Imagine a world in which ultimate decision-making authority with respect to matters of corporate policy resides not with senior management or the board of directors, but a federal prosecutor.

Imagine further that this prosecutor exercises his or her influence not through extrinsic or indirect means, but rather by expressing the government’s policy preferences from a seat in the corporate boardroom.

Sound far-fetched? The government took a step closer to this extraordinary model of regulatory participation in corporate governance last month. Christopher J. Christie, the United States Attorney for the District of New Jersey, attended a meeting of the board of directors of Bristol-Myers Squibb Co., during which the board (acting on the recommendation of an independent monitor), ousted the company’s chief executive and general counsel.1 While we don’t know what Christie said during the meeting, it’s safe to assume that the United States Attorney’s presence carried considerable weight with the board.

Setting aside broader (and important) normative questions regarding the government’s use of a deferred prosecution agreement as a means of managing critical aspects of corporate policy. Officers and directors might ask themselves whether they want the government to have a seat in their boardrooms. If the answer is “No,” corporate leaders should be asking what they can do to keep increasingly aggressive regulators away from the reins of corporate governance. They can start by assessing, and shoring up their companies’ compliance culture.

WALKING THE WALK
A regulator’s assessment of the relative goodness of a company (broadly construed as the effectiveness of its rhetorical commitment to integrity and compliance) is based on the strength and credibility of the company’s ethical bona fides. Thus, in considering whether a company’s leadership truly walks the walk of ethical corporate governance, federal prosecutors or regulators will generally home in on what (if anything) its officers and directors actually do. These actions would include encouraging timely reporting of misconduct, responding to allegations of wrongdoing and disciplining bad actions.

If a company has implemented demonstrably effective procedures for responsibly addressing misconduct, a prosecutor is more likely to view an incidence of bad behavior as an aberration, rather than suspecting it is the tip of the iceberg. By contrast, in the absence of credible indicia of meaningful commitment to compliance, a regulator may suspect that an episode of misconduct reflects a larger systemic pathology. Accordingly, he or she may want to dig deeper, and take more aggressive (and possibly intrusive), action. While it sometimes takes a full-scale regulatory upheaval to set a company on the path of good corporate governance, such goodness can and should be actively pursued on the front-end, rather than after the discovery of problems.

Fortunately, good governance actions that can serve to keep regulators at bay have other obvious and practical benefits. Mechanisms that promote good practices can increase the likelihood of catching wrongdoing early, enabling a company to address problems before they multiply and spread. Moreover, practices which promote compliance with applicable laws have the associated benefit of saving a company from the costs and distractions related to governmental investigations and the civil lawsuits that inevitably follow them.

STEPS YOU CAN TAKE NOW
There are countless reasons why officers and directors should give meaningful attention to ethics and compliance. But how? What can officers and directors do now, and in the ordinary course, to establish an effective and credible ethics- and compliance based culture? In assessing a company’s ethical bona fides, officers and directors should consider the following.

• COMPLIANCE REGIME As a starting point, a company must establish a robust compliance program led by independent, sophisticated individuals of the highest integrity who have direct access to independent members of the board. As part of establishing an effective compliance regime, management should develop, and communicate to all employees, clear procedures for reporting and responding to allegations of misconduct. Dissemination and explication of such procedures provides necessary guidance to employees,while showing them, the public, and perhaps regulators that the company is committed to addressing ethical issues in a fair and appropriate manner.
• EFFECTIVE COMMUNICATIONWhenever practical, management should report to employees regarding actions the company has taken in connection with allegations of misconduct. Lettingemployees know the corporation has responsibly addressed such allegations, in a manner consistent with the company’s policies, reinforces the idea that management is committed to maintaining an ethical corporate culture. This can have a deterrent effect as well.
• MEANINGFUL SUPPORT At a minimum, a reporting policy should make clear that those who report fraud will not be retaliated against for doing so, and those who participate in fraud will be held accountable. In addition, management and the board should consider affirmatively rewarding or recognizing employees who uncover and report misconduct. Rewards could include meetings with or letters of recognition from senior management, ethics/ integrity awards or citations, and even associated financial awards.

In addition, from the top down, compensation should be tied not only to financial results, but also to the manner in which employees, officers, and directors conduct themselves. Thus, failure to enforce good behavior among subordinates should be reflected in an associated decrease in discretionary compensation.

Furthermore, corporate leaders must be committed to holding accountable those who participate in corporate wrongdoing. Again, management and the board must consistently ensure that, from the top down, those who transgress are disciplined appropriately. Terminating or demoting responsible individuals sends a message to employees, investors, and regulators that the company will not tolerate and, if necessary will remove, problematic personnel.

CONCLUSION
Recent events suggest the government is willing to go to remarkable lengths to enforce its vision of good corporate governance. Officers and directors would do well to take the initiative to assess and, where necessary, improve their companies’ policies and procedures for corporate compliance. In addition to helping to keep policy-making authority where it belongs, focusing on companies’ ethical bona fides is also in the best interests of the shareholders to whom corporate leaders are accountable.