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The Risk of Corporate Carelessness: Lessons from C&E History

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oscar-wilde-quote“To lose one parent … may be regarded as a misfortune; to lose both looks like carelessness,” wrote Oscar Wilde, and something similar can be said for corporations that fail to learn from one compliance and ethics failure only to suffer a second such event.

Consider the case of Hoffman-LaRoche, which was prosecuted in the late 1990s for an antitrust violation and was fined $14 million dollars. According to press accounts, the company did not respond sufficiently to the offense, and, not too long after, it was prosecuted again. This time the fine was $500 million – then the largest criminal penalty in the history of U.S. law.

Interestingly, the record that Hoffman-LaRoche broke had been set in a case where the organization (Daiwa Bank) was also was penalized harshly in part because the government felt it had not responded appropriately to a prior violation.

Or, consider the even more striking case of Arthur Andersen, which was indicted for obstruction of justice in connection with the Enron investigation – a charge that literally put the firm out of business and threw its many thousands of employees out of work.

Why was the Justice Department willing to take this harsh and controversial step? One reason was that Arthur Andersen had not responded sufficiently, in the government’s view, to an earlier act of wrongdoing.

More recently, in connection with a much-publicized case involving questionable investment activity by one of his lieutenants, Warren Buffett has been criticized for not having learned the lessons of an earlier scandal at a company in which he had invested – Salomon Brothers. (See http://www.nytimes.com/2011/05/02/business/02views.html.)

In that case, the firm’s senior managers failed to respond adequately after discovering an act of serious wrongdoing by another employee – a lapse which caused considerable harm to shareholders, and which seems similar to what at least some press accounts suggest happen in the recent matter.

To help companies be more careful in the wake of C&E failures, the Sentencing Guidelines for Organizations were amended last year to provide (in a key commentary) that following detection of any offense an “organization should act appropriately to prevent further similar criminal conduct, including assessing the compliance and ethics program and making modifications necessary to ensure the program is effective.”

Given the lessons of C&E history and the explicitness of this provision, not conducting a post-offense assessment runs a significant risk of being seen – and treated – as carelessness by the government.

Does such an assessment need to be conducted by an external party? The Guidelines are clear that this is an option, not a requirement: “[t]he steps … may include the use of an outside professional advisor to ensure adequate assessment and implementation of any modifications” (emphasis added).

Indeed, an external post-offense assessment will, in my view, most likely be warranted only a) in cases of significant wrongdoing; or b) where the analysis and/or recommendations involved in the assessment could be controversial within the organization, and hence independence is necessary for the process to be effective.

Post-offense C&E assessments have always been a sound idea. And, following the recent amendment to the Guidelines, they should now be considered part of the official definition of what it means to be a careful corporation.

Editor’s note: Mr. Kaplan is doing a CCI webinar May 17 entitled Advanced Compliance and Ethics Risk Assessment. For more information, go to https://secure.confertel.net/tsregister.asp?program=CCI.


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