Legal compliance is one thing, but ethical dilemmas are another world entirely
The setting: Midtown Manhattan, lunchtime
The interlocutors: Mary Beth Kissane, principal at Walek & Associates and NIRI board member; Michael Verde, partner with Katten Muchin Rosenman
The topic: Ethics
Recorded by: Neil Stewart
Mary Beth Kissane: There is so much to the issue of ethics, and how it intersects with the role of IR.
Part of it has to do with people’s ability to speak truth to power because one of the inherent conflicts of being an IRO is that you report to the CEO or CFO, so he or she is your patron, but sometimes you may have to correct your boss.
Mike Verde: What an IRO says or doesn’t say to the outside world is regulated; if you do the wrong thing, it’s a violation of the law and well-established rules.
But there is no guidance for what you do in the gray areas where it’s not clear whether your obligation is to yourself, the people you work with or the firm you work for. Then it’s an ethics issue, not a legal one.
Scenario 1: Breaking bad news
MBK: If an investor perception study says your CEO or CFO should be fired, the ethical question is: can and should you go around the people to the board of directors with those results?
MV: Without a finding of actual wrongdoing, the IRO has no ethical obligation to tell anybody other than the people who commissioned the study – presumably the CEO or CFO.
But if the board orders an investor perception study and finds investors projecting poor performance because of a failing business plan, then that’s easy: the IRO can take the results straight back to the board.
MBK: There may be a temptation to change or omit something from the results of the perception study. Monkeying around with perception work really concerns me because investors and analysts have robust compliance and chances are pretty good those calls were taped, which means they’re discoverable.
If anything goes wrong at the company and it gets sued, the original conversations could come out and the board would be considered constructively to have had access to those data, even though IR didn’t pass on the details.
MV: If management commissioned the study, however, and the questions are very subjective – like: what do you think of management? and most people say, ‘Meh’ – it’s just a subjective perception and the IRO has no obligation to do anything with it.
MBK: From a best practice perspective, it’s IR’s job to interpret what the Street thinks for management and the board. If you don’t report the results, you’re losing a teachable moment.
Besides, if you don’t share your own perception study work with the board, then when directors themselves want a study done, you may not even know they’re doing it.
When SOX first came out, there was a suggestion that a board should have its own IR person and do its own perception work. But that would send a signal to the Street that there was a split within the company.
No one wants their board doing rogue perception work; IR should own it, and make the board part of the process. Have the conversation with management before it becomes an ethical issue.
Scenario 2: Going against management
MV: Here’s a harder ethics question. Let’s say a CFO has an extraordinarily complex strategy and an explanation why certain transactions should be kept off the books – an Enron-type situation.
Hardly anyone understands it, least of all the IRO. To him it looks like a mess. But the CFO says, ‘Kid, you don’t know what you’re talking about. I’ve been doing this since you were in diapers.’
That’s an ethics problem. The IRO instinctively believes something is wrong, but he realizes that if he talks to anybody and he’s mistaken, his career is over.
His CFO is going to think he’s not only an idiot, but also a disloyal idiot. If the IRO doesn’t raise the issue and it turns out the company was hiding significant losses, however, his career is over then as well.
MBK: If he were lower down in the firm, say an employee in the accounting department, he could call the whistleblower hotline. But could the IRO do that? The SEC has increasingly said it views the IRO as the owner of Reg FD compliance, the gatekeeper to the company. That implies he needs to say something.
MV: The further up the food chain you are, the more responsibility you have to take direct action and not just toss it to an anonymous number.
MBK: From a practical perspective, I would tell an IRO in that position to call NIRI’s ethics committee; it’s exactly the kind of situation the committee was put together for. In fact, it has been used as circumstantial proof by the courts. It’s no get-out-of-jail-free card, but calling the ethics committee is evidence the IRO really tried hard to get the answer right.
MV: The ultimate fire alarm is the in-house general counsel. His or her ethical duties are far greater than the IRO’s, and much more stringently applied. If an IRO views something as a twitch, the general counsel sees it as a major league tremor. The general counsel is so much more in the bull’s-eye.
In contrast to the very ill-defined ethics rules for IROs, in-house counsel have a whole ethics section devoted just to the suspicion of wrongdoing within the company because that puts them in conflict with representing their client and their duty to the public.
So go unburden yourself to your general counsel. And if anyone asks later what you did about it, you can say you talked to the general counsel and he or she said not to worry about it. In my book, talking to the general counsel is the IRO’s ultimate safe harbor.
Scenario 3: Private investigations
MBK: What happens to the IR professional when an investigation is launched – an internal investigation or even a criminal investigation? IROs think investor conversations are tough; they don’t have any idea how hard an investigation can be.
MV: People who don’t come from this environment don’t realize how vulnerable they are. Someone in a communications or accounting role can be made to look like a pathological liar or a bumbling idiot – or both – in the space of about 20 questions.
You know the good cop/bad cop scene in movies? It actually works. When I was a sergeant in the NYPD, guys in my squad would get called down to the internal affairs division.
They’d come back and say, ‘There was this lieutenant looking to crucify me, but I think the sergeant doing the interview really liked me.’ Even people who do this for a living are psychologically vulnerable.
MBK: So who should the IRO turn to?
MV: That’s when it gets tough. Everybody is trying to cover him or herself, and your general counsel at that point becomes useless to you.
You’re in a horrible situation with three constituencies to worry about: the people you’ve been working with, the company itself, and the most important one – you. There’s no choice for an IRO but to get his or her own attorney.
MBK: Whenever I’m part of a Reg FD panel discussion or teaching Regulation 101 for NIRI, I get questions about whether an IRO would ever need an attorney, and who would pay for it.
It used to be that most of the IROs in the discussion were senior and wouldn’t hesitate to ask within their company about being added to its directors & officers (D&O) insurance policy, which would pay for their own lawyer.
These days it seems like a lot of IROs don’t even know they have the liability – they figure their company is looking out for them.
MV: If you’re in the chain of communication – or miscommunication – to the public, then regardless of your title you have criminal and financial liability, and that’s why you should be on the D&O policy.
Conclusion
MBK: The world has become so much more complicated since IR evolved into a profession. It’s funny that we talk about common sense. It isn’t common at all, but it’s what good IROs have – good antennae and good common sense.
They have to work very hard to build a reputation for themselves and their companies, winning over people externally and internally. Speaking truth to power is such an important part of that.
MV: If there’s one rule I could pass on to IROs, it’s that you don’t know what you don’t know, so don’t be afraid to ask.
The idea that you can navigate this thicket of regulations and ethical responsibilities on your own because you have a pure heart and a good head is nuts. Go and talk to people.
