The Board’s Role in Safeguarding Reputation

There is a good reason why Warren Buffett wrote in a recent memo to Berkshire Hathaway managers,

The priority is that all of us continue to zealously guard Berkshire’s reputation. We can afford to lose money – even a lot of money. But we can’t afford to lose reputation – even a shred of reputation.

At a recent Arizona Chapter meeting of the National Association of Corporate Directors, a panel of experts including Professor Charles M. Elson and Professor Robert E. Mittelstaedt expressed concern about the recent spate of insider trading scandals making headlines in national publications and what these ethical breaches may say about the core values of our society.

Management mischief and lax corporate cultures can lead to reputational damage, loss of revenues, higher legal fees, and possible fines and sanctions. As is typical in large organizations, senior leadership does not want to accept bad news. Small problems can be ignored and eventually lead to bigger problems that appear on the front page of a national newspaper.

In 2010, Johnson & Johnson was involved in at least 11 major recalls. Chief Executive Officer William Weldon maintains the company’s quality control issues have been “overshadowed by one company” (McNeil), and maintains “this is not a systemic problem.” At Johnson & Johnson, each division has its own culture. Weldon’s problem could be one of not having actionable intelligence at his fingertips to oversee J&J’s more than 250 companies operating in 60 countries.

The California Public Employees’ Retirement System (CalPERS) has also taken a hit to its reputation as a result of scandals involving Board members and placement agents. Recent efforts to prevent future scandals have yet to restore trust and confidence in the system.

How can the Board proactively safeguard the organization’s reputation? On an ongoing basis, the Board must independently verify that the organization’s performance is legal, ethical and sustainable by extending its inquiries beyond the senior leadership team and deep into the employee population of the organization.

The Board has fiduciary responsibilities best met by engaging an independent party to assess the efficacy of structures, policies, and systems on an ongoing basis to substantiate to external stakeholders that the organization is committed to the core values of integrity, transparency, accountability, and risk oversight.

To safeguard the organization’s reputation, the Board can no longer rely on internal stakeholders alone and must trust, but verify. The Board can accomplish this by engaging an independent party to survey and solicit input from every employee to identify material weaknesses in internal control, compliance and reporting systems that can go undetected by traditional internal audit, risk, and compliance programs.

Finally, the Board should engage an independent party to rapidly elevate risk and operational intelligence to the C-Suite and Board to ensure senior leadership is willing to accept bad news from subordinates and address problems by initiating appropriate actions.

Failure of the Board to independently verify that the organization’s performance is legal, ethical and sustainable may easily have significant consequences in light of the proposed rules for implementing the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934. As Mark Twain said,

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.

Why risk paying a whistleblower millions when, with very little time and effort, you can create and maintain a culture where that doesn’t happen?

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Guest post from Mark Rome of zEthics, Inc.. The Business Integrity Alliance is a joint venture between zEthics and Boundless, LLC, which provides organizations an independent assessment of corporate culture on an ongoing basis to safeguard an organization’s reputation.

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3 Responses to The Board’s Role in Safeguarding Reputation

  1. James McRitchie April 20, 2011 at 12:31 pm #

    For additional background, see SEC Proposes Whistleblower Regulations @ http://corpgov.net/?p=3740. When the SEC’s proposed rules were announced, I wrote:

    “Yes, these whistleblower regulations will make it difficult to operate meaningful company hotline programs, which aren’t going to offer anywhere near the monetary rewards of the SEC program. I’m not sure what the answer is, but it is not caving to suggestions like those listed above. Shareowners should carefully review the proposed regulations and should monitor comments as they are submitted.”

    I think Mark Rome and the Business Integrity Alliance have a good solution with a much more comprehensive approach than simply establishing a whistle blower hotline.

  2. Mike Brozzetti April 22, 2011 at 6:47 am #

    As Einstein said, “Problems cannot be solved by thinking within the framework in which they were created.” Former SEC enforcement attorney, Pat Huddleston, understands this as he recently quoted: “What we really need is a new paradigm for due diligence when it comes to fraud.” In addition, former prosecutor of the U.S. Attorney’s Office, George Terwilliger, affirmed “It’s really about intentional opaqueness where transparency is legally required. It’s about taking steps to hide the true nature of transactions…” (John Buchanan. “It Could Happen to You.” Conference Board Review – Spring 2011)

    The Business Integrity Alliance market-based solution extends beyond just the whistle blower hotline giving Directors, Officers, and Shareowners deeper insights into the areas of ethics, governance, and culture which are the most relevant, but often overlooked, areas within the internal compliance system.

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  1. CorpGov.net » SEC Adopts Whistleblower Rules - June 1, 2011

    […] not only institute their own whistleblower programs, but as Mark Rome noted in a recent guest post (The Board’s Role in Safeguarding Reputation), should engage an independent party to survey and solicit input from every employee to identify […]

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