The ongoing MF Global controversy provides corporate counsel an opportunity to share with client leadership an important and very practical lesson with respect to the role of the corporate compliance, or risk, officer. The multiple House and Senate hearings that took place last week have been primarily focused on finding the missing customer funds, and understanding how they were misplaced without executive or board awareness. The broader concern—and the more significant governance lesson—arises from the controversial role the MF Global risk officer is reported to have played in connection with the investment strategy.
A series of high-profile media reports allege that the MF Global risk officer’s warnings were marginalized in the process, which may have contributed to the ultimate investment losses. At their core, such allegations raise highly practical concerns relating to the management of the corporate compliance and risk functions to which every board must be attentive and sensitive. The corporate counsel is uniquely positioned to brief organizational leadership in this regard.
Recent headlines such as “Corzine Rebuffed Internal Warnings of Risk” and “MF Global’s Risk Officer Said to Lack Authority” paint a highly unflattering portrait of how senior corporate leaders responded to the risk officer’s warnings. In this scenario, the risk officer is the lone sentinel who correctly identifies the holes in the company’s bet-the-farm strategies, bravely confronts the CEO and the board with his concerns, is basically ignored, and is ultimately asked to leave the company before the farm is actually lost.
Specific allegations involving the CEO include his categorizing the risk officer’s perspective as “extreme”; making a “him” (the risk officer) or “me” (the CEO) challenge to the board; questioning the risk officer’s qualifications for the position; and expressing annoyance with the risk officer’s persistent warnings. Ultimately, the risk officer left the organization but before the failure of the investment strategy, and his replacement was reportedly given a more limited portfolio, without the ability to comment on the trading strategy so heavily criticized by his predecessor.
Now, we all know that allegations are just that—and the truth can be an elusive treasure. And we’ve all been in situations that get spun for public consumption in an inaccurate light. Further, many of us have had engagements in which either risk or compliance officers have aggressively pushed the edge of the envelope, losing credibility as a result. But let’s “get real”—these MF Global allegations are not positive signals of a culture of organizational compliance, at least when viewed through the lens about a billion-dollar corporate controversy. They are the kinds of accusations that can serve as an invitation for regulatory intervention, in which there is almost a presumption that the risk or compliance officer was correct.
Further, they draw attention to the possibility that marginalizing the risk or compliance officer may not be an uncommon occurrence. And that’s really unhelpful. So, the crucial takeaway for clients is the importance attributed to appropriate dealings between corporate leadership and compliance and risk officers. As these media stories suggest, the cost of failing to get this right is very high.
Corporate counsel can well serve the client CEO and the board with cautionary guidance on the proper role of the compliance and risk officers within the organizational structure; their vertical and horizontal reporting relationships; and the deference that officers and directors are obligated to pay to compliance and risk officer presentations. In other words, this type of situation calls for a timely tutorial that stresses an understanding of the unique role the law and public policy assign to the compliance/risk officer functions. Not a “compliance officer is always right” lecture—we know from experience that such is not always the case. Rather, a broader discussion that reminds leadership of its fiduciary obligation to preserve an organizational culture of compliance and prudent risk assumption, and of the critical voice that empowered, respected, and engaged compliance and risk officers contribute to such a culture.
An indirect benefit of such a discussion is that it allows leadership to understand better how the roles of the compliance officer and the general counsel differ, the ways in which they overlap, and the importance of coordination between the positions. The more that leadership understands the specific perspectives that general counsel and the compliance officer contribute to the organization, the more likely it is to take favorable advantage of those perspectives—to the betterment of the organization’s legal and risk profiles.
And that’s especially important for several key reasons: First, media coverage of the 10-year anniversaries of both Enron and Sarbanes-Oxley serves as a reminder of the valuable role risk and compliance officers play. Second, as government enforcement actions increasingly focus on the role of responsible corporate officers, their actions and the extent to which they promoted a culture of compliance and appropriate risk management become even more important.
As the MF Global story strongly suggests, a public perception of fumbling the compliance officer relationship can cause real problems for leadership—especially when the “smoke” from those warnings accurately predicts a “fire.” Sure, it’s important to find out where all the money went—but the more lasting story might be whether the CEO and board should have listened more closely to the risk officer—and why they didn’t.
Michael Peregrine, a partner in the law firm of McDermott Will & Emery LLP, advises corporations, officers, and directors on issues related to corporate governance, fiduciary duties, and internal investigations.
See also: “House Committee MF Global Hearing Spotlights Risk Officer, NY Fed GC,” CorpCounsel, December 2011.
