The FCPA-SOX-Dodd-Frank Trifecta
By April Hall
A roundtable discussion on the three laws that make board service what it is today. 
 
Directors & Boards was founded just before the passage of the Foreign Corrupt Practices Act (FCPA), which in 1977 prescribed strict internal auditing controls and disclosures from U.S. corporations. This was in response to the discovery that some U.S. companies had been paying bribes in other countries as the price of doing business in those countries. The act specifically outlawed corporate bribes and placed the onus on the board for compliance oversight.
 
The FCPA is the first part of the trifecta of legislation that defines corporate governance in the United States today.
 
The second is the Sarbanes-Oxley Act of 2002 (SOX). Accounting scandals at Enron, WorldCom, Global Crossing and Tyco the previous year caused billions of dollars in corporate and investor losses and impacted financial markets and general investor trust. SOX was enacted to help protect investors from fraudulent financial reporting by corporations.
 
Finally, and most recently, as a result of the Great Recession and banks that were “too big to fail,” The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) overhauled the U.S. financial regulatory system, created new agencies and added new corporate governance requirements, including proxy to allow shareholders the ability to nominate directors and propose non-binding votes.
 
To reflect on the influence of these three acts, Directors & Boards managing editor April Hall convened a roundtable of three governance experts.
 
  • Norman Augustine is the retired chairman and CEO of Lockheed Martin and an aerospace engineer by training. He has had careers in government, business and academia.
  • Robert Dilenschneider is the founder and principal of The Dilenschneider Group, a strategic communication counselor that marks its 30th anniversary this year. He advises CEOs and boards.
  • Lisa Quateman, a retired senior partner at the law firm Polsinelli, serves on both public and private company boards, including one where she is the designee of a large public pension fund.
 
The conversation has been lightly edited for length and clarity.
 
 
Directors & Boards: Let’s start with your views on the impact and merits of the FCPA, SOX and Dodd-Frank. 
 
Norm, you were coming up in corporate America when the FCPA was passed. What was your experience around the legislation, and was there an immediate impact?
 
Norman Augustine: I would say that 1977 was pivotal for American business, and my view is that the FCPA was a major step forward, but it had one flaw. That flaw is that it only applied to the United States. In a global market, not everyone follows the rules of the FCPA. 
I think they’re the right rules, and we should try to encourage others to join with us.  If you have to bribe people to be successful in a given market, you just don’t belong in that market. You write it off.
 
Robert Dilenschneider: The Foreign Corrupt Practices Act is a very important piece of legislation. One, it has stopped many corporations from doing things that they might otherwise have done. Two, I can’t think of another country in the world that has such an act. 
 
The good news is the United States is a very significant economic unit — the most significant in the world. And therefore, when we act on the FCPA, it’s noticed. There are some people in different parts of the world who would like to do business with the United States but, frankly, their agents want to get paid off, so they don’t do business with us. I regard that as good. 
 
How does the FCPA affect corporate governance? 
 
Lisa Quateman: The FCPA affects the types of areas of inquiry for board members to be thinking about. It’s part of the overall compliance culture that I think directors have the opportunity and responsibility to promote. 
SOX is inextricably linked to Enron, Tyco and WorldCom. Those companies’ shady accounting practices not only lost billions of dollars for shareholders, but also crushed consumer confidence in Wall Street. SOX calls for more oversight and direct responsibility from both management and directors. How does that materialize in the boardroom?
 
Augustine: It’s so important that people have confidence in our markets. It’s important to business. It’s important to investors — everyone. I think SOX was a step forward. But it had one major flaw, in my opinion. 
 
At Lockheed-Martin, I had to sign quarterly that I individually certified the accuracy of our financial statements and the adequacy of the internal controls. I did everything I could to ensure accuracy, and the internal auditor reported directly to me, not through the legal department. But there were 182,000 people working for me! Every time I was asked to sign that certification, I was deeply troubled, because how could I sign off on this when we had people all over the world, people I had never met? I felt that the statement should have said something like: “To the best of my knowledge, after reasonable due diligence, I certify the following.” But the way they wrote it, it was really impossible to certify. It was not a “get out of jail free” card. It was a “go to jail free” card. I thought that part was very counterproductive.
 
But creating the Public Company Accounting Oversight Board (PCAOB) was one of SOX’s accomplishments. I had served on the Public Oversight Board, which was the predecessor of the PCAOB. It was a five-member board and we had a bully pulpit, but no authority to enforce anything. These were during the years there were a lot of accounting shenanigans starting to appear. It was also during a time when arguments were being made that conventional accounting standards were no longer meaningful in the modern world — that it was not the dollars on your balance sheet that mattered, but how many hits you’re getting to your website. People literally made that argument. It was also a time when independent audit firms were going into the consulting business, which opened a lot of conflict-of-interest questions in my mind. Amid the conversation on all of this, all five of us on that board resigned because we weren’t able to enforce our concerns. As a result, the PCAOB was created, which does have enforcement authority and can gain access to information we couldn’t access. To me, that was the biggest accomplishment of SOX. 
 
Quateman: Boards and companies need to be careful with this kind of legislation. A quarterly requirement can slip into autopilot mode, and I’ve seen that happen with a lot with regulation. Industry organizations come up with a standard template for disclosure that, in my humble opinion, doesn’t say much and which can inhibit the kind of critical thinking Norm is referring to here and that Bob talks about when you’re really looking at the purpose behind these rules. Boards need to stay vigilant in their compliance duties and not let them become rote. 
 
SOX also provided whistleblower protection. Did this protection change the way that the board does business?
 
Augustine: I served in the government for a number of years. I think whistleblower protection is an important factor. But, like so many things, it has to be done with caution, because not all whistleblowers are honorable. 
 
We used to have an outside firm maintain our ethics line, which you could anonymously call. We would get calls on everything under the sun. We kept a graph of the number of calls, and every quarter we presented this to the board. If the curve went up, the board would say, “Oh my gosh, you’re not doing things right!” And if it went down, the board said, “Oh my gosh, you don’t pay enough attention to doing things right!”
 
Dilenschneider: Whistleblowing protections are important. When a person blows the whistle, they’re frequently isolated in the corporation and looked at by their colleagues and sometimes by management or the board as having overstepped their bounds. That’s really unfortunate. 
I’d like to give you a hard example from Procter & Gamble. An outside firm made a presentation to a P&G group. At the end, the P&G person said, “Well, do you think this product will have any health problems associated with it?” These guys said, “Don’t worry about it. We’ll get through that. We just had a couple of good quarters. It’ll be fine.” To his credit, and possibly because his compensation depended on it, the P&G person went to the top of his organization and blew the whistle. That outside organization was never again heard of again in Cincinnati, at Procter & Gamble headquarters. There are plenty of actions where the whistle can be blown before the problem arises.
 
Quateman: In today’s evolving culture, it’s important for companies to look at how they can incentivize, as Bob says, blowing the whistle before you need to become a whistleblower. One of my boards, for example, rewards people who report near misses, and we measure how good it is when we have more near misses because that means people are focused mostly on safety, more so than worried about, you know, tattling on somebody. And I think that there are opportunities to promote that kind of good culture before it gets to the ostracism that you described when the whistleblower is isolated or retaliated against. 
 
Let’s turn our attention to Dodd-Frank, the Wall Street Reform and Consumer Protection Act. This legislation was, of course, in reaction to the 2008 financial crisis and institutions that were bailed out by the federal government because they were “too big to fail.” The bill was also another attempt to bring transparency to the table for shareholders with director nominations and proxy access. How did that additional shareholder access affect board work?
 
Quateman: Working as outside counsel for the FDIC, I saw just enormous, enormous bureaucracy created when Dodd-Frank came into effect, with a whole department needed to be created to evaluate the “too big to fail” safety provisions — the disaster plans — that banks needed to come up with. There’s no question that some response needed to be made to what happened in 2008, but Dodd-Frank was very extensive regulation, and one can question whether at some point the law of diminishing returns will kick in. 
 
Do you think that this influenced perceived responsibilities for committees within the board and what they had to disclose? 
 
Augustine: Transparency is almost always important, but unfortunately, there are circumstances in business where you can’t be totally transparent, such as when you’re working on a new product that may give you a market advantage or when you are first considering a merger or acquisition. The idea of transparency destroys such things, so there are limits. 
 
Dodd-Frank stepped in on the subject of hedge funds and private equity at banks. Overall, I give Dodd-Frank a good grade. But to me, the really big impacts that affected business were the first few things we talked about. And one of the downsides that Lisa mentioned is that each of these laws created a cottage industry of people to be sure that the ‘T’s are crossed and the ‘I’s are dotted. 
 
But all three bills, in my opinion, were important steps forward. Yes, they had some flaws, but I give them all positive grades. And for companies that are trying to act in an ethical and legal matter, these regulations put them on a more level ground. 
 
When I speak at business schools, I like to begin my remarks by asking the students if they recognize some numbers: 
 
Suisse First Boston: 1.5; ImClone: 7; Rite Aid: 8; Adelphia: 15; Westar: 18; Dynergy: 24; Tyco: 25; WorldCom: 25; and Enron: 165.
 
I then ask if the students can recognize what those numbers are. Some will say, “Well, are those stock prices?” And I’ll say no. And some say, “Well, is that their return on investment over a period of time?” No. 
 
When they give up, I say, “Those are the number of years that their executives were sentenced to prison.” I am always amazed at how attentive the students will suddenly become!
 
So even though these acts have made board and CEO service more complicated and time-consuming, it sounds like you’re saying the good outweighs the bad. But do you have any thoughts on how these regulatory regimes could be streamlined?
 
Quateman: After I retired from my law practice, I thought my shoulders would loosen up, but no. As a board director, I’m still tense. There’s a lot of responsibility. There’s a lot to keep track of. Could things be streamlined? You hear time after time how a legislator will say, “I didn’t have time to read the bill.” That’s at both the federal and state level. Does it need to be that way? Do the laws need to be this complex? 
 
Dilenschneider: An awful lot of people call me and say they want to sit on a corporate board. I say, “OK, that’s a great thought and you’re just the right person to do it. Are you aware of what the corporate board has to do, what it stands for and what the directors do? I know the compensation is something you want, the position is something you want, but it comes with a lot of responsibility. It’s going to take a lot of time with the midnight oil to get this done properly.” Some people generally shrink away at that point. 
 
How have you seen that play out with sitting directors? Have you seen some people leave boards because it’s become too much work?
 
Augustine: I had one director who ran a large insurance firm who jokingly told the board that the way to keep from getting sued as a director is to always vote last and to always vote with the minority. 
 
When I served on boards for Procter & Gamble, Lockheed Martin, ConocoPhillips and Black and Decker, it was not easy to find really experienced people who did not have other major commitments of their time — the real top tier of people who were willing and qualified to serve on boards. Today there is much more personal liability for board service. A consequence of that is we have to be sure we don’t drive away the very people we would like to have serve on boards. 
 
Dilenschneider: I think a lot of directors are anxious. They want guidance from the audit department, they want guidance from the legal department. They’d like direction from the CEO.  There’s a lot of anxiety up there. 
 
What is left to be done in corporate governance — either through further legislation or voluntarily in the boardroom?
 
Augustine: There are clearly things we need to do to get our houses in better order. But the thing that really needs emphasis is getting other countries to write laws that deal with issues like bribery or transparency, because we have such an unbalanced playing field in global trade. The U.S. and its two closest allies, Europe and Japan, represent 50% of the world’s GDP. That should give us some collective clout on these issues. 
 
Quateman: We talked about specific federal laws and how they’ve impacted companies and boards. Those conversations are equally applicable to so many other laws, as well as regulations that we’re expecting to see under the new SEC chair or the Corporate Transparency Act. We’re going to see more and more regulations, so let’s take the lessons from today’s conversation and apply them to future legislation as well. 
We have case law and some protections in the corporate statutes for board directors, notably the business judgment rule. We do have what’s left of the D&O insurance market. It’s very expensive nowadays, but we have those kinds of protections as well. 
That said, a board is not a place to park yourself as a cushy opportunity. It’s prestigious, it’s an honor, but it’s real work. I encourage what your readers are doing, which is staying current and devoted to continued learning. 
 
Augustine: I think the business world has — and I have, as well — been guilty of perhaps overemphasizing the bureaucracy that is triggered by the FCPA, SOX and Dodd-Frank, whereas its impact, in my view, has been enormously on the positive side in helping American business and helping businesses that want to do the right thing. 
 
Balancing that comment, I think the Congress and the public have been guilty of focusing too much on the 1% of the firms that made the FCPA and Dodd-Frank necessary, as opposed to the 99% that take great pride in their ethical standards and do abide by the law. 
Too often the government — instead of putting up a sign that says, “Speed limit 40 miles per hour” — puts up a sign that says, “No speeding under penalty of law,” without defining a speed limit. I ran into that a few times where the highest-paid lawyers in the world were telling us what turned out to be wrong. The 80,000-pages of rules are lifetime employment for attorneys!  

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