The Corporate Crisis: Executive Misconduct

How a corporation responds to a potential crisis involving allegations of an ethical lapse on the part of a senior executive has the potential to shape its corporate image long after the initial event is over. As Toyota and the Subway corporation are currently discovering, despite all best corporate governance efforts, including expertly crafted corporate compliance programs and codes of conduct, no corporation is immune from the damage that can be sustained from the alleged ethical lapse or misconduct on the part of a senior executive or corporate spokesperson. Mitigation efforts can be especially challenging when the senior executive’s alleged unethical or illegal conduct is unrelated to the corporation’s operations.

A comprehensive understanding of the underlying relevant facts is critical to the corporation’s decision making process. As well as a proactive and focused mitigation protocol that provides the corporation with the ability to demonstrate a good faith response to the misconduct.

All too often, C-suite executives believe that due to their organization’s robust and comprehensive compliance programs, their organizations are well protected from such ethical crises involving their key executives. As a result, integrity mitigation protocols tend to be assigned a low priority at the senior executive level.

Research studies have indicated that on average upwards of 60% of CEO’s and corporate boards have failed to successfully embrace integrity mitigation protocols into their overall corporate strategic planning. Given the potential consequences to the organization if such events are not proactively mitigated, it is essential that an organization has an effective risk mitigation program in place so that senior management can be prepared as best they can be. This is particularly true in today’s 24/7 news cycle and sound bite journalism. In the current environment, where instant access to the news is so readily available, a corporation cannot afford to play catch-up.

In the event that the senior executive’s alleged unethical or potentially illegal conduct is unrelated to the organization’s operations, the potential fallout and reporting obligations may not be readily apparent to the organization. This is particularly important to corporation’s that are publicly traded and heavily regulated, in which case, the alleged misconduct may require certain reporting obligations on the part of the organization.

Failure to comply with the mandatory reporting requirements, has the potential to increase the organization’s civil and criminal liability exposure. The FCPA, SOX and other statutes and regulations all impose varying levels of disclosure requirements.

In instances where the corporation learns that a senior executive is the subject of a government civil or criminal investigation, the corporation should take steps to monitor and if possible manage the company’s cooperative efforts with investigators. The goal here is to demonstrate the organization’s good faith response to the misconduct and more importantly, attempt to shape and focus the investigation away from the organization. In all discussions with investigators or prosecutor’s, the corporation’s should attempt to underscore the organization’s incidental connection to the matters under investigation.

While dealing with the crisis, the organization must take care to avoid ant inconsistencies between its regulatory and legal reporting statements and the message it send to its various constituencies about the employee’s alleged misconduct.

One of the best courses of action is for the organization to try to distance itself from the personal misconduct of the senior executive. Should the corporation choose to suspend the senior executive, the corporation should inform relevant constituents that the corporation’s operations will not be destabilized or disrupted by the absence of the executive. It should be kept in mind, that when dealing with the media, the corporation’s response should be proportionate to the interest of the matter.

Proper identification and assessment of the crisis is essential to the corporation’s ability to initiate a proper response. A corporation facing a crisis must be able to identify the options available to them. The corporation’s crisis response plan needs to be flexible enough to allow for adjustment to changing circumstances and environments. It is essential to keep in mind that crisis response mitigation is a process not a project. Accept the fact that some percentage of what you plan for today will change two weeks from now and will deteriorate over time. Above all when drafting your crisis response procedures try to avoid the “War and Peace” syndrome, and do not confuse crisis management with business continuity planning.

Equally important, and extending beyond the potential liability exposure, the corporation may find itself facing significant reputational damage. In such a situation, the corporation must assess whether an internal investigation is warranted. A properly conducted internal investigation will provide the corporation with the means of determining the underlying facts of the matter. The internal investigation may also implicate certain defects in the corporation’s procedures or the potential involvement of others within the organization. Also the internal investigation has the potential to insulate the organization from civil and or criminal liability exposure.

During a crisis keep in mind that the world is watching. Consequently, it is incumbent to know your audience. During the crisis, all of your corporate constituencies, shareholders, creditors, consumers, business partners, employees and especially regulators and industry analysts will be monitoring your response to the crisis. As a result, the organization must prepare and respond in a manner that promotes confidence and transparency.

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