Risk Management

The Corporate Crisis: Executive Misconduct

A corporation’s response to an ethical lapse by a senior executive may have lasting effects on how it is perceived. Toyota and Subway have discovered that even though corporate compliance programs and codes are well-crafted, there is no way to protect a corporation from any alleged ethical lapses or misconduct by senior executives or corporate spokespersons. Even if the misconduct or unethical behavior of the senior executive is not directly related to corporation operations, mitigation efforts can prove difficult.

The corporation must have a complete understanding of the relevant facts to be able to make sound decisions. A proactive, focused mitigation protocol is also necessary to allow the corporation to respond in good faith to misconduct.

C-suite executives often believe that their organization’s strong and comprehensive compliance programs protect them from ethical crises involving key executives. In integrity mitigation protocols are therefore often given low priority at senior executive levels.

Research shows that at least 60% of CEO’s, corporate boards, and board members fail to implement integrity mitigation procedures into their overall corporate strategy planning. Because of the potential negative consequences for the organization if these events are not prevented, it is vital that senior management has a comprehensive risk mitigation program. This is especially true in today’s 24-hour news cycle and sound bite journalism. Corporations cannot afford to be late in the game of catch-up in today’s news cycle, which provides instant access to all the latest information.

The potential consequences and reporting obligations for senior executives may not be immediately apparent if the alleged illegal or unethical conduct of a senior executive is unrelated to their organization’s operations. This is especially important for corporations that are publicly traded or heavily regulated. In such cases, there may be reporting obligations.

Failure to meet the reporting requirements can increase an organization’s civil or criminal liability exposure. Different disclosure requirements are required by the FCPA, SOX, and other statutes.

If a corporation discovers that a senior executive is under investigation by the government, it should take steps to ensure the company cooperates with the investigators. This will demonstrate that the company has acted in good faith to correct the misconduct. It will also help to focus and shape the investigation away. In any discussions with investigators, or prosecutors’, the corporation should highlight the organization’s connection to the matter under investigation.

The organization must avoid inconsistencies between the regulatory and legal reporting statements it uses and the message that it sends to its constituents about the employee’s misconduct.

An organization should try to distance itself form the personal misconduct of its senior executives. This is one of the best options. If the corporation decides to suspend the senior executive it should inform all concerned that the corporation will not be affected by the executive’s absence. Remember that the corporation should respond to media inquiries in a manner that is appropriate for the issue.

The corporation must be able to identify and assess the crisis in order to respond appropriately. The best way for a corporation to respond to a crisis is to be able identify all options. The corporation’s crisis plan should be flexible enough to adapt to changing environments and circumstances. It is important to remember that crisis response mitigation should be a process, not a task. You must accept the fact that some of the things you have planned for today may change in two weeks and then deteriorate over time. Avoid the “War and Peace” syndrome when creating your emergency response plans. Also, don’t confuse business continuity planning with crisis management.

The corporation could also be subject to reputational damage, which is important beyond any potential liability exposure. The corporation should assess whether an investigation is necessary. An internal investigation properly conducted will give the corporation the ability to determine the true facts. Internal investigations can uncover weaknesses in corporate procedures and possible involvement by others within the company. Internal investigations can protect an organization from civil or criminal liability.

Remember that the entire world is watching you during a crisis. Therefore, it is essential to be aware of your audience. Your crisis response will be watched closely by all your stakeholders, including shareholders, creditors and consumers. Employees and regulators are just a few of the many people who can help. The organization must respond to the crisis in confidence and transparency.

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