(TMA International Headquarters)
Events in recent months at such corporate giants as
Enron, Tyco, and WorldCom have highlighted the importance of proper corporate
governance. No company is immune from the possibility of an Enron-like disaster.
Companies should ask if their current corporate policies are enough to protect
individuals and the company from liability. Does everyone within a company —
public or private, large or small — understand that he or she can
make a difference
in preventing a disaster?
A company without proper corporate policies in place faces significant
legal, regulatory, and business risks, including crippling lawsuits,
governmental investigations, loss of goodwill, and personal liability on the
part of managers and employees. Claims start to fly when a company suffers
losses or damages because of wrongful or unauthorized actions by its
employees.
By themselves, corporate policies cannot prevent every potential misstep.
If they are properly implemented, however, appropriate policies can lessen the
likelihood that such problems will develop, and they can also provide a defense
if misdeeds by employees result in lawsuits against a
company.
Corporate governance refers to overseeing and directing a company. It
entails supervising and contributing to the executive functions of management
and being accountable for the company’s affairs to its shareholders, employees,
customers, suppliers, regulators, and the community. Corporate governance
obliges directors and officers of a company to:
- Develop and implement strategies to ensure a
company’s survival and prosperity.
- Evaluate risks and make certain that effective
control mechanisms are in place.
- Supervise the performance of executives.
Directors and officers have legal obligations to control the company.
They must evaluate potential weak spots and see that effective corporate
policies are in place to mitigate the risks. They must ensure that the company
has adequate systems of internal control and accountability and that effective
compliance programs have been adopted. Directors and officers are obligated to
ensure that the company upholds the highest standards of ethical
behavior.
If properly drafted and disseminated, corporate policies can protect a
company from liability. Good policies serve as defenses to lawsuits or
governmental investigations and also provide a company with legally defensible
grounds to terminate employees who breach its guidelines.
Effective corporate policies must be carefully drafted to cover all
required subjects without leaving legal loopholes. At the same time, all
employees must be able to understand them. Effective corporate policies must
reflect the global nature of a company’s operations. In other words, policies
must be flexible enough to take into account differences in culture and customs
of foreign countries within which a company
operates.
Subjects that should be addressed by corporate policies
include:
- Compliance with laws,
regulations, and accounting standards.
- Whistleblowing. These
policies should address the obligations of employees to the company and its
stakeholders with regard to reporting wrongdoing and also the protections
against termination that employees have for doing so.
- Records retention and
destruction, including how records should be categorized, how
long each category of record should be retained, and what records can be
destroyed at some point.
- Ethics and business
practices.
- Sexual harassment.
- Confidential information and trade secret
protection, including what steps employees must take to protect
a company’s confidential information and that of third parties.
- Internet and e-mail use.
- Privacy, including what legal obligations a company has in the absence of
a privacy policy and whether that default position can be improved from the
company’s perspective by drafting a policy. Privacy policies should also
address how such guidelines should be brought to the attention of customers.
To date, Canadian companies have not incurred the kind of fines and
liabilities that U.S. regulators and courts have imposed on businesses. Laws
that give rise to personal liability are well established in Canada, however.
For example, the Investment Dealers Association of Canada fined the former
president of Rampart Securities Inc. $125,000 in July and suspended him from
employment with IDA member firms after the company was fined
$3 million for sales compliance
violations. The IDA said that the president of the company, along with other
senior officers, failed to meet their responsibility to establish policies that
met association requirements and to ensure that such policies were implemented.
A firm commitment to a corporate code of ethics serves as a foundation
for the activities of the company and its employees. It sets standards for
acceptable behavior and performance and sends a strong signal to investors,
employees, customers, suppliers, and regulators that the company is serious
about principled behavior. It can forestall questionable practices and prevent
the need for regulatory intervention, and it makes the company more attractive
for financing and for mergers and acquisitions.
Policy Tune-up
Companies should
review their policies from time to time to ensure that they are up-to-date and
address all legitimate issues. However, here are seven steps that companies
should consider taking immediately with regard to their
policies:
- Consolidate all existing policies and eliminate
duplication. Rather than providing a safety net in efforts to cover all
possible scenarios, duplication instead creates confusion and inconsistency
that can be exploited in a lawsuit.
- Develop a standard format and method of organization
for policies. This makes policies easier to find, read, and amend as necessary
to reflect changes in legislation and case law.
- Create internal consistency among present policies.
Some polices must be detailed and lengthy, and procedures often must be
specified as part of a given policy. This level of detail, however, increases
the risk that internal inconsistencies will appear, such as the use of
undefined jargon, improperly used terms, and procedures that contradict the
intent of a policy.
- Ensure that all applicable legislation and
regulations are followed.
- Develop a process for employee training. Policies
that are not communicated to employees and implemented through training are
ineffective. A company should not rely on such policies as a defense to a
lawsuit, nor should it use such a policy to fire an employee who breaches it.
Moreover, for employees to buy into company policies, they need to understand
how corporate policies protect them as individuals and the company against
liability.
- Identify gaps in policy and amend or draft new policies to address them.
The integrity of an organization ultimately depends on the character of
its employees, from the top down. Corporate policies will not prevent a
dishonest officer or employee from engaging in fraud or other misdeeds. They
will, however, make a company more attractive to its stakeholders and help it
avoid potential liability.