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.