Managing Conflicts and Confidences
RE: Incidence of Insider Trading and Conflict of Interest
With this memo I officially informing you that a real possibility exists that the deal that is to be announced tomorrow may have been based on insider information from a relative of one of the sales representatives who worked on securing this deal.
Background of the Matter
As it has become known to me, Rick – our top performing sales representative has a cousin who works for the client company. According to Rick, his cousin helped him to button up the forthcoming deal. Rick further implied that this sort of deal making has been going on for quite some time in our company and he has been using this questionable approach all the time. The rationale given by Rick to other sales representatives was that deals based on personal connections work for everybody – our company, our clients. They also boost earnings for the shareholders. This information was revealed by Rich to a group of other sales representatives. So, there are several individuals who may confirm this information.
Furthermore, I am also informing you that Andy, the Head of Sales for North America, attempted to pressure me to overlook the issue suggesting that I should “stick to running HR” while he would stick to “managing the sales team”. Andy implied that he would talk to Rick about the issue after the deal is announced. This suggests that not only our Head of Sales for North America has been aware of such questionable sales practices but likely has been involved in covering up previous incidences.
I strongly believe that this situation should be investigated further as it is clearly at least unethical and even illegal. Most importantly, if the information about deals made on insider information is leaked, this may have devastating consequences for our company.
Issues to Consider
Given the severity of issue, I would like you to consider the following points:
- Impact on company and stakeholders. Information that our deals have been based on insider information will ruin the reputation of our company. Reputational losses are hard to quantify but it is more than likely our company will lose many if not most of our current clients. This certainly will have a strongly negative effect on our sales. Future deals will be scrutinized extensively by our competitors and the public, which will increase our transaction costs. Our stakeholders in addition to facing reputational losses, will likely see their earnings drop, quite significantly. In the worst case scenario, they may even sell off. Also, the prospect of C-Suite’s responsibility would become real.
- Legal issues and regulations. Obviously, our company’s legal counsels should be consulted immediately about the legal issues associated with the matter. However, even a cursory look at laws and the current industry regulations suggest that the practice of making business deals based on insider information and especially insider information obtained from a relative or a close associate (nepotism) is illegal. In particular, such business dealing contravenes: (a) several provisions of The Sarbanes-Oxley Act of 2002, specifically Section 302 (Disclosure Control) and Section 404 (Assessment of Internal control); (b) several provisions of The Investor Protections and Improvements to the Regulation of Securities of 2010, specifically Subtitle G regarding corporate oversite of business processes, and also, (c) because our company is public and incorporated in the state of Delaware, the provisions of The Delaware General Corporation Law regarding kickbacks and payoffs.
- Risk-reward assessment. Again, it is difficult to quantify all risks and properly weigh them against possible rewards given the facts of the matter. Yet, in my opinion the possible risks may far outweigh the short-term gains associated with this forthcoming deal. The reward is quite tangible – monetary gains derived from the forthcoming deal. On the other hand, the risks include: (a) investigation of insider information business dealing by regulatory agencies, which will stifle normal business activities of our company, (b) possible fines if our company is found negligent, (c) likely lawsuits by past clients and our current competitors seeking protection from unfair business practices, and (d) threats to long-term sustainability of our company from clients and investors sell offs. These risks are real and quite serious.
- Proposed Actions
- As a head of HR, considering possible impact, legal issues and the risk-reward assessment, I propose the following actions to be taken:
- Hold the announcement of the deal until all circumstances surrounding it are properly and swiftly investigated.
- Form an Internal Review Team tasked with (a) interviewing all key persons involved in the current matter, (b) investigating (together with accounting) whether the biggest 10 deals in the past were associated with similar practices, and (c) presenting a detailed report for the C-Suite members within 7 business days.
- Suspend without pay pending the results of the investigation: Rick – the sales representative and Andy – the Head of Sales for North America, and possibly other sales team members who were aware of insider information dealing.
- Consult our legal team on all possible legal ramifications of the matter.
- If the Internal Review Team finds evidence corroborating the suspected insider information dealing, then (a) Rick, Andy and all other who were knowingly involved should be terminated and referred to proper government agencies, (b) the deal should be cancelled as too dangerous for the reputation of our company.
- Emergency meeting with stakeholders should be scheduled and the results of the internal review should be presented to stakeholders to make some possible governance change decisions.
In my opinion, at this time, we need to: