CEOs and executives just can’t get a break in the news
lately.  A jury found both former Countrywide
executive Rebecca Mairone and Bank of America liable for fraud for
Countrywide’s “Hustle” loans in 2007 and 2008 (see
here). Martha Stewart has had to renegotiate her merchandising agreement
with JC Penney to avoid hearing what a judge will say about that side deal in
the lawsuit brought against her by Macy’s, with whom she purportedly had an
exclusive merchandising deal (see
here).  JP Morgan Chase is in talks
to pay $13 billion to settle with the Department of Justice over various
compliance-related failures, but the company still faces billions in claims
from angry shareholders. The company isn’t out of the woods yet in terms of potential
criminal liability (see
here). CEO Jamie Dimon isn’t personally accused of any wrongdoing, and in
fact has been instrumental in achieving the proposed settlements. But in the
past he has faced questions from institutional shareholders about his dual
roles as chair of the board and CEO. Those questions may come up again in the
2014 proxy season.

The Bank of America verdict and the recent JP Morgan Chase
settlement may herald a new age of prosecutions and settlements both for
institutions and executives for compliance failures and criminal activity. With the recent announcement of a $14 million dollar award for an SEC whistleblower coupled with the SEC's pronouncements about getting its "swagger" back, we can expect more legal actions to come as employees feel incentivized to come forward to report wrongdoing. 

So what is the role of the board in directing, managing, and
shaping corporate culture? In my former life as a compliance officer this
issue occupied much of my time.  My peers
and I scoured the newspapers looking for cautionary tales like the ones I
recounted above so that we could remind our internal clients and board members
of what could happen if they didn’t follow the laws and our policies.

Bryan Cave partner Scott Killingsworth has written a white paper
on the importance of the board in monitoring the C-Suite.  He examines the latest research in behavioral
ethics citing Lynne Dallas, Lynn Stout, Krista Llewellyn, Maureen Muller-Kahle,
Max Bazerman and Francesca Gino, among others. 
It’s definitely worth a read by board members in light of recent
headlines. The abstract is below:

The C-suite is a unique environment peopled with
extraordinary individuals and endowed with the potential to achieve enormous
good – or, as recent history has vividly shown, to inflict devastating harm.
Given that senior executives operate largely beyond the reach of traditional
compliance program controls, a board that aspires to true stewardship must
embrace a special responsibility to support and monitor ethics and compliance
in the C-suite. 

By themselves, the forces at large in the
C-suite would challenge the ability of even the most conscientious and rational
executives to make consistently irreproachable decisions. The C-suite
environment is characterized by the presence of power, strong incentives and
huge temptations (financial and other), high ambition, extreme pressure, a fast
pace, complex problems and few effective external controls. The problem of
C-suite ethics has a deeper dimension, though, than the mere impact of strong
pressures upon rational decision-makers. Recent behavioral research brings the
unwelcome news that the subversive effects of these pressures are magnified by
systematic, predictable human failings that can prompt us to slip our moral
moorings and overlook when others do so. We are just beginning to understand
the insidious power that such factors as motivated blindness, attentional
blindness, conflicts of interest, focused "business-only" framing,
time pressure, irrational avoidance of loss, escalating commitment,
overconfidence and in-group dynamics can exert below the plane of conscious
thought, even over people who have good reason to consider themselves ethically
strong. and behaviorally upright. 

But we also know that organizational culture can
dramatically affect both ethical conduct and reporting of misconduct, by
establishing workplace norms, harnessing social identity and group loyalty and
increasing the salience of ethical values. How can these learnings inform the
board’s interaction with, and monitoring of, the C-suite? And how can the board
help forge a stronger connection between the C-Suite and the organization’s
compliance and ethics program? This paper suggests several key strategies for
dealing with different aspects of this complex problem.