On Friday former Tyco CEO Kozlowski and CFO Swartz were found guilty on 22 criminal counts by a New York jury. After a six-month long trial ended in a mistrial last year, prosecutors simplified their case, and post-trial reports have the jurors focusing on the credibility of the pair’s testimony. One major issue was an inability to explain why certain “compensation” that didn’t appear to have had board approval was not reported on W-2 forms. Former GC Mark Belnick was acquitted of charges last year.
From a compliance perspective, this verdict serves as a reminder that company officers should adhere to a higher standard of conduct than that required by their corporate compliance program. Training I am familiar with focuses on what not to do, and also the importance of avoiding an appearance of impropriety. This is a concept lawyers recognize from their basic legal ethics coursework. Auditors frequently examine the “tone at the top” when assessing the adequacy of internal controls.
Kozlowski and Swartz may have their convictions overturned on appeal. What is clear is that they acted in a manner that invited scrutiny. Had they insisted that all compensation be explicitly authorized in written form by the proper board committee, they would probably have never been charged. The jurors drew their own conclusions about the explanations (such as oral approval from deceased director).
During compliance training, a common response when someone asks if conduct X is potentially a problem is: “Think about your parents, spouse or child reading about it in the newspaper.”
I can think of two people who might have had some faint recollection of that concept last Saturday morning.