Notwithstanding the financial institution-specific regulatory and supervisory scheme, the Federal Reserve Board's (FRB) publicly-posted letters of reprimand issued to Wells Fargo's (WFC) former CEO/Chair (in his capacity as Chair), former independent Lead Director, and current board in connection with its recent, widely-publicized Cease & Desist Order (signed by each current director) are pertinent in principle - and thus keenly instructive - for all companies (regardless of industry) in defining what constitutes effective oversight.
Common themes include board responsibility for: (i) ensuring that corporate strategies are consistent with the company's risk profile - which is expected to be appropriate, and appropriately managed and resourced, in a firm-specific context; (ii) actively seeking timely and robust information from management; and (iii) identifying and actively pursuing "red flags" that signify potential compliance problems, including consideration of an investigation where warranted. The letters to the former Chair and Lead Director also emphasized their respective board leadership and independent oversight roles and responsibilities.
Among many other notables, the FRB's letter to the Lead Director references a seemingly innocuous and fairly widely-used type of provision from WFC's Corporate Governance Guidelines to support its reprimand of that individual, which companies of all shapes and stripes may wish to further reflect upon:
You were made aware of sales practices and other compliance issues while you were lead independent director. However, you did not appear to initiate any serious investigation or inquiry into the sales practices problems or put a proposal to do so to the WFC board. In addition, you did not appear to lead the independent directors in pressing firm management for more information and action, even after you were aware of the seriousness of the problems. This lack of inquiry and lack of demand for additional information are not consistent with the duties and responsibilities of the Lead Director as described in the firm's Corporate Governance Guidelines between 2013 and 2016. For example, those guidelines provide that the Lead Director will facilitate communication between the WFC board and senior management, including advising WFC's Chairman and CEO of the WFC board's informational needs and approving the types and forms of information sent to the WFC board.
Fredrikson & Byron Partner, former ABA Corporate Governance Committee Chair, and Society member John Stout viewed the FRB's action as an important heads-up for boards, board chairs, and lead directors as respects their corporate integrity/corporate culture/compliance oversight responsibilities. In that context, he suggests the following steps for boards to facilitate their effective oversight:
- Boards must own responsibility for their company's integrity, and reflect that in the company's published values and governance documents.
- Boards must seek information that would help them assess and address integrity issues, and use the tools at their disposal to do so:
- Reviewing corporate values and checking to see how those values are being observed throughout the organization
- One-on-one candid conversations with key management and other personnel, who would be aware of integrity, culture, and compliance issues
- Conducting a robust assessment of strategy, and corresponding enterprise wide risk management and mitigation measures
- Looking more carefully at employee, customer, supplier and others' concerns for patterns, inconsistency with company values, etc., and ensuring that those matters are addressed
- Looking at disputes facing the organization, and considering the underlying causes and the approach to resolving them
- Assessing the impact on organizational culture of decisions involving executive compensation, employee incentive programs, bonuses, perks, and other means of incenting stronger operational and financial performance
- Understanding the signals to employees and others that a Board sends through the various actions it takes and priorities that it emphasizes
- Periodic rigorous performance evaluations of the Board, Committees, Directors, the Board Chair and the Lead Director
- Ensuring a board/management culture of absolute candor
See also the FRB's release summarizing its actions and noting that WFC will replace three current board members by April and another by year-end, this Governance Institute of Australia blurb, and additional relevant resources on our Director Duties & Liabilities, Corporate Culture, Compliance & Ethics, and Risk Management & Oversight topical pages. This post was first reported in last week's Society Alert!