TONE AT THE TOP
In corporate culture, leadership sets the example in defining and enforcing an ethics strategy
// BY LARRY D. THOMPSON
PREFACE
Larry D. Thompson is PepsiCo Senior Vice President of Government Affairs, General Counsel and Secretary and former U.S. Deputy Attorney General. The following remarks are an excerpted version of his speech from the annual meeting of the State Bar of Texas in June 2006. The full transcript of his remarks is available here.
I had the great pleasure of sitting down with Larry Thompson over lunch to discuss his views on corporate compliance and ethics programs and the debate over attorney-client privilege. While serving as Deputy Attorney General for DOJ, Mr. Thompson was the author of the January 2003 “Principles of Prosecution” memorandum, which has been the definitive guide for federal prosecutorial decisions ever since.
Mr. Thompson addresses how companies build a culture of ethics, and also discusses his view on the waiver of attorney-client privilege in the context of government investigations. Such “waivers” have been a controversial element for many, with lobbying by some for this principle to be discontinued. As you will see in this piece, Mr. Thompson draws a line between the “sharing of facts” (appropriate for the government to ask for) vs. the “sharing of attorney advice regarding the facts” where Mr. Thompson agrees that attorney client privilege is critical and should not be abusively infringed upon. As such, while it is unlikely that a corporation’s “refusal to waive privilege’ would be removed as a consideration of prosecution, one could envision that a future revision of the “Principles of Prosecution” memorandum may try to delineate between this important “waiver of privilege re: facts” vs. “advice and opinion.”
TONE AT THE TOP
Distinctive corporate cultures do exist. I think we all know and have experienced corporate cultures that are good–the majority of them, in my experience. Unfortunately there are also bad corporate cultures. Almost all organizations, including corporations, develop their own sets of attitudes and practices to guide employees’ thoughts and behavior.
This establishes the culture of an organization. In most corporations, the culture instills respect for the law and ethical conduct. In a minority of organizations, a culture develops that breeds contempt for the law and prizes business results regardless of means. And, of course, there are other corporations where the culture is uncertain because there has been no clear tone at the top set to guide employees’ behavior.
With this backdrop, let’s review some observations about setting the tone at the top of a business organization. What is the right tone? Exactly why is tone at the top important? How do you achieve the right tone at the top?
ESTABLISHING THE RIGHT TONE
It is obvious and far easier to say you should have a certain tone at the top than to spell out in detail what that tone should actually be. One commentator has noted that the answer to the question of how to set the right tone is similar to a famous line in the 1964 obscenity decision, Jacobellis v. Ohio. In that court case Justice Potter Stewart noted that while we can’t define pornography, we know it when we see it.
According to Professor Lynn S. Paine of Harvard, the right tone at the top goes beyond the compliance systems prevalent in many corporations today which focus on the avoidance of legal sanctions. The right tone at the top involves a system of organizational integrity where the business organization has a set of guiding values that are understood. This system supports ethically sound behavior by all employees. These ethical values are the responsibility of all employees, not just lawyers or compliance officials.
Professor Paine’s work was published in 1994, well before the Sarbanes-Oxley legislation enacted in 2002 and the revisions of the organizational sentencing guidelines which went into effect in November 2004. So, while having the right tone at the top seems to be the smart and responsible thing to do, there are legal reasons for doing so as well.
Sarbanes-Oxley mandates that public companies adopt a code of ethics for their principal executive officers and senior financial officers. Among other things, the required code of ethics should have provisions that promote honest and ethical conduct. The code should also include provisions that promote full, fair, accurate, timely and understandable disclosure in public reports and documents. In other words, Sarbanes-Oxley calls for complete transparency in a corporation’s business dealings.
Yet establishing the right tone at the top means much more than company compliance with post-Enron legislation and regulations. Establishing the right tone at the top is the best way to preserve a business organization’s good reputation, which can be easily destroyed when employees act unethically. Also, business organizations with the right tone at the top are, in the long run, winners in the marketplace. As one expert has noted, these companies attract and retain the best talent. They are also the corporations that other corporations want to do business with: attracting the best suppliers, customers and business partners.
Professor Paine has outlined five factors that are critical to establishing an effective ethics strategy in a corporation:
01 First, the guiding values of the organization must make sense and be clearly communicated. Employees at all levels must take responsibility for them. At PepsiCo, a cross-divisional, cross-functional global team of more than 40 employees worked for over a year to develop a set of core values and guiding principles that could apply across all our diverse businesses and in more than 200 countries. Those values have been rolled out across the world in thousands of in-person training sessions. Management constantly reinforces our values through Town Hall meetings, newsletters, posters and other types of communications. Our values are personal. They articulate who we are and what we stand for as individuals and as a company. We expect each employee to take personal ownership for living our values.
02 Second, an organization’s leaders must be personally committed, credible and willing to take action on the values they promote. This is the essence of setting the right tone at the top. Corporate executives must visibly embrace the corporation’s values; they cannot be mere mouthpieces.
03 Third, a corporation’s other systems and structures must support its guiding values. For example, a performance appraisal system should be sensitive to means and not just reward ends. At PepsiCo, executives and managers are rated every year through a 360-degree process–not just on the results that they achieve, but on how they achieve those results.
04 Fourth, the corporation’s values should be integrated into the normal channels of management decision making and reflected in the company’s critical decisions. For example, marketing plans, strategic decisions, dealings with customers and suppliers and people decisions should all reflect a company’s values. Two of PepsiCo’s core values are to care for customers, consumers and the world we live in, and to sell only products that we can be proud of. We continually review our products, our marketing and advertising programs and our operations to measure progress against these core values.
05 Fifth, managers throughout the corporation should understand these values and be empowered to make ethically sound decisions on a daily basis. A system of ethics training is usually needed to achieve this factor. At PepsiCo, we just completed training for more than 20,000 employees worldwide through a multilingual Web-based course on our Code of Conduct. The course was interactive and scenario-based and provided employees with practical advice on how to handle real-life ethical dilemmas.
When you cut through it all, setting the right tone at the top of a business organization is simply communicating to employees that everyone from the CEO on down is expected to conduct the company’s business in accordance with high ethical conduct and absolute integrity. This is so because it is what it takes to be a great, successful company, and not just because the law mandates it. And this is everyone’s job, not just the lawyers or the compliance officers.
THE ROLE OF LAWYERS
While establishing the right tone at the top involves more than setting up a compliance program, everyone in this business recognizes that lawyers play a key role in developing and promoting an ethics regimen which will always have legal compliance as one of its critical components. Certainly, in the face of some very high profile abuses by just a few corporations, we’ve come to understand that some lawyers have made mistakes when advising corporate clients–especially on issues relating to ethics and compliance. Based on my experience, lawyers tend to get into trouble in this area when they make one or both of the following mistakes.
First, some lawyers fail to give corporate clients their independent professional judgment. The phrase “independent professional judgment” is, and ought to be, redundant. A professional lawyer, by definition, is a person who renders independent judgment pursuant to his or her professional responsibilities.
Giving independent judgment should be more important than job security. Independent judgment is the only thing we lawyers, as professionals, have to offer. Think about this: without it, we are merely hired guns who trade off the reputation of our great profession.
Second, some lawyers in the corporate context forget who their client is. We all know from our first corporate law class (and now from Section 301 of the Sarbanes-Oxley Act) that the client is the corporate entity. It is not just the CEO or, if you’re in a law firm, the general counsel who hired you. A 2002 survey conducted by an organization of general counsel found that more than 20 percent of the general counsel surveyed felt that their corporate cultures were such that they emphasized “senior management” as the client, as opposed to the corporation itself. Yes, this is a minority view, but it is sufficiently large to put at risk billions of investor dollars at plenty of companies.
To me, these mistakes illustrate how lawyers sometimes inadvertently impede setting the right tone at the top of corporations. I submit we need to get past this type of thinking and behavior and understand that, as corporate lawyers, we represent the corporation as an entity and have a professional obligation to zealously protect the interests of shareholders. In corporations with the right tone at the top, lawyers’ professional obligations are co-extensive with the executive team’s, which is to ultimately be responsible for the interests of the shareholders. For example, as all of you know, we presently have this debate about the privilege going on, primarily amongst ourselves. It is interesting to some, emotional for many and somewhat puzzling to others, including myself. It involves the attorney-client privilege and its waiver in the context of government investigations. Professor William H. Simon of Columbia University Law School provocatively challenges this almost unthinking devotion to the privilege in connection with government investigations. He calls this “the confidentiality fetish.” For Professor Simon, claiming the privilege to keep factual information from regulators or enforcement officials is inconsistent with the notion of openness and complete transparency in today’s post-Enron world. It also flies in the face of Section 406 of Sarbanes-Oxley.
Most corporations, when faced with a government inquiry, retain lawyers to conduct internal investigations to determine what happened and to give the corporation legal advice on a going-forward basis. Oftentimes, factual information the government believes it needs to complete its investigation is withheld from the government because to do so, in the opinion of these lawyers, could constitute a waiver of the privilege and work to disadvantage the corporation in any subsequent litigation with third parties.
AN ESSENTIAL PRIVILEGE
I want to emphasize that I understand that the privilege is absolutely essential to a lawyer’s ability to effectively represent a client and protect the attorney’s advice to a client in our adversary system. And, I do believe the Department of Justice policies enacted in 2003 did not envision or contemplate privilege waivers for purposes of a corporation establishing cooperation except in limited circumstances when the factual information needed by the government could not be obtained in any other way.
For me, when representing a corporation, much of the debate about waiver of privilege in the face of a government investigation is misplaced. The privilege belongs to the client (the corporation), not to me, the lawyer. My client’s policy–one important part of the ethical tone at the top–is to cooperate fully with government investigations.In my view, that means making the necessary facts available to regulatory or enforcement officials, and to the company’s internal and outside auditors–not using the privilege to prevent disclosure of relevant facts. I want to stress that I’m referring to facts and not an attorney’s advice to a client, which is, I think, almost sacrosanct and should only be requested by, or disclosed to, the government in limited, very special circumstances (which are clearly articulated in the law). But when it comes to facts, not legal advice, the attorney-client privilege shouldn’t trump the complete disclosure of the necessary facts, even if there are potential consequences in future civil litigation.
As a prosecutor, I witnessed lawyers representing corporations refuse to provide factual information to the government for fear of a disclosure that might constitute a waiver of the privilege. I never really understood this because I could not even fathom a situation in which it would not be in the interest of a corporation, which had an ongoing, viable business, to do anything but fully cooperate with reasonable requests by the government for factual information.
I have heard the argument in favor of doing things a different way. It goes like this: Without the confidentiality of the privilege, corporate officials would avoid lawyers or withhold information from us. As a result, lawyers would not be able to properly advisethe corporate officials on how to obey the law. However, one problem with this view is that it assumes an employee is bent on disobeying the law. This is usually not the case in my experience. But, if it is, a lawyer has another set of problems relating to his or her duty of loyalty to the corporation and not the employee or official who is bent on disobeying the law.
But, as Professor Simon points out, the rationale for preserving the privilege at all costs completely collapses when you understand that it is absolutely clear under Upjohn that the privilege belongs to the corporation. In fact, employees interviewed during the course of an internal investigation should be informed of who owns the privilege during the standard Upjohn advice to interviewees. No corporate executive can assume that everything he or she tells the corporation’s lawyer, especially during an investigation, will remain confIdential forever. A corporation may direct its counsel to waive the privilege in the face of a government investigation, despite potential adverse civil consequences, in order to get the matter under investigation quickly behind it. In fact, oftentimes this is exactly what happens. Corporations certainly do not need lawyers standing in the way of their ability to fully cooperate in a government investigation and receive the appropriate credit for doing so.
The right tone at the top, in my view, does not, in today’s environment, involve having lawyers keep factual information from investigators, its internal and outside lawyers and from government officials during investigations. This approach runs counter to the interests of the corporation and its shareholders.
This is not to say that we lawyers are always on the wrong side of the equation in these circumstances. I’ve seen lawyers play literally heroic roles in representing corporations where the culture and tone at the top were bad and caused the corporation to get into a lot of trouble. These lawyers literally saved their corporate clients and brilliantly represented the interests of the corporation’s shareholders.
So, we all know that having the right tone at the top is critical. Notwithstanding my concerns regarding the privilege, I’m absolutely confident that lawyers will play a pivotal role at most corporations in setting the right tone at the top. This is as it should be and is consistent with high standards of integrity in our profession.
