Legal/Regulatory

One of the most positive, long-lasting effects of the Sarbanes-Oxley law—and the corporate responsibility movement it prompted—has been the significantly increased board focus on applying “best practices” to boardroom conduct. Yet the concept is prone to misunderstanding and misapplication; just what are best practices, what do they mean and what actual benefit do they provide? And what are the consequences for the board that elects not to apply them? Ten years after the enactment of Sarbanes, those remain useful topics for boardroom discussion.

After the last few years of extremely aggressive DOJ prosecutions under the Foreign Corrupt Practices Act (FCPA), corporate board members can be forgiven if they saw a ray of hope in the recent comments of Lanny Breuer, the head of DOJ's criminal division. Breuer, speaking at a November 2011 FCPA conference in Washington, announced that in 2012, DOJ would be releasing "detailed new guidance" on criminal and civil FCPA enforcement. So,what can corporate board members reasonably expect from DOJ's upcoming FCPA guidance? Not much.

A well-known nationwide pharmacy retailer was recently subject to an enforcement action by the U.S. government costing them a settlement of $2.25 million, the implementation of a comprehensive written compliance program, and an agreement to submit to compliance audits every 2 years for 20 years. What type of violation could have resulted in such a severe punishment to the company? The answer may surprise you – these penalties were the result of reported HIPAA security breaches.

As activist investors have become the driving force behind the sale, spin-off, or restructuring of a number of public companies, directors have become increasingly focused on the array of tactics designed to put pressure on public company boards of directors. As activists are learning, with success comes scrutiny. One activist investor tactic that has drawn the attention of boards and regulators is the use of derivative securities. Since derivatives allow activists to create an economic position in a company’s shares that is far greater than the percentage of the shares they actually own, this scrutiny is certainly appropriate.

We’ve just entered the “governance season,” i.e., the unique period of time beginning with the 10th anniversary of Enron’s bankruptcy (October 2011) and ending with the tenth anniversary of the enactment of the Sarbanes-Oxley Act (July 2012). And an excellent way to celebrate that season is through boardroom education focused on the lasting governance lessons of the corporate responsibility movement.

The Delaware Supreme Court recently made it a bit easier for shareholders to sue directors and officers for insider trading—and to force disgorgement of profits—by upholding a bedrock principle of state law: fiduciary duty.

“The intersection of government and business in this country is growing, and business interests are finding themselves in need of more than the traditional lobbying efforts to shape legislation in their favor.”

It's no secret that the regulatory environment is tougher than it used to be. General counsel who responded to Corporate Board Member and FTI Consulting's annual survey cited regulatory compliance as the area they perceive will contribute the most to the legal department’s workload over the next 12 months, over such duties as transactions, HR/employment issues, and proxy/director election issues.

Given the close attention being paid to corporate accountability as a result of the economic meltdown and subsequent bailout, some governance observers predict we may see a greater effort to hold directors personally liable for serious violations or neglect of duties.

As many had speculated, the Securities and Exchange Commission finalized the amendment to the proxy access rule (14a-8), which will allow for certain investors to have their director nominations included in the company’s proxy materials.