Duties of Directors to Expose and React to Management Wrongdoing - US

Introduction

It is late on a Friday afternoon. The Chief Executive Officer, or the General Counsel, of XYZ Corp. receives a telephone call advising that the local FBI, United States Attorney, or Regional Office of the SEC, is investigating serious charges of wrongdoing alleged to have been committed by Ms. A, the Company's Chief Operating Officer and governmental liaison, in connection with a number of government procurements. A search warrant, or an all-inclusive subpoena, has been, or shortly will be, issued for all documents relating to Ms. A and the government contracts she has helped procure. The Company's cooperation is sought.

Governmental civil and criminal investigations are a fixture of our corporate landscape. Senior managers and, ultimately, corporate directors have to assess the need to be responsive to various governmental pressures, while at the same time giving true meaning to the presumption of innocence upon which all of us rely.

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When events of this nature arise, reliance on clichés, unthinking adherence to laudatory principles and guidelines, and a failure to assess the particular situation, can lead many corporations down a path they will soon rue.

The current environment imposes a responsibility on companies to ferret out employee misconduct and to deal with any known or suspected instances of misconduct with efficient and decisive measures. What is lacking are prescribed guidelines for directors to whom these difficult questions are referred. This essay seeks to fill that void.

The Current Ambient Circumstances

At a minimum, at least five specific factors should influence how corporations, and their officers and directors, respond to indications of possible illegality on the part of one or more senior employees of the Company.

·First, the Doctrine of Accountability suggests that officers and directors aware of potentially illegal conduct by senior employees may be liable for any recurrence of...