Compliance Building

As the recession continues, conflicts and ethics are likely to increase. Morrison & Foerster LLP and The Markkula Center for Applied Ethics put together a webinar: Facing Conflicts of Interest in Troubled Times. These are my notes.

James Balassone, Executive in Residence, Markkula Center for Applied Ethics, started by talking about the environment in which the problems take place. He first pointed out that the downturn has uncovered the excesses of the previous boom. It did not cause more Ponzi schemes, they just became apparent.

He then looked at the forces that increase illegal or unethical behavior. First is excessive pressure to bend or break the rules. That pressure can come from one of three place. There is hierarchical pressure from above. There is teammate pressure form peer. There is individual pressure to succeed.

Another force that increase illegal or unethical behavior is fear and angst. People are afraid of losing their jobs. In a downturn, when there are layoffs happening, you want to be a top performer.

Jim contrasted those fears with factors that provide restraint:

• Loyalty – to resist personal temptation
• Courage – to raise an issue or report a wrongdoing
• Sense of fairness – a willingness to share the pain
• Reputation – value to the individual and the organization
• Goodwill – to absorb further sacrifice
• Integrity – to deliver more bad news

Collectively, these values form the ethical culture of the organization.

Next up was Steve Debenham, Senior Vice President, General Counsel & Secretary at AsystTechnologies, Inc. He focused on some of the issues faced when a company is insolvent or in the zone of insolvency. The issue is that when the company enters the zone of insolvency, the duty of the board shifts from the long term success of the company to the preservation of assets for the creditors.

Steve then turned to the inherent conflict involved in the re-pricing of stock options. With the stock market downturn, many option are underwater. There is an inherent conflict in the decision to re-price and fixing the new strike price when the officers and directors are involved in the process.

Nancy Leavitt Fineman, from Cotchett, Pitre & McCarthey focused on communication and sugar-coating bad news. You want to try to minimize the damage caused by bad news. But lying about performance is a good way to get your company sued or get handcuffs on your wrist. The securities laws are founded on full and complete disclosure.

Next up was Lynn E. Turner, former Chief Accountant of the SEC. The SEC wants to see companies play it straight down the middle (like a good golf shot). He hates the term business ethics. There is only one kind of ethics. If you start qualifying it, you can get yourself on a slippery slope.

He does not like the concept of crossing the line. “If you can see the line, you are probably too close.”

He thinks companies giving guidance is one of the most ridiculous things. It leads to nothing but trouble. If you miss it, your stock takes a hit from the analysts. So there is an excessive pressure to make those numbers.

Steve Debenham came back to talk about insider financing. DGCL §144 has statutory limitations on “Interested Director Transactions” as do other state corporate laws. There is an inherent conflict with an insider transaction. It is the transactions that are best for the director that are likely to get challenged. There is also the problem of lost opportunities.

Last up was Darryl P. Rains from Morrison & Foerster LLP to talk about the conflicts with joint representations in class and derivative actions. On the plaintiff’s side you have three groups: current shareholders, former shareholders, and shareholders’ attorneys. These parties may have some different interests.

On the defendant side you have several groups: the company, disinterested directors, interested directors, current officers, former officers, and employees. As with the plaintiffs, these groups may have different interests.

Given the differing interests, each fragmented group should have its own representation. But that multiplies the already expensive cost of litigation. On the defense side, a unified defense is usually a stronger defense.

Darryl pointed out the issues from the Broadcom case. (I wrote about this case in: Attorney-Client Privilege and Internal Investigations.) The law firm represented the company in an internal investigation. The same law firm also represented the company and officers in a shareholder suit. The law firm got in trouble when it turned over the statements the CFO made to the law firm.

In settling derivative actions, plaintiffs’ lawyers may be at odds over the settlement. The economic settlement can be different and sent more to the lawyers, with the plaintiffs merely getting some governance reform at the company. Darryl used the example of the settlement from Cirrus Logic.

This was a great webinar. It is archived so you can listen to the presentations and see the slidedeck from your office: Facing Conflicts of Interest in Troubled Times.