It's been a popular, if inaccurate, story line over the last few years that corporate executives are rarely held responsible for misconduct that occurred on their watch. That neither the government, nor corporations, are holding individual leaders accountable for careless stewardship, if not also fraud or malfeasance. That the companies, their mission and their stakeholders are the ones left "holding the bag" in those circumstances.
But that narrative might be changing somewhat. Several new, highly public developments showcase prominent executives being subjected to significant financial penalties, loss of employment and reputational damage arising from allegations that they bore responsibility for corporate scandals to which they contributed, directly or indirectly.
Even though these developments are unique in their nature and scope, the sheer magnitude of the penalties asserted and the intensity of the media coverage are likely to attract significant attention in the executive community. They've been page-one news; people are noticing and boards may be expected to react.
And the first one's a whopper. A federal regulatory agency recently issued a notice of charges against five former senior executives of a major financial services organization. The agency's actions were grounded in what it determined to be the executives' roles in what it had previously concluded to be the organization's systemic sales practices misconduct. Those charged included a senior business unit leader, several former senior business executives, the former general counsel, and both the former chief auditor and executive audit director.
The relief sought includes both civil money penalties (ranging from $25 million to $500,000, depending upon the individual); and either a lifetime ban from participation in the industry, or a commitment to affirmative actions or refrain from certain conduct in any future involvement in the industry. It should be noted that the named individuals are contesting these charges.
At the same time, settlements were entered into with several former officers, including the CEO, chief administrative officer, chief human risk officer and chief risk officer. The settlement terms ranged from the most severe: lifetime industry ban and $17.5 million civil money penalty against the former CEO; to the (marginally) less severe: a personal cease and desist order and assessment of a $1.25 million against the former CRO.
The other development was also well-publicized: Major League Baseball's decision to suspend for one year both the General Manager and the Manager of the Houston Astros for their role in the infamous electronic sign-stealing scandal, and their subsequent termination by the Astros. This action, involving two senior executives of a highly sophisticated business organization, is perhaps more consistent with disciplinary measures taken by a self-regulatory organization (or a governing board) than a governmental agency.
There was no indication that either Astros executive was an active participant in the sign stealing scheme. Rather, their punishment related principally to the fact that they both were in a position to have done something about the scheme, but failed to do so. For the General Manager, it was his failure to take adequate steps to ensure that his club was in compliance with the evolving MLB rules on sign stealing. In particular, he didn't distribute within the team MLB's memoranda on rules changes, and did not confirm that the players and field staff were in compliance with MLB rules and the memoranda. For the Manager, it was his failure to act to stop the conduct and to notify the players and a key coach that he disapproved of it. This, even though he was aware of the conduct, and believed the conduct to be both wrong and distracting.
The extent to which the executives contributed to the wrongful conduct differs in the two developments. In neither case do the penalties appear to be asserted on a "captain of the ship" basis; i.e. that they were the executives in charge when the malfeasance occurred. Rather, the culpability arose from a determination the executives contributed to the harm, either through their knowledge and participation, or their failure to take action to prevent conduct that they knew (or had reason to know or suspect) was contrary to law or industry rules.
So the word's likely to get out. If the dollar amounts don't shock, the industry bans (no matter the length) might. The underlying emphasis on individual accountability will get recognized, and carry with it the potential for impacting executive attitudes. And boards may need to be respond, in a couple of different ways.
First, boards can anticipate the potential for executive angst and try to address it proactively and appropriately. Review and discuss the scope of D&O and indemnity coverage available to them. Confirm the adequacy of the legal and compliance support to which they have access. Assure that they have direct contact with board leadership. Encourage them to express concerns they may have about the strategic direction of the company; its commitment to a culture of integrity; and about the consistency of its compliance and incentive goals.
Second, boards can have direct conversations with senior leadership to confirm governance expectations of executive accountability generally, and its support of a culture of compliance in particular. Just what are the board's standards in this regard?
Third, boards may choose to revisit the role of compensation in their oversight of senior leadership. Are incentive goals consistent with the mission? Are compensation clawbacks in place, and if so are they sufficient to help deter misconduct and promote greater executive engagement in compliance?
Finally, boards might engage in some introspection; e.g., review their own obligations with respect to engagement, compliance oversight and attentiveness to risk warning signs. For directors are not immune from the kinds of accountability meted out in these two developments. Indeed, with respect to the financial services company, a regulatory agency previously sent letters to each then-current company board member confirming that they had, during the period of compliance breakdowns, failed to meet supervisory expectations. Not a letter any board member wants to receive.
No matter how you look at it, with these new developments we're talking about significant penalties. No matter what your career earning power may be, those are huge hits to a bank account. No matter how prominent a person you may be, those are body blows to a personal reputation. It may be an awkward topic, but given what's been going on—an important one. Because the spotlight on individual accountability just got a little bit brighter.
Originally published on Forbes, February 2020.
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