Preventive Law from the Perspective of
Corporation General Counsel
By Daniel S. Hapke, Jr.
An essay prepared for the National Center for Preventive Law
California Western School of Law
Nearly all of my 26 years in the practice of law were spent as in-house counsel in business corporations. These three corporations had in common the fact that engineering was the service sold or highly engineered products were the goods sold. However, each of these companies had very different preventive law needs and solutions.
Sverdrup Corporation (now a division of Jacobs Engineering Group headquartered in Pasadena, California) was ranked year in and year out in the top ten architecture/engineering (AE) firms in the United States. For AE firms, preventive law often involves best practices in the language of their client contracts. For example, if the AE agrees to an express guarantee or warranty as to its design, in most states this act establishes a standard of care higher than that required of design professionals under the prevailing common law. The consequence of such language is to void the AE's professional liability insurance if a claim arises under the contract containing this imprudent language. Another source of difficulty is for the AE, by contract or by conduct, to assume responsibility (or even oversight) of construction site safety. These illustrations point out the fact that over the years, the AE profession has learned that properly negotiated and drafted contracts are the first line of defense. Said another way, if one acts in a preventive fashion then no defense should be needed.
For five of the nine years I worked at Sverdrup, I also taught design and construction law at the Washington University School of Architecture in St. Louis. This subject matter was part of a larger course on professional practice in both the undergraduate and masters degree programs. I learned early on in my teaching "career" that architecture students were very interested in aesthetics, form and function and they had a very keen sense of business development and client relations. However, in general, they found contract language boring and legal best practices even more so. In addition, many students accurately noted that some of our advice was detrimental to client relations and marketing in light of the fact that many young architects want to offer as many services as the client requests. All too often we were forced to resort to horror stories in order to get the students' attention or to drive home key points.
As a beneficiary of the Reagan buildup to win the Cold War, General Dynamics Corporation was the number 1 or 2 defense contractor in the world in the 1980's,. Thus, the Department of Defense was our major customer, with Foreign Military Sales supplementing a substantial portion of our gross revenue. Our preventive law concerns were the same as any Fortune 50 manufacturer, plus the byzantine DoD regulations, the Foreign Corrupt Practices Act, export laws, and so on. In those "go go" days of massive military procurements, the challenge was to reign in the marketing and program people while still winning our share of the contract awards. Thus, at General Dynamics the in-house lawyers spent a lot of their time trying to control those business people who tended to oversell the capabilities of our products and services. We also spent a lot of time on conflict of interest issues arising from our employees' dealings with current and former government officials and employees.
My last corporate position was Senior Vice President & General Counsel of Cordant Technologies Inc. (now a division of Alcoa Inc.). Cordant's stock was listed on the New York Stock Exchange and it was a Fortune 600 manufacturer of highly engineered components for commercial aerospace, automotive and other heavy industries. As an issuer of publicly traded securities, Cordant's management was justifiably concerned with Wall Street, the analysts and institutional shareholders. As General Counsel, I concerned myself with the preventive law aspects of such things as forward-looking statements, selective disclosure and public reporting.
As a manufacturer of components for major industrial original equipment manufacturers (OEM), Cordant dealt with customers that dwarfed it. Companies like Boeing, Ford, General Electric and Lockheed Martin make a practice of. exacting concession after concession from their suppliers. All too often the OEM ignores the words in the supply contract when they are not advantageous to the OEM. Therefore, while contract language is always important, it is not relied on by the supplier as the first line of defense. Instead, day-to-day performance on the bases of on-time delivery, quality, increased productivity, and decreased cost are the names of the game. These are often referred to by terms like 99continuous improvement", "lean manufacturing", "synchronous production" or "Six Sigma." Whatever they are called, these are the tenets by which commercial aerospace and automotive component suppliers must live (or die).
Outside of the customer-supplier interface, Cordant had all of the other exposures facing a manufacturing company with 17,000 people working in over 60 plants on three continents. With just five general practice lawyers in the legal department, the challenge of practicing preventive law was, at times, daunting. At the time Alcoa acquired Cordant, we were in the midst of implementing a comprehensive, wall-to-wall compliance program. We believed that this program, supported by our business ethics program and augmented by our "legal best practices", offered the best approach to incorporate preventive law into our company. Attachment A is a brief description of the relationships between and among Cordant's Business Ethics, Compliance and Legal Best Practices programs.
Attachment B is a draft of the Cordant Technologies corporate policy on compliance programs. Exhibit 1 to this policy is a list of the principal areas of law in which we believed Cordant had compliance exposure. In a future phase of the policy's implementation, we planned to provide an online compliance resource to every member of management at all company locations. Acting as a sort of force multiplier, the online resource would provide compliance standards and quidance via each manager's PC 24 hours a day and seven days a week. This is not a substitute for obtaining timely legal advice, but, considering the realities of this decentralized business enterprise, it was a reasonable response to the company's preventive law needs.
Over the years companies have discovered that compliance programs are most successful when they rest on a foundation of ethical conduct. Once thought to be applicable only to government contractors, the more enlightened view is that all business enterprises and organizations benefit from having business ethics woven into the fabric of their culture. Merely publishing an ethics booklet or policy is window dressing. The program must rest on the company's core values, must be management driven and must set standards for the conduct of all employees, independent contractors and suppliers of the business. A method of detecting violations and imposing appropriate sanctions must also be included. While these elements of an effective program have been around for decades, the creation of the federal Sentencing Guidelines for organizations in the early 1990's certainly raised the stakes. Thus, another aspect of preventive law is to avoid criminal prosecution or, at the very least, to qualify for maximum mitigation credit under the formula included in the Sentencing Guidelines.
Attachment C is a copy of the March 1999 edition of the Cordant Technologies Code of Ethics and Standards of Business Conduct for the Corporate Office workforce.
From these experiences it is obvious that preventive law practice in corporations varies between industries and between industry participants. Moreover, each company must adopt a preventive law approach that respects its own culture, history, markets and management style. Additionally, preventive law approaches and programs must be dynamic rather than static. They must flexibly address changes in the law, changes in the areas of interest to the plaintiffs' bar and the regulatory community and, last but not least, they must promptly reflect each change in the company's product line, organization, territories and business goals.
Relationships between and among Cordant's Business Ethics, Compliance and Legal Best Practices Programs:
What Is a Business Ethics Program?
· A "values-based" system to help all employees guide their conduct in the absence of clear rules (the "gray areas")
· A strong Business Ethics Program is the foundation upon which our Compliance Programs and Legal Best Practices are built
· A "wall-to-wall", all hands program that is lead by line management
· Ethical decisions are about how we, as an organization or as individuals, want to be perceived
What are Compliance Programs?
· They are "rules-based" systems designed to mitigate risk to the business enterprise
· Compliance rules establish minimum acceptable conduct
· Compliance rules tend to cluster in discrete subject areas and some areas may only concern a limited number of employees
What are Legal Best Practices?
· Beyond mere compliance with the law, these practices further mitigate risk or enhance shareholder value
1. Contract terms and conditions
2. Selected environmental "over-compliance"
3. Intellectual property protections
4. Most insurance coverages
5. Merger & acquisition due diligence reviews
CORDANT TECHNOLOGIES INC.
Applicability: This policy applies to the entire Company.
It is the policy of Cordant Technologies to comply with all laws, regulations and standards that are applicable to our businesses and our operations.
By their nature compliance programs change over time as our businesses evolve to keep up with the markets in which we compete and as regulatory and standards-writing agencies issue rules and guidance. With this in mind, Cordant's current compliance efforts are responsive to the requirements listed on Exhibit 1 attached hereto. As stated however, these requirements change from time to time.
Direction and oversight of the Company's compliance programs are provided by the Compliance Council which consists of:
Senior Vice President and General Counsel (Chair)
Vice President and Controller
Director, Safety and Environmental Affairs
Director, Internal Audit
Director, Human Resource Programs
and at least one representative from each of the Business Units
The Compliance Council carries out its responsibilities by performing various functions including but not limited to the following:
1. Making recommendations to senior management on the inclusion of compliance in the evaluation of employee's performance.
2. Making recommendations on awareness and training activities that will enable Business Units and their individual locations to achieve and maintain compliance. The Compliance Council ensures that the Company actively participates in industry organizations that are sources of compliance best practices (e.g., Defense Industry Initiative (1311); MAPI; Labor Policy Association (LPA)).
3. Identifying subject areas and issues that need to be addressed by Company compliance programs or that have ceased to require action (i.e., keep the programs up-to-date).
4. Developing and/or obtaining for the use of all business units and locations of the Company, resources that assist employees in knowing compliance requirements and how to achieve them efficiently. Examples of these resources are:
• Copies and summaries of government regulations;
• Audit materials and checklists;
• Listings of approved, qualified service providers in compliance subject areas and various geographic areas; and
• Compliance best practices information.
5. The Compliance Council directs periodic compliance audits and spot checks to test the quality of the Company's compliance programs, resources and actual practices.
6. The Compliance Council makes periodic reports to the Chairman and CEO of the Company and other members of senior management.
October 26, 1999
TO: Chief Executive Officer
Executive Vice President & Chief Financial Officer
Executive Vice President for Human Resources and Administration
FROM: Daniel S. Hapke, Jr.
SUBJECT: Compliance Programs
1. Prompted by compliance lapses earlier this year, we have been studying how best to strengthen compliance at all business units and all locations. Attached is a draft of such a policy.
2. The attached draft represents this approach to achieving our compliance objectives:
· Measuring and rewarding members of management's performance in the compliance area;
· Providing awareness and training activities; and
· Compiling and distributing compliance resources.
This last function, as presented in the draft, is its most traditional element. A more aggressive and state-of-the-art approach would be to include in the policy a concept like this:
· While a variety of media have been and will be used to make the compliance resources available throughout the company, the preferred method is through posting them on the Cordant Technologies company-wide intranet. The goal is to provide them comprehensive compliance resources to all employees who need them, with access via their office PC's.
3. I spoke to the Chief Information Officer about the financial and technical feasibility of having a company-wide intranet. He supports the idea and, as a matter of fact, stated that its development has recently been requested by the IS functions from each Business Unit. Thus, using such an intranet to support the compliance initiative would add a function to a communications medium that was already desired for other purposes.
4. Please let me have your comments and questions.
Daniel S. Hapke, Jr.
EXHIBIT 1 to Attachment B
COMPLIANCE REQUIREMENTS APPLICABLE TO CORDANT
Restrictions on Resale
Product Integrity and Warranty
Government Contracts and Subcontracts:
Federal Acquisition Regulations (FARs)
False Claims Act
Truth in Negotiations Act
Federal Aviation Administration (FAA) issues
Equal Employment Opportunity/Affirmative Action Plans (EEO/AAP)
Hostile Working Environment
Employment and Immigration Laws
Employee Retirement Income Security Act (ERISA)
Fair Labor Standards/Wage and Hour
Worker Adjustment and Retraining Notification (WARN) Act
Labor Organizing Activities and Related Matters
Terminations for Cause
Chemical Handling and Hazardous Material Transportation
Discharge to Water
Regulated Equipment and Building Materials
International Traffic in Arms Regulations (ITAR)
Commerce Control List
Technical Data Export
Diversion and Re-Export
Generally Accepted Accounting Principles (GAAP)
Emerging Issue Task Force (EITF) Procurements
Generally Accepted Accounting Standards (GAAS)
Financial Accounting Standards Board (FASB) procurements
Federal Cost Accounting standards (CAS)
SEC Reporting Regulations and Insider Trading Compliance
Foreign Corrupt Practices Act (and other domestic and foreign bribes and kickbacks and the OECD Convention on Bribery)
Misappropriation of Trade Secrets
Occupation Safety and Health Act (OHSA) and Workers Compensation
Political Activities and Contributions
CODE OF ETHICS AND STANDARDS OF BUSINESS
Corporate Office, March 1999
Dear Fellow Corporate Office Employee:
Cordant Technologies and its operating units are dedicated to achieving our business objectives and, at the same time, doing so in accordance with the high ethical standards we have set in our Code of Ethics. Often, good common sense is all we need to act in an ethical manner. However, in some situations, more guidance may be needed and that is the purpose of our Standards of Business Conduct.
You may find it helpful to view the Code's and the Standards' underlying values in the context of the stakeholders Cordant Technologies serves:
· our customers
· our shareholders
· our fellow employees
· our suppliers
· the communities in which we live and work
In addition, the Cordant Technologies corporate headquarters serves a sixth group of stakeholders: all of the business units that make up the Company.
Please read this booklet carefully, and then sign and return the enclosed acknowledgement card to Corporate Human Resources. If there is anything in our Code of Ethics or Standards of Business Conduct that is unclear, ask for help from one of the sources listed in this booklet. If you ever become aware of a violation of our Code or Standards, our Board of Directors and I expect you to report that violation to appropriate Company management. If you prefer to make an anonymous report, the Hotline may be used for that purpose.
We expect the Code and Standards to be followed by you and your fellow employees in all our business dealings. Our dedication to high ethical standards in the work place is absolutely essential to our continued success.
James R. Wilson
Chairman of the Board and Chief Executive Officer
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