The US Department of Justice’s (DOJ) Corporate Enforcement Policy (CEP) is never going to be the most popular item on the board’s education agenda, but it is quickly becoming one of the most significant.
With the DOJ’s renewed focus on corporate fraud enforcement and new fiduciary duty interpretations from the Delaware courts, corporate responsibility is back in vogue on boardroom agendas. Directors, especially those serving on audit and compliance committees, are now incentivized to recognize this movement and its potential implications for the company.
This is particularly important given the government’s emphasis on individual accountability and the significant, highly time-pressured decisions companies will be required to consider should they become aware of potential wrongdoing within their ranks. Those will most definitely be board-level decisions, not management’s.
The foundation for the renewed emphasis on corporate responsibility dates back to September 2022 and a series of policy speeches by senior DOJ officials. The fundamental message was three-fold: that the DOJ remains committed to corporate criminal enforcement, to supporting corporate responsibility, and to encouraging investment in compliance and culture.
That message surely caught the attention of most corporate counsel and, in many companies, that of the board’s audit and compliance committees. But for others in leadership, it may have seemed more like government saber-rattling than a serious initiative that deserved full-board attention. To a certain extent, that’s understandable.
But the government’s corporate responsibility messaging became much tougher for boards to ignore with the DOJ’s Jan. 17, 2023, release of its revised CEP. This revised policy document generally serves to underscore the government’s focus on prosecuting corporate fraud.
More particularly, though, it introduces a series of “new, significant, and concrete incentives” (including declination of prosecution) for companies to self-disclose identified corporate misconduct to the government. And for companies that choose not to self-disclose, the revised CEP provides incentives for companies that “go far above and beyond the bare minimum” when cooperating with DOJ investigators.
The revised CEP’s provisions have been supplemented by the Feb. 22, 2023, release of the US Attorneys’ Offices Voluntary Self-Disclosure Policy (VSD) which provides additional details on the requirements for voluntary self-disclosure, as well as on the benefits that the DOJ believes self-disclosure offers.
In essence, the revised CEP and the VSD combine to serve notice on boards to take internal investigations of potential fraud even more seriously than they already do. These important new policies are something of a flashing light, alerting boards to the possibility that they may be called upon to make serious, “bet the ranch” decisions on whether, and if so, how, to engage with the DOJ should an investigation identify problematic behavior—including that of executives. And with that alert, it encourages boards and their audit committees to prepare for the potential that they may be called upon to make those decisions.
Key to this preparation is an understanding that both the revised CEP and the VSD implicate corporate governance in three notable areas, which may most effectively be addressed by the board’s audit and compliance committees:
1. Key Board Decision-Making. The board of directors is likely to face a series of critically important decisions regarding corporate cooperation and voluntary self-disclosure should an internal investigation identify likely criminal wrongdoing by the corporation or its employees, including executives. These decisions relate to confirming that the results of the internal investigation accurately and reasonably identify possible criminal wrongdoing, and processing the chain of related decision-making. The latter includes deciding whether to make a voluntary self-disclosure; whether to meaningfully cooperate with the DOJ investigation or otherwise remediate; and whether to not disclose or otherwise to not cooperate.
These are in most circumstances board-level decisions and should not be made without the input of qualified white-collar defense counsel. They are decisions which must weigh the potential advantages of cooperation and self-disclosure (e.g., declination of prosecution), with the potential disadvantages of proactively engaging with the DOJ on matters of corporate conduct, especially when the evidence of wrongdoing is not clear-cut.
The issuance of both the revised CEP and the VSD gives members of audit and compliance committees the opportunity to familiarize themselves with these possible decisions, so as to be positioned to advise the board should wrongdoing be identified. Telling oneself, “It couldn’t happen here” is not a recommended governance best practice.
2. The Compliance Program. The audit and compliance committees and the board should recognize that, in many ways, the incentives offered by the revised CEP and the VSD underscore the value of maintaining an effective compliance program. Compliance program effectiveness is one of the key factors the DOJ will consider in determining whether a company will receive full credit for the “timely and appropriate remediation” element of the revised CEP.
Eight specific plan criteria are identified, and while they have all previously been identified in prior DOJ documents, they may serve as a useful resource for audit and compliance committee monitoring.
3. Executive Compensation. In her Sept. 15, 2022 presentation, Deputy Attorney General Lisa O. Monaco introduced the use of financial and executive compensation in promoting compliance and avoiding improperly risky behavior. Specific approaches include rewarding companies that claw back compensation from employees, managers, and executives when misconduct happens.
In her presentation, Monaco indicated that she has directed the DOJ’s Criminal Division to develop further guidance on how to reward corporations that employ clawback or similar arrangements. While the revised policy does not include such guidance, it does reference the use of compensation to incentivize compliance, and Monaco’s referenced guidance may still be forthcoming.
Nether the revised CEP nor the VSD represent the end of the corporate responsibility messaging from the DOJ. Indeed, a series of public conferences in early spring provide a logical forum for additional statements from the DOJ on corporate fraud enforcement. Boards should expect further updates from their corporate counsel on these points and should be prepared to work with management on necessary responses.
From a board awareness angle, there are several key takeaways from both the revised CEP and the VSD:
1. It is clear that the DOJ and its Criminal Division are committed to incentivizing self-disclosure, corporate cooperation, and remediation. The DOJ is offering corporations what it believes to be meaningful benefits to encourage early and proactive engagement with government prosecutors when indications of material misconduct arise.
2. These self-disclosure incentives notwithstanding, the DOJ makes it clear what it perceives to be the risks of failing to self-disclose: “The bottom line: call us before we call you.”
3. Decisions on whether to engage with the DOJ on possible misconduct are among the most consequential and time-sensitive that a governing board may be called upon to make—and it should take some meaningful steps in the near term to be prepared to do so if circumstances arise. The board and its counsel will need to heavily weigh these decisions, which the DOJ says it appreciates.
4. Companies should be highly motivated to assure the effectiveness of their corporate compliance plans in general, and to manage risks and incentivize ethical employee behavior in particular, as a means of demonstrating their good faith efforts to address corporate fraud.
5. When it comes to cooperating with the government, timing is everything. As DOJ leadership has made clear, companies seeking cooperation credit need to come forward and disclose important evidence to the DOJ quickly. Both companies and prosecutors evaluating those companies will now be “on the clock.” An undue or intentional delay in providing information and documents will result in a reduction or outright denial of cooperation credit.
Planning for what leaders never want to happen (e.g., indications of material corporate misconduct) is not going to be a popular board education choice. But in the current enhanced corporate responsibility environment, it may be the smart play from a board perspective.
Michael W. Peregrine is a partner in the Chicago office of McDermott Will & Emery. His views do not necessarily represent the views of McDermott Will & Emery or its clients. He thanks his partner, Sarah Walters, for her assistance in preparing this post.
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