22 June 2004

The 10 Trickiest Legal Challenges for Directors Today

The 10 Trickiest Legal Challenges for Directors Today

Feature Story

by David Sendler

Board members must navigate an ever more dangerous legal minefield, from dealing with stiffer standards of compliance to getting tough with CEOs. Some of the sharpest legal minds in the business rank and analyze the potential pitfalls.

If it comes to a fight, you want the best lawyers you can find. Even better, they should be on hand to keep you out of trouble in the first place. On the following pages, a panel of powerhouse professionals—13 of America’s top corporate attorneys—do just that, identifying the 10 biggest dangers directors face and suggesting ways to handle them. Heed their advice. With thanks. Just think what this would have cost you in billable hours.

Ten of the 13 were picked by peers as tops in their areas of practice in a Corporate Board Member poll three years ago. The rest—Douglas M. Hagerman, Kate H. Murashige, and Robert S. Strauss—have been singled out for distinction in other issues of the magazine.

In ranking legal traps, these superstar attorneys emphasize the importance of protecting shareholders, corporate employees, and your own reputation and personal assets as you serve on a board. And Robert S. Bennett of Skadden Arps Slate Meagher & Flom LLP in Washington, D.C., offered a provocative parting shot.

“Let’s urge Congress to apply to itself the principles and spirit of Sarbanes-Oxley, which emphasizes the importance of integrity, accountability, and independence,” Bennett said. “Imagine if Congress did what it demands of corporate America:
“No perks or pork.
“Financial accountability.
“No ‘I’ll scratch your back if you’ll scratch mine.’
“Imagine how great it would be if Congress treated all citizens as it demands that corporations treat shareholders.”

1. Mastering the Art of Complaince

Directors are increasingly being taken to task for corporate compliance failures, as we saw in the recent federal appellate decision holding that the directors of Abbott Labs could be held liable for its FDA fines. In addition to setting an ethical tone, boards need to monitor management’s design and implementation of compliance programs. The Justice Department and the U.S. Sentencing Commission have said that the existence of effective compliance programs can lead to more lenient sanctions against companies whose employees commit illegal acts. Implementation is as important as having a program, however, because having policies in place and not following them can make matters worse.

Douglas M. Hagerman, 43
Senior Vice President and General Counsel, Rockwell Automation, Milwaukee

Directors will have to adapt to the aggressive regulatory environment without becoming risk-averse. The idea is to build a profitable company and make money for stockholders while staying out of jail.

Robert S. Bennett, 64
Skadden Arps Slate Meagher & Flom, Washington, D.C.
Criminal Defense And Complex Civil Litigation

4. Handling A Crisis
Boards should require management to have a crisis plan. Without one that can immediately be put into effect, a company can make very large mistakes. There could be an investigation, an explosion, a research report that gets negative press, and if crucial decisions are not made effectively and quickly it could have enormous financial and other implications.

Sheila L. Birnbaum, 64
Skadden Arps Slate Meagher & Flom, New York City
Class-Action Defense

Crisis handbooks and crisis simulations are very important but can only go so far. The board cannot anticipate and prepare for every major issue that will arise, so it must make sure that the top management fosters open communication and the highest standards of compliance.

Robert S. Strauss, 85
Akin Gump Strauss Hauer & Feld, Washington, D.C.
Domestic And International Strategic Relations

It's good to see that the top lawyers in America think that mastering the art of compliance and handling a crisis are tricky legal challenges. Corporate Management and the Board of Directors already know this. The question is, what are they doing about it with their employees and their customers on a consistent and documented basis today. Most organizations we talk to think they are going to be protected by their lawyers or the local first responders by hitting the speed dial or 911. This perception is what puts these same companies into situations where they are quickly paralyzed and unable to recover in a timely manner. Be Proactive. Be Preventive. Be Relevant. Be Supportive. With Sally at the front desk, Harry on the warehouse dock and Joe in Human Resources. They are the ones who will more likely be the people to save your institution from "Red" zone operational risk.

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