70 The Alabama Lawyer 184 (2009). Conducting Business in the Twenty-First Century: How to Avoid Organization Suicide (Part 1).

• Author: BY PAMELA H. BUCY and ANTHONY A. JOSEPH

The Alabama Lawyer

2009.

70 The Alabama Lawyer 184 (2009).

Conducting Business in the Twenty-First Century: How to Avoid Organization Suicide (Part 1)

Conducting Business in the Twenty-First Century: How to Avoid Organization Suicide (Part 1)BY PAMELA H. BUCY and ANTHONY A. JOSEPH"[I]t is organizational suicide not to have a corporate compliance plan."(fn1) This was not true two decades ago. It is today for every business, from large, publicly-owned companies, to small, closely-held family businesses. Among other things, this means that any lawyer who advises a business client without ensuring that the client has an effective, updated, corporate compliance plan risks committing legal malpractice.

This is the first in a series of three articles addressing corporate compliance. This article discusses how and why corporate compliance is important in today's commercial world. The second article reviews the components of an effective corporate compliance plan.(fn2) The third focuses on responding to a problem of non-compliance.(fn3)

The combined impact of the following six events over the past 20 years have made effective corporate compliance a necessary part of the duty of due care: (1) promulgation of the Federal Guidelines for Sentencing Organizations by the United State Sentencing Commission; (2) the focus on corporate compliance by the United States Department of Justice when deciding whether to charge a business entity with a crime; (3) passage of Sarbanes-Oxley; (4) court decisions holding directors personally liable for failing to ensure that a business has an effective corporate compliance plan; (5) amendments to, and passage of, civil statutes such as federal and state False Claims acts, which significantly reduce damages and penalties when a defendant exercises "good" corporate citizenship; and (6) market responses to the exercise of "good" and "bad" corporate compliance. Together, these events make an effective corporate compliance program essential for every business.

Recent Events Making Effective Corporate Compliance a Key Part of the Exercise of "Due Care"

In 1986, the United States Sentencing Commission,(fn4) an agency within the federal judiciary branch, began drafting guidelines for sentencing businesses which had been convicted of crimes. By 1991, the Commission had promulgated the Federal Guidelines for Sentencing Organizations.(fn5) These Sentencing Guidelines make a strong statement about corporate compliance. They provide a steep reduction in the sentence (potentially up to 95 percent) for any organization that had in place at the time of the offense an effective compliance and ethics program.(fn6) The Sentencing Guidelines also provide considerable detail about what constitutes an effective compliance plan, including: "standards and procedures to prevent and detect criminal conduct;" ensuring that "[h]igh-level personnel [have] overall responsibility for the compliance and ethics program," providing "effective training programs," supplying anonymous and confidential mechanisms for reporting of suspected violations of the law; establishing regular monitoring and evaluation procedures to assess the effectiveness of a compliance program.(fn7)

At the same time the U.S. Sentencing Commission was developing its sentencing guidelines, the U.S. Department of Justice was drafting guidelines for its prosecutors to determine whether to criminally charge a corporation, partnership or other fictional entity. These guidelines, known as the Principles of Federal Prosecution of Business Organizations,(fn8) also focus on corporate compliance programs. Revised most recently in 2008, they direct federal prosecutors to consider, before indicting a business, the "existence and effectiveness of the corporation's pre-existing compliance program."(fn9) Like the Sentencing Guidelines, the Principles of Prosecution provide detail about effective corporate compliance, essentially identifying the same components as the Sentencing Guidelines.(fn10)

Because of these developments by prosecutors and the sentencing commission, a business now may be able to avoid indictment altogether, negotiate lesser charges or receive a lesser sentence if convicted, simply by having an effective corporate compliance program in place at the time a criminal offense may have occurred. This is important because the existing standard for imposing criminal liability on fictional entities is so broad...