On Tuesday, January 10th, NACD Southern California hosted a luncheon program, “Growth, Red Flags & Ethics: A Discussion with John Hueston.” As former Assistant U.S. Attorney, John Hueston led the successful prosecution of Ken Lay and Jeff Skilling in the Enron trial.  Later as an attorney in private practice, his firm Hueston Hennigan LLP, specializing in high-stakes business disputes and white collar criminal defense, successfully represented Angelo Mozillo, former CEO of Countrywide Financial.

Drawing on these cases and a wealth of experience, John provided perspective on what directors need to do to meet fiduciary responsibilities, the role of principles versus rules in ethics and compliance, and best practices in leading special investigations. Moderated by NACD So Cal chapter director Ken Merchant, Deloitte & Touche LLP Chair in Accountancy and Professor of Accounting at the USC Marshall School, the event was held at The California Club in downtown Los Angeles.

Key Takeaways:

1. The primary driver behind most malfunctioning boards is a lack of appropriate board composition and/or corporate governance processes. How a board interacts with itself, with management, and other behavioral protocols are typically the key determinants in assessing culpability in the face of an investigation.
   
   For example, in the case of Enron, the compliance program on paper was top-notch, yet the tone at the top of the organization greatly deviated from policy. The lesson is that directors need to take note of whether the code of conduct is being enforced and be certain the chief compliance officer is held accountable and following proper due diligence.
   
   
2. Failures in communication between committees tend to occur when board meetings are overly structured, leaving little to no time for breakout sessions to discuss important issues and share information. By insisting on scheduling time for open communication into the agenda, directors can’t be faulted for not having the right processes in place. 
   
   
3. Too often, the tone at the top of large organizations encourages “creative” flexibility of the rules instead of focusing on the guiding principles or the ethics behind them. Whenever there are hints of this kind of corporate culture, Hueston suggests determining and enforcing additional checks and balances.  Otherwise it may not be in a director’s best interest to serve on that board.
   
   
4. Even in the most egregious of scandals, unless directly involved in some kind of investment or scheme, a director is not likely to face criminal prosecution. That said, being attentive and employing reasonable processes will keep boards’ and individual directors’ records clear and help all board members sleep well at night.