect financial reporting.
  7. Responding to Detected Offenses and Developing Corrective Action Initiatives. Systemic problems should be investigated and policies addressing the non-employment or retention of sanctioned individuals be developed. We recommend the general counsel or special outside counsel oversee this.


The next post will conclude this series on corporate compliance for governing boards by reviewing best practices.


Posted by J. Beavers in  Federal Sentencing   |  Permalink




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