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By Yin Wilczek
Wells Fargo’s fake-account controversy and other high-profile corporate scandals highlight one common theme: directors were kept in the dark about critical information.
“This has come up time and time again,” said Anton Valukas, a Chicago-based senior partner at Jenner & Block LLP. The internal investigation report on Wells Fargo’s banking practices found the board didn’t get the information it needed, he said.
The failure to keep directors informed can be costly. Wells Fargo paid $185 million in September to settle government probes that employees opened bogus accounts without customers’ permission to help meet sales targets. The bank also suffered a leadership shakeup and faces numerous customer and investor lawsuits.
More recently, some of the bank’s 15 board members narrowly survived a shareholder vote at its annual meeting April 25 in Ponte Vedra Beach, Fla., which was roiled by angry investors.
Valukas, who chaired Jenner & Block until April 30, in 2014 led the internal investigation into General Motors Co.’s ignition switch problems. He spoke to Bloomberg BNA on the sidelines of an April 25 University of Delaware/Association of Corporate Counsel conference on the Volkswagen emissions scandal. The conference was sponsored by Bloomberg Law.
Boards must ensure they have a reporting structure in which information is gathered and transmitted to directors and employees are required to communicate with the general counsel, among other requirements, Valukas said. “The question is: Does the board insist that those systems be in place?”
Valukas also said that before the collapse of Lehman Brothers, there was great concern among mid-level managers about the risks the firm faced. However, that was not communicated to the board.
The investment firm folded in 2008 after suffering massive losses from the subprime mortgage crisis, leading to the largest bankruptcy filing in U.S. history. Valukas in 2009 was the court-appointed examiner in the Lehman Brothers Holdings Inc. bankruptcy.
Once a scandal breaks, Valukas said, boards should try to get “completely unfettered and accurate information” about what really happened. The board must maintain its independence from management in terms of reviewing the facts, he said. It must evaluate whether top management was involved or failed to do what it should have, and whether there were failures up and down the line and what steps should be taken.
Most importantly, the board must be able to be candid with regulators and the public so they “believe that somebody’s in charge who’s giving them straight information,” he said. “Credibility is critical in these matters.”
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