Article by: Michael W. Peregrine

The challenges associated with board oversight duties in “crisis situations,” and related expectations regarding director attentiveness, are highlighted in a recent Wall Street Journal article concerning Theranos. It serves as a reminder of the valuable role that general counsel can play in supporting the ability of directors to satisfy these duties and expectations.

Two former Theranos directors were criticized in the article, which ran on May 30. They were taken to task for their lax oversight of corporate operations. Based on a review of depositions given by the directors, the article suggested that they had failed to follow up on public allegations that the company was using standard technology in its blood testing operations, rather than its touted proprietary technology. The inference (fairly or unfairly) was that these allegations were a significant warning sign of the company’s emerging financial, regulatory and reputational problems.

The article included specific excerpts from the directors’ respective depositions in which they seemingly acknowledge that, the public allegations notwithstanding, they made no separate inquiry of the CEO as to whether the proprietary technology was working as planned. One of the directors was quoted as testifying that he “didn’t probe into” that issue: “It didn’t occur to me.” He was further quoted as adding, “Since I didn’t know, I didn’t have anything to look into.”

The clear theme of the article was that the two directors were deficient in the exercise of their oversight obligations, and that the public allegations were “red flags” of corporate or executive misconduct that they missed, to the detriment of the company and its investors. To buttress this theme, the article included criticism from a law professor who noted that it is “a board’s fiduciary duty to find out what was going on.”

Media stories questioning whether directors have satisfied their fiduciary obligations are nothing new, especially in highly public corporate controversies. And it’s never fair to draw conclusions of director culpability from media reports – there are always two sides. But what is unusual about this matter – what could make many directors pause for a deep breath – is that these allegations implicated directors of exceptional national prominence and credibility. These are two individuals who by their life’s work could be expected to be the most competent of fiduciaries (and may well have been in this case, the article notwithstanding).

One is former U.S. Secretary of State George Shultz, an enormously respected adviser who has dedicated much of his life to Cabinet-level public service. The other is the former chief of naval operations, Adm. Gary Roughead. These are serious people who have dedicated their lives to public service.

When such credible and capable individuals can be publicly criticized for lack of attentiveness, it’s reasonable to expect a ripple effect in the boardroom. The typical director can be excused for having some concerns about his or her liability exposure. “If this kind of guy can’t do the job,” a director may think, “how can I be expected to do it?”

And that’s a concern that should not go unaddressed, for the sake of both board effectiveness and director retention. The Theranos story could serve as a useful teaching moment that an attentive general counsel can use to bridge the “confusion gap” and give the board an understanding of what might reasonably constitute a red flag that requires some form of response.

Step one is for the general counsel to review the basics: namely, that the oversight obligation requires the board to have a thorough knowledge of corporate affairs. The board is not expected to ferret out corporate wrongdoing or risk, absent a particular warning sign that a cause for suspicion exists. Board action is not required until it is presented with extraordinary facts or circumstances. But when it is, that’s the point at which the board has a known duty to act, and must do so proactively.

But here’s the rub: There’s no one-size-fits-all legally binding definition of “red flag” that a director can keep in his or her pocket and periodically refer to in times of controversy. So the general counsel who aims to guide directors might start with a hypothetical involving something that, on its own, is innocuous, but when combined with other information of which the board is already aware, would require an immediate board response. In other words, a red flag is more than just bad news. It’s the kind of thing that would make a director want to raise his or her hand high, and hold it there until an adequate answer is provided.

If this is not clear enough, the general counsel can then offer examples of what courts – including those outside of Delaware – have found to constitute red flags. And those fall within a wide range of circumstances, including but not limited to financial discrepancies, governmental inquiries, credible whistleblower reports, serious conflicts of interest, sudden executive departures, notable swings in operational results and unusual executive conduct. And it can include omissions as well as commissions, such as the continuing failure to recruit top talent; persistent director absences at board meetings; notable departures from traditional quality of management reporting; excessive qualifications in legal or accounting opinions; etc.

The general counsel could also offer examples of what courts have found to be proper board responses to red flags. The GC’s goal is not to deliver an all-inclusive list of red flags to which directors can refer in times of trouble. It’s to provide value by sketching, in practical and understandable terms, the contours of a warning sign. You want them to be comfortable that they’ll know it when they see it. And that can’t help but contribute to the effectiveness of a director’s oversight duties, even if the director isn’t a former Cabinet officer or a renowned military leader.

Michael W. Peregrine, a partner in McDermott Will & Emery, advises corporations, officers and directors on matters relating to corporate governance, fiduciary duties and officer/director liability issues. His views do not necessarily reflect those of his firm or its clients. He can be reached at mperegrine@mwe.com.

Article by: Charlie Platt / iDiscovery Solutions

I’ve written on this topic before, and despite the danger of sounding like a broken record, I will repeat myself: Cybersecurity is all about risk management. Many of you are likely working with your company’s chief information security officer (CISO) and security teams to help assess and control this cyberrisk. (At least I hope you are.) And one of the first things most security professionals recommend is taking an inventory of your IT assets. In fact, it’s embodied in the first Function of the National Institute of Standards and Technology’s (NIST) Cybersecurity Framework:

“The activities in the Identify Function are foundational for effective use of the Framework. Understanding the business context, the resources that support critical functions, and the related cybersecurity risks enables an organization to focus and prioritize its efforts, consistent with its risk management strategy and business needs. Examples of outcome Categories within this Function include: Asset Management; Business Environment; Governance; Risk Assessment; and Risk Management Strategy.”

Continue Reading Are You Accounting for One of Your Largest Cybersecurity Risks?

Interview with Scott Lefton/AccessData

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Interview with Mike Koehler / FCPA Professor Blog

 

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Article by  Rebecca Love Kourlis & Brittany Kauffman / The Institute for the Advancement of the American Legal System (IAALS)

 

Americans deserve a legal system that can resolve disputes fairly, promptly and cost-effectively. But the truth is that runaway costs, delays and complexity are denying people justice and undermining public confidence in our legal system. Recognizing that this must change, in July 2016 the Conference of Chief Justices (CCJ) and the Conference of State Court Administrators (COSCA) adopted a resolution endorsing 13 recommendations designed to secure the fair, speedy and inexpensive resolution of civil cases in state courts. Continue Reading Civil Justice Reformers Aim to Modernize State Courts: Leaders call for states to implement 13 recommendations

Interview with Teresa Lavoie / Fish & Richardson

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Article by Alan R. Boynton, Jr. / McNees Wallace & Nurick LLC

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By David Yurkerwich / Navigant

 

The Chinese intellectual property sector has been changing and growing for years, but few people would tell you so. The country has long been labeled as an IP rights violator and generally carries a bad reputation in its handling of copyrights. But Chinese companies are becoming more aggressive in building patent portfolios.

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Interview with Jordan Thomas / Labaton Sucharow LLP

For six years Jordan Thomas has led the whistleblower representation practice at Labaton Sucharow LLP, which specializes in SEC cases. Thomas, a former assistant director in the SEC’s Enforcement Division, has worked as the practice’s sole partner, “borrowing” associates from the firm to help. But in May, as talk of the new administration’s desire to dismantle Dodd-Frank continued to swirl, Thomas made a startling announcement. He had just hired three partners to boost the practice to another level. The new hires were Steven Durham, former chief of the Fraud and Public Corruption Section of the U.S. Attorney’s Office in Washington, D.C.; Timothy Warren, former associate director in the SEC’s Enforcement Division; and Robert Wilson, former deputy assistant director in the Enforcement Division. We couldn’t help but wonder: Why three, and why now? The interview has been edited for style and length.

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Article by Sasko Markovski & Amy C. Cococcia / Fragomen

 

Australia has been next in line across a number of jurisdictions around the globe to announce significant changes to employer-based immigration programs. This article provides an overview of some of the key changes announced as well as guidance on what actions businesses should be taking where impacted. Continue Reading What You Need to Know About Australia’s Visa Changes: The new rules are all about protecting jobs