A recent (July 23, 2014) unanimous decision by the Delaware Supreme Court has potentially momentous importance for ethics and compliance programs. Because Delaware is the “corporation state,” other courts tend to follow the Delaware courts on corporate governance issues – remember the “Caremark case.”
At issue was a discovery order on behalf of civil litigants in a Foreign Corrupt Practices Act (FCPA) case against Walmart alleging that Walmart’s board may have breached a fiduciary duty to investigate bribery allegations. (Wal-Mart Stores, Inc. v Indiana Electrical Workers Pension Trust Fund). Among the documents sought by the plaintiffs were files from Walmart’s former compliance officer and files allegedly pertaining to an on-going investigation being conducted under legal privilege.
I know little about the underlying litigation which concerns allegations of bribery in Mexico. And that is not what matters. What matters is that files and documents thought to be related to Walmart’s compliance program were deemed open to discovery in a civil litigation. The Court’s decision was focused in scope, pertaining to files and documents related to potential breaches of fiduciary duty. But it is likely that this decision is a first step toward breaking down the both the legal privilege and the so-called self-evaluative privilege concerning compliance matters. The impact of the decision is great as the plaintiff’s attorneys asserted breach of fiduciary partly on the grounds that the board was or should have been informed of an on-going compliance investigation. In other words, reports of compliance concerns should go to the board but may not be protected when they do.
I believe that this decision will have significant impact on ethics and compliance programs. The relatively free exchange of information between some compliance officers and their boards may well be impaired. More importantly, asserting legal privilege with respect to investigations that are or should be reported to the board is threatened. Like most of these matters, there is a good and bad. Arguments that compliance should report to legal to protect the privilege may be weakened. But compliance reporting to a board may be subject to far greater caution. You can read the decision at:
Welcome to Mark Pastin’s web site. You will find information about Mark and his publications, services and speaking engagements here. Mark started working on ethics and compliance problems in business, government and the professions in the early 1970s. His 1986 book, The Hard Problems of Management: Gaining the Ethics Edge, was the first to take a managerial approach to ethics in business. (See Publications for details.) In his new book, Mark shows readers how to use their own innate ethical sense to create organizational and social change. Make an Ethical Difference: Tools for Better Action was released late in 2013 and is available now at Amazon.com and Berrett-Koehler Publishers.
Mark Pastin 