Amid other key risk and governance concerns, certain interrelated issues can be overlooked. Here are a few that should be top-of-mind for public or private midsize companies:
Compliance and Whistleblowers
Most companies, whether public or private, can inadvertently run afoul of today's broader compliance obligations.
For example, employers have new and increasing confidentiality obligations for employment records and employee medical data and also for customer credit and consumer electronic information stored by the business. Financial reports are increasingly provided to the government, lenders and other third parties, so even an inadvertent inaccuracy or incompleteness raises liability issues.
Joseph Masterson, Harvard 1978, is a partner in
Quarles & Brady LLP's Business Law Group in Milwaukee, advising clients about patent, trademark, and copyright prosecution, licensing and enforcement matters for more than 35 years.
Because even private companies have so many critical compliance obligations (including securities law obligations), company employees and third parties could (at least in principle) report actual or potential violations through compliance hotlines or directly to government regulatory officials.
Incentive Compensation and Clawbacks
"Pay for performance" incentive compensation is a growing component of executive compensation. Getting the performance tests and measurements right is essential for the executives, for the business owners and for outside parties like lenders and regulators. Performance tests, frequently based on generally accepted accounting principles (GAAP) or non-GAAP financial and accounting metrics, often are subject to judgment and interpretation and are always subject to human error.
The self-interest of the executive team creates the potential for conflicts of interest in interpreting and applying the metrics and correcting for any mistakes, which in turn can lead to hotline complaints and put pressure on compliance officers and directors for clawbacks. The can also lead to allegations the officers and directors have breached fiduciary duties.
Anti-Retaliation Policies
Anti-retaliation policies to protect employees and others who lodge good faith tips or complaints with the company or its regulators are not new, but the broader scope of protected activities and the increasing compliance and reputational issues further increase the challenges for both management and the board.
Employee Disclosure Obligations and Confidentiality Clauses
Employee handbooks, employment agreements and severance agreements generally require employees to keep confidential company information secret and to report to a supervisor or compliance officer any ethical or legal violations that come to the employee's attention. Severance agreements often include a payment conditioned on satisfying those obligations and releasing any claims. However, discouraging employees or former employees from reporting potential law violations directly to enforcement agencies (such as the Securities and Exchange Commission) is itself unlawful, and the government is increasingly arguing that employment and severance agreements violate these laws.
