Beyond Sarbanes Oxley
Beyond Sarbanes-Oxley: Conscientious Compliance
A confluence of various regulations and court decisions, beyond Sarbanes-Oxley, has made it de rigueur to adopt corporate codes of conduct or corporate compliance and ethic programs. But arguably, and not fully appreciated, the only thing that could be worse for directors and officers these days than not having adopted a corporate compliance program, is having adopted one and not effectively implementing it. Boards of directors and their advisors must now focus on not merely adopting programs, but on establishing procedures and processes that provide active oversight of directors of compliance programs.
Why is adopting a compliance program an absolute necessity now?
EVOLVING CASE LAW
The need for these programs comes from many directions. From
corporate case law comes the Delaware case In re Caremark Int'l. Derivative Litigation, 698 A2d 959 (Del. Ch. 1996) and its progeny, particularly the Abbott case. Caremark brought Delaware law into line with modern practice revising the prior standard (Graham vs. Allis-Chalmers Mfg. Co., Del. Supr., 188 A2d 125 (1963)) that absent cause for suspicion, directors had no affirmative duty to inquire whether the corporation had programs to be informed about its compliance with laws. Under the Caremark case, the Delaware Court of Chancery established that a director's "duty of care" includes taking steps to assure that the corporation has the competency to detect and prevent criminal wrong doing: "it is important that the Board exercise a good faith judgment that the corporation's information and reporting system is in concept and design adequate to assure the Board that appropriate information will come to its attention in a timely manner as a matter of ordinary operations, so that it may satisfy its responsibility." The Caremark decision does not create criminal liability, but does support civil liability for a board's failure to provide adequate over-sight by its "considered inaction." Interestingly, in Caremark Chancellor Allen referenced the federal sentencing guidelines adopted in 1991, as support for his finding that directors must have a duty to oversee the company's compliance policies and programs: "I note the potential impact of the federal organizational sentencing guidelines on any business organization. Any rational person attempting in good faith to meet an organizational governance responsibility would be bound to take into account this development and the enhanced penalties and the opportunities for reduced sanctions that it offers."
In re Abbott Laboratories Derivative Shareholders Litigation, 325 F.3d 795 (7th Cr. 2003) involved numerous FDA violations by Abbott Laboratories over a 6 year period that included a then-record $100 million fine, destruction and suspension of sale of products accounting for $250 million, loss of significant market capitalization and termination of a strategic acquisition. A shareholder alleged the directors' failure to exercise adequate oversight over these matters constituted breach of the directors' duty of good faith.
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