Last fall, United States Deputy Attorney General Sally Yates released a memorandum titled “Individual Accountability for Corporate Wrongdoing.” The “Yates Memo” is the latest installment in a series of prosecution guidelines for United States Department of Justice attorneys to consider when conducting corporate fraud investigations, making charging decisions and developing prosecution strategies. (See this Featured Article by Brian Cromwell for a detailed discussion.)
The Yates Memo generated a storm of negative responses due to its emphasis on holding individuals accountable for alleged criminal activity, as compared to previous guidelines that had placed a greater emphasis on charging companies. Perhaps overshadowed in the discussion are its implications for corporate governance.
What does the Yates Memo Say?
The Yates Memo requires companies to identify all individuals involved in potential wrongdoing “regardless of their position, status or seniority” in order to receive credit for cooperation. The DOJ appears, in essence, to be demanding full and complete access to facts throughout the investigation process in order for a company to receive cooperation credit. The policy will, therefore, pressure companies to provide more factual evidence than previously required against the individual wrongdoers. A related concern is whether the Yates Memo also erodes the attorney-client privilege by requiring companies to turn over information that is protected.
Mr. Cromwell and others expect there to be a strong shift in the DOJ’s focus toward individual accountability. As a result, individuals should expect to be prosecuted for their involvement in corporate misconduct. Companies, on the other hand, must be extremely careful when collecting information during internal investigations, knowing that, in order to be considered “cooperative,” a company will have to compromise the liberty of their culpable employees.
What does that mean for corporate governance?
All of this has significant corporate governance implications, including for such processes as board of directors oversight, internal controls and disclosure controls and procedures, and, ultimately, public reporting. Companies should reconsider all aspects of their corporate governance in light of the Yates Memo.
Certainly, a strong compliance tone at the top remains crucial to avoiding the extremely damaging consequences of individual executives being caught up in DOJ investigations. More specifically, companies should:
- Allocate more resources to design and implement systems to identify culpable, and prosecutable, individuals.
- Be aware of, and have procedures in place to carefully navigate, conflicts between corporate counsel (in-house and outside) and individuals.
- Be alert to the prospect of parallel civil suits when evaluating whether to cooperate in a DOJ criminal investigation and vice versa.
- Confirm that internal controls and disclosure controls and procedures are designed not only to identity corporate problems, but also the individuals involved.
- Adjust personnel training, or add additional training if necessary, to reflect the Yates Memo’s new prosecutorial emphasis on individuals.
- Give special attention to related person transactions and conflicts of interests. (See this Doug’s Note regarding new PCAOB Auditing Standard No. 18.)