Speaking at a Stanford Directors' College, White reminded directors they have obligations to shareholders and regulators as well as oversight of their companies' management. Directors play a critical role in preventing and detecting securities laws violations, White said, and responding to any problems that may occur in spite of their efforts.
"You are the essential gatekeepers upon whom your investors and, frankly, the SEC rely," White said. "We see you as our partners in the effort to ensure that investors in our capital markets can invest with confidence and, hopefully, success."
Setting a Tone
White said although auditors, lawyers, and compliance professionals all have obligations to prevent and detect misconduct, directors' fiduciary duties to oversee their companies makes them the most important corporate gatekeepers.
"Ensuring the right 'tone at the top' for a company is a critical responsibility for each director and the board collectively," White said. "Setting the standard in the boardroom that good corporate governance and rigorous compliance are essential goes a long way in engendering a strong corporate culture throughout an organization."
Citing organizational culture as one of the most important deterrents to financial reporting fraud, White said directors must play a key role in shaping a company's attitude and behavior. Directors must insist on a strong compliance culture while also paying attention to factors such as the risks inherent in the organization's business model, its financial condition, and broader industry and market trends that can affect the organization.
"You must pay attention to what senior managers say, but also listen for the things they are not saying," White said. "You have to know what is going on in your company’s industry, but also the broader market."
White also advocated that directors pay attention to regulatory developments that can influence their companies and the markets they operate in.
Responding to Problems
Acknowledging that financial reporting fraud and other forms of misconduct can occur despite the best efforts of directors, managers and regulators, White told directors they need to think about effective response and mitigation strategies.
Depending on the materiality of a suspected offense, White said, companies may wish to consider self-reporting potential problems to the SEC. Doing so generally leads to a more favorable outcome to the organization than trying to hope nobody notices undesirable behavior.
As a further incentive to self-reported suspected fraud, White said the SEC's three-year-old whistleblower program has received more than 3,000 complaints in each of the two past fiscal years. The program's financial rewards make it more likely that someone will report suspected misbehavior, and less likely that a company can keep that behavior safely behind closed doors.
Similarly, White said directors have an obligation to ensure their companies cooperate fully with SEC investigations if fraud or misconduct is reported or suspected.
Instead of merely complying with subpoenas for documents or information, which is required under securities laws, White said directors, companies and their legal representatives need to work actively with SEC investigators when asked.
She said the early communications a company has with the commission set a critical tone that often influences the final outcome of an investigation.
"There is, of course, cooperation and then there is cooperation, just as there are compliance programs that look great on paper but are not strongly enforced," White said. "We know the difference."
Despite these challenges, White said the commission is willing to work with and support directors who take seriously their responsibilities to oversee management, and to listen to the concerns of shareholders.
"Service as a director is not for the faint of heart, but nor should it be a role where you fear a game of 'gotcha' is being played by the SEC."