What a board doesn’t know can hurt it


What a board doesn’t  know can hurt it Ethical BoardroomBy Michael Volkov – CEO and owner of The Volkov Law Group




VimpelCom’s $397.6million FCPA settlement revealed the serious consequences that can occur when a board of directors fails to adhere to ethics and compliance programme requirements. The VimpelCom board of directors failed to lead the company responsibly.

In the context of ethics and compliance, a failure to lead puts companies on the fast track to legal violations that can quickly result in a serious government enforcement action, reputational damage, collateral litigation and a threat to the company’s leadership.

We all know that a board is critical to establishing a company’s tone-at-the-top.  Creating the right corporate culture is much more than video statements and puffery about ethics and compliance. It is more than checking the box on the elements of a compliance programme. And, most importantly, it is more than making sure that the board can ‘defend’ its actions.

Looking back on the VimpelCom FCPA enforcement action, the board of directors failed to answer a simple question – who is the beneficial owner of two companies that VimpelCom proposed to acquire? Unfortunately, the board never got an answer to that simple question and therefore suffered a serious consequence when it turned out the owner was the notorious daughter of the Uzbekistan president, a known corrupt official.

VimpelCom’s case is a learning moment. The board needed to investigate this matter further, demand that its staff provide information confirming the ownership of the target companies, given the corruption risks, and then make the proper decision. A proactive board would have rejected the transaction and avoided a very costly mess.

A new dynamic is needed in the corporate boardroom. When individual directors embrace a new mindset of proactive governance, premised on doing the right thing rather than finding a way to excuse doing the wrong thing, corporate culture, profitability and sustainability will succeed.

How to hold your board accountable

While companies are expanding internal compliance programmes, companies fail to take a hard look at their own corporate board performance beyond rote and well-established self-assessment models. Corporate boards are often composed of talented, experienced and smart people, but functioning as a successful board requires more than those individual skills. Boards need to develop their own expertise in order to successfully lead a company.

Corporate boards have to be held accountable for their performance and commitment to compliance.

One key principle underlying improved board performance and responsibility is independence. Corporate boards are no longer under the domination or control of powerful CEOs; instead, corporate boards are developing into independent and resourceful leaders.

The days of a CEO serving as the chairman/chairwoman of the board are less frequent. In the 1990s, approximately 80 per cent of public companies had a single person serving as chairman/chairwoman and now the number is down to around 40 per cent. The percentage of independent directors has been rising and now exceeds 80 per cent of all board seats.

Governance and training

There is a dirty little secret out in the corporate governance world, so listen closely: sometimes board members and C-Suite executives do not understand what the law requires and how a compliance programme is supposed to work. Corporate boards and senior executives are responsible for oversight of a company’s compliance programme. If they lack basic education and understanding of the legal risks, they cannot lead the company effectively.

I have long advocated that corporate boards and senior executives should attend annual mandatory training programmes. They have to understand exactly what the law requires or prohibits, how the company is addressing these issues and what questions they should be asking to ensure compliance. Training a board is about more than explaining the basic building blocks of a compliance programme – it is also about their role and their accountability for the performance of the company’s compliance programme.

Fault for the current lack of education rests squarely in the laps of board members, senior executives and the chief compliance officer. Board members and senior executives are busy professionals and many think that they are experienced enough not to need more training. But, unless a board member happens to have prior experience in compliance, each board member will need to learn how to oversee and monitor a compliance programme.

Embrace a new dynamic: the CCO’s role

For years, lawyers have played a key role in corporate governance by directing boards to play a largely defensive role. Thus, corporate boards are focussed on worst-case scenarios as a guiding principle to escape potential liability. I am not advocating that lawyers be escorted out of the boardroom, only that the ‘defensive’ approach be replaced with a more realistic balancing of governance principles and risks.

“One key principle underlying improved board performance and responsibility is independence. Corporate boards are no longer under the domination or control of powerful CEOs; instead, corporate boards are developing into independent and resourceful leaders”

In this balancing act, however, the need for attention to corporate culture and reputation has been diminished. Lawyers tend to resist change and in particular can become threatened when new influences start to appear in the boardroom. Lawyers must make room at the table for chief compliance officers (CCO) in order to promote and enhance the company’s culture of ethics and compliance. Giving CCOs a seat at the boardroom table can help lead the board to a new standard of care that embraces the company’s culture, reputation, and oversight of programmes and relationships key to ethics and compliance.

Into the future

Corporate boards are playing a greater role in the oversight and management of company activities. This increased responsibility comes with significant risks. Some corporate boards are requesting more information and reports from senior management and attempting to be better informed and make better decisions, but we still see significant failures all too often.

The US Department of Justice has been emphasising its focus on prosecuting culpable individuals when criminal wrongdoing occurs. As part of this effort, both it and the Securities and Exchange Commission are looking squarely at board members and senior executives to hold them accountable for failing to act responsibly and prevent wrongdoing when it occurs. Companies and boards need to make sure they have the infrastructure in place to support effective board governance – the risk is too great to ignore any longer.


About the Author:

Mike Volkov has over 30 years of experience in practicing law. A former federal prosecutor and veteran white-collar defense attorney, Mike is an expert in compliance, internal investigations and enforcement matters. Mike was a federal prosecutor for over 25 years, and has extensive trial experience in federal court. He also served as chief crime and terrorism counsel for the Senate and House Judiciary Committees. Mike maintains a highly popular FCPA blog – Corruption, Crime & Compliance. He is a regular speaker at events around the globe, and is frequently cited in the media for his knowledge on criminal issues, enforcement matters, compliance and corporate governance.