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Cross-Cultural Management

The CEO’s Private

Investigation
by Joseph Finder
From the Magazine (October 2007)

Summary. Reprint: R0710A When new CEO Cheryl Tobin arrives at Hammond Aerospace, she
picks up a faint scent of corruption. But if her predecessor broke the rules, her executive team
isn’t talking. Cautious about damaging reputations over nothing, she hesitates to make... more

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If Mussolini had been the CEO of a major American corporation, Cheryl


Share Tobin thought, his office wouldn’t have been this big.

 She stood in the doorway of her new work space, on the 33rd floor of the
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Hammond Tower in downtown Los Angeles, and took a deep breath.
 Seven o’clock on her first morning as CEO of Hammond Aerospace.
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Briefcase in one hand, Starbucks nonfat venti latte in the other.

Print Go for it, kiddo, she told herself as she exhaled, then resolutely strode
over the threshold and across the antique, jewel-toned Serapi rug. She
remembered the moment, a couple of weeks ago, when the chairman of
the board had solemnly ushered her in here. He’d stood in awestruck
silence, presumably to impress her with the majesty and grandeur of the
job they were courting her for.

She’d been impressed, all right. But also secretly appalled. It was
obscene: easily four times the size of her office at Boeing, where she’d
run the largest division. This wasn’t exactly her style. A peacock’s
plumage might impress the peahens, she liked to say, but it was also a
flashing neon all-you-can-eat sign for predators.

Floor-to-ceiling windows on two sides, with dazzling panoramic views of

Wilshire Boulevard. A private terrace where you could entertain visiting
dignitaries. Even a working fireplace with a slate hearth—what was that
all about?

It was all about the colossal ego of its former occupant, of course. The
legendary James Rawlings, the globe-trotting CEO-statesman who’d
single-handedly built a minor producer of airplane windshields into one
of the world’s leading aerospace companies. Jim Rawlings had been a
man of immense charisma and iron will, a hard-charging salesman
who’d dominated Hammond Aerospace until the moment, one month
ago, when he’d dropped dead from an aneurysm on the sixth hole at
Pebble Beach. Right in front of three Japan Airlines execs with whom
he’d been negotiating a $5 billion order for thirty H-880 SkyCruisers, the
company’s new wide-body passenger jet.

Half an hour after they’d carried him away on a gurney, the shaken
Japanese executives signed on the dotted line.

Even in death, he seemed so present. His grandiose office had been

preserved exactly as he’d left it, a shrine to a cult of personality. They
still hadn’t taken down the photos on his ego wall: skiing with Prince
Charles in Klosters, sailing with Gianni Agnelli in the Adriatic,
schmoozing with King Abdullah at the royal palace in Riyadh. The place
still reeked of cigar smoke.

She had some serious redecorating to do. For starters, the humidor had
to go.

The vast black marble slab of a desk was uncluttered by a single object.
Where is the telephone? she wondered. Didn’t the guy use a phone?

She set her briefcase on the floor, then placed the almost-empty paper
cup on the gleaming surface of the desk. It looked almost ironic there,
like some Damien Hirst installation.

Now she stood watching the early morning traffic, the Matchbox cars
barely visible through the smog. She missed Chicago, didn’t much care
for Los Angeles, but she could get used to it. Good sushi here, she’d
heard.

What the hell have I gotten myself into? Cheryl wondered. No doubt,
leading Hammond Aerospace was the opportunity of a lifetime. But at
the same time, she was acutely aware that not a few people in this
building wouldn’t mind terribly if she tripped and fell off her private
terrace and took a header onto the asphalt of Wilshire Boulevard, 33
stories down. Not least a guy named Hank Bodine, the head of
Hammond’s commercial airplane division and the internal candidate
for the job she’d just secured. Everyone here had thought he was a shoo-
in, himself included.

“Good morning, Ms. Tobin. You’re in early.”

Startled, Cheryl turned around. Her new executive administrative

assistant, Jackie Terrell, stood in the doorway.

She was a tall, regal African-American woman in her early fifties,

wearing an elegant lavender suit and matching pumps. When the two
women had first met a few days ago, Jackie had seemed a bit stiff.
Excessively formal, maybe. But she’d been Jim Rawlings’s assistant for
18 years, which meant she’d be invaluable.

“Oh, good morning, Jackie. Yeah, I like to get in before the phone starts
ringing. And please—I’m Cheryl.”

Jackie smiled with prim cordiality. “Jim always arrived at nine on the
dot, and I always get here by eight. But I’ll make sure I’m in by seven
from now on.”

“Oh, don’t be silly. Eight is fine.”

Jackie nodded. “Please let me know what I can do for you.”

For one thing, you can drop the Mrs. Danvers act, Cheryl thought. “I’d
like to call a meeting of my executive team this afternoon.”

“I’ll send out the notifications.” Jackie hesitated an instant, then said:
“They’ll be—well, traditionally, executive team meetings are held on
Tuesday mornings, Ms. Tobin, but—”

“Tomorrow’s fine,” Cheryl said. There’d be plenty of opportunities to

break some china before the week was out.

“May I get you a cappuccino? Jim always liked a cappuccino, first

thing.”

“No thanks.” She indicated the paper cup defiling Jim Rawlings’s desk.
“I’ve had my hit of caffeine for the day. Too much makes me jittery.”

“I see. Well, please let me know if there’s anything I can get you.”

Cheryl thought for a long moment and then said, “Actually, Jackie, there
is something. Some information.”

“Of course. What would you like to know?”

“Let’s sit down for a moment.” Cheryl walked over to the conference
area and sat in a high-back black leather chair. Jackie perched at one
end of a long black Chesterfield sofa and took out a pad.

Note to self: Get rid of the damned men’s club furniture, Cheryl thought.

“Jackie,” she began delicately, “when I was at Boeing, I heard certain

rumors…about Hammond.”

“Rumors?” Jackie cocked her head.

“Of course, you never know what’s true and what’s not when it involves
a competitor. But what I often heard was that the reason Jim’s sales
team was so successful at landing foreign contracts was—well, to be
blunt, that they weren’t reluctant to give certain incentives.”

“I’m not following you, Ms. Tobin.”

“Off-the-book deal-sweeteners. Bribes, not to put too fine a point on it.

There were whispers that Hammond kept a secret slush fund for payoffs
to various foreign officials.”

Jackie shook her head. “That sounds like watercooler gossip to me.”

“Perhaps. But sometimes there’s truth in gossip.”

“People always love to trash the competition. Sour grapes, I’m sure.”

“No doubt that’s all it is. But now that I’m CEO, I need to be absolutely
certain.”

Jackie shifted, visibly uncomfortable. “Anyway, I was hardly in a

position to know anything.”

“You know what they say about you,” Cheryl said lightly. “That you
know where all the bodies are buried, right?”

Jackie seemed to be studying the rug. Cheryl had the distinct

impression that her new assistant was holding out on her.

“Well,” Cheryl said abruptly, getting to her feet. “Forgive me if I put you
in a difficult position.” She returned to the big black sarcophagus of a
desk and, without turning around, added, “Given your loyalty to Jim.”

“No—” Jackie said. “That’s not it at all.”

“You see, if the allegations are baseless, no one will be more relieved
than I,” Cheryl said softly. “But I want everyone to know that I won’t
stand for any coloring outside the lines. I want Hammond’s reputation
to be spotless.”

“I won’t stand for any coloring

outside the lines. I want
Hammond’s reputation to be
spotless.”

A few seconds later, Jackie said in a small voice: “There might have been
something.” • • •

Cheryl’s new assistant spoke falteringly. “I’ve heard the rumors, too, of
course. But I always ignored them. Until one day I found a folder on
Jim’s desk, and I picked it up to file it away.” She added hastily: “I
handled all his personal papers, even the most confidential. He knew he
could trust me to be absolutely discreet. That’s why I was so surprised
when he told me to put the file down. He was quite…short with me. He
said it was personal. Not like him at all.”

“What was it?”

“Banking documents, it looked like. I mean, I had to look inside to know

where to file it.”

“Of course you did, Jackie,” Cheryl said reassuringly.

“I saw some wire-transfer instruction forms. Sending millions of dollars

from one of Hammond’s accounts to a bank in Grand Cayman. I
remember wondering about that because I didn’t think we did any
business there.”

“What happened to that file?”

Jackie’s eyes brimmed with tears. “I never saw it again.”

After a few seconds of silence, Cheryl said, “Thank you, Jackie. I know it
mustn’t have been easy for you to tell me.” • • •

Hank Bodine was a big, bluff man of around 60, with a shock of silver
hair, heavy black brows, and a large square jaw. He wore a perfectly
tailored gray suit and a silver tie. He looked like a CEO. Cheryl had done
her due diligence on him, though, and had heard he was a swaggering,
foul-mouthed martinet given to explosive tirades. She wondered why
the board had passed him over for the CEO job. Might it be his
temperament? Or something else?

He looked around the office as he entered. “Haven’t changed a thing, I

see,” he said in a booming voice.

“It’s only my first day,” Cheryl said. “In a month, you won’t recognize
the place.”

She led him over to the men’s club seating area, where they chatted
aimlessly for a few minutes. Hank made little effort to conceal his
hostility. “Well,” he said, “I can’t wait to hear what sort of changes
you’ve got in mind.”

“Who said anything about changes?” Cheryl said blandly.

Hank flashed his unnaturally white teeth, but the smile did not reach his
eyes. “The board wouldn’t have brought in an outsider to keep things
the same.”

“You know, I never like to mess with success. I mean, your order book
for the SkyCruiser is over a hundred billion dollars, isn’t that right?”

Hank nodded, waiting.

“I’ve got to tell you,” she went on, “it’s a lot better to be working with
you than against you. Your division sure grabbed a lot of business away
from Boeing in the past few years.”

A hearty guffaw. “Hey, maybe we’re selling a better plane.”

Cheryl shrugged. “I hope that’s it.”

“Plus, I’ve got a crack sales force.”

“So I hear.”

“We’re the underdog. We have to get up earlier. Work longer. Fight

harder.”

“As long as everything’s on the up-and-up, you have my unqualified

support. And gratitude, for that matter.”

Hank’s smile faded. “What’s that supposed to mean?”

“We’re both grown-ups, Hank. I think you know what I’m talking about.”

“I’m not sure I do.”

There was a beat of silence. “I just want to make sure,” Cheryl said
quietly, “that no laws have been violated. I’m talking about the Foreign
Corrupt Practices Act.”

Hank’s eyes glittered coldly. “Is that an accusation?”

“Simply a statement,” she said. “I won’t tolerate any bribery, any payoffs
to lock in deals. I want your personal assurance that nothing of the sort
is going on at Hammond. To your knowledge.”

He jutted his jaw, looked away. “I’m not going to even dignify that—”

“Hank, I want you to know that I’m considering launching an internal

investigation.”

“That some kind of threat?”

“Not at all. Call it a heads-up.”

“You can’t be serious.”

“Deadly. Hank, let me remind you: I was at Boeing when someone tried
a little too hard to land a big, juicy Pentagon contract—by offering a job
to the woman in charge of air force acquisitions. Remember that? A
couple of years ago?”

“Yeah,” Hank said impatiently.

“Our CFO went to prison. Our CEO was forced to resign. Boeing had to
pay millions of dollars in penalties. If it weren’t for a great legal team,
we’d have faced criminal charges, too. We lost probably billions in
potential business. So I’m going to do my damnedest to make sure
nothing’s going on here.”

Hank leaned forward, hunched his shoulders. “And what exactly do you
think that’s going to accomplish? You have any idea what’s gonna
happen to our share price when the word gets out that the new CEO’s off
on some witch hunt, looking into bribery or slush funds or whatever the
hell?”

I never said anything about a slush fund, she thought. “But if it’s not
true—”

“Doesn’t make a damned bit of difference if it’s true or not. We’ll lose
contracts left and right. Soon as there’s a drop of blood in the water, the
sharks are gonna circle, believe you me.”

She watched him in silence.

“You’re barely here an hour, and already you’re trying to tear the place
apart,” Hank said in a low, insinuating voice. “I’ve got news for you. You
don’t work for Boeing anymore.”

Only later did Cheryl realize that Hank Bodine hadn’t actually denied
anything. • • •

Hammond’s general counsel was a trim, nervous man named Geoffrey

Latimer. He was around 50, with graying light brown hair perfectly
parted on one side and Brylcreemed into place. He shook Cheryl’s hand,
his grip firm and dry. His fingernails, she noticed, were bitten.

She’d dropped by his office unannounced, hoping to get to him before

the rumor mill did. His office was a fraction of the size of hers. Neat
stacks of papers and binders covered nearly every surface. He, too, had
an ego wall of photographs of himself with various VIPs. This seemed to
be standard issue on the 33rd floor.

Geoffrey listened gravely, his head bowed, like a priest hearing

confession. When she finished, he looked up.

“I assume you’re not talking about having me spearhead an internal

investigation.”

She shook her head. “It would have to be done by an outside law firm.
It’s the only way.”

“I agree.”

“Good.”

“But I think it would be a mistake,” Geoffrey said.

“How come?”

He leaned back in his chair and tented his hands. His brow was deeply
furrowed. “To begin with, news of an investigation into possibly illegal
conduct would inflict serious harm on the company.”

“News of an investigation into

possibly illegal conduct would
inflict serious harm on the
company.”

Yes, she thought. Hank Bodine’s argument. “But not if it’s contained,”
she said.

“If you mean trying to keep the fact of such an inquiry a secret, I’m
afraid that’s just not realistic. Good Lord, there’d be forensic document
examiners combing through years of files and archived e-mails,
computer experts talking to our IT people….” He shuddered. “We’re
talking front page of the Wall Street Journal.”

Cheryl folded her arms, bit her lower lip. “But at the very least, don’t you
think I pretty much have to inform the board about my suspicions?”

Now he leaned forward in his chair and began toying with a

paperweight. “Here’s the thing, Cheryl. Once you do that, you escalate
things to an entirely new level. The whole matter will spin completely
out of control.”

“How so?”

“The regulatory environment out there has gotten really brutal in the
past couple of years. The courts have started to hold individual directors
personally liable for any corporate malfeasance they know about and
don’t act on. That could mean potentially millions of dollars in legal fees
alone—for each director. And all for what might turn out to be nothing
more than a wild goose chase.”

“You’re kidding me.” She tried to swallow, but her mouth had gone dry.

“Unfortunately, no. So look at it from their standpoint—you tell them

about this suspicion of yours, and they’ll have no choice but to take
immediate and serious action.”

“Which might not be such a bad thing, correct?”

He closed his eyes, gave a long, tremulous sigh. “Look, Cheryl. What
they’ll almost certainly do is take control of the company out of your
hands. They’ll feel as if they have no choice. You’ll be the CEO of
Hammond in name only—you’ll have no power.”

She watched him, didn’t know what to say.

“Cheryl, if you have some sort of concrete evidence of corruption, then a

probe would be not only responsible but imperative. Yet if you’re going
on nothing more than a hunch… oh, dear. The fact that there are stories
out there about alligators in the sewers doesn’t justify sending
inspectors down the manholes. Trouble is, as soon as you repeat these
tall tales, everyone’s got to act as if they’re true.” He paused, gave the
paperweight a final little shove. “And something else. Please forgive my
bluntness.”

“Go ahead,” she said dully.

“A lot of people here are going to consider this just some clumsy attempt
on the part of the new CEO to discredit her very popular predecessor. To
blacken his name.” He winced. “I’m not saying that’s your intent, of
course—far from it. But you’ll start losing senior people. You’ll become a
pariah, Cheryl. And you have to ask yourself: Is it really what’s best for
the company?”

Her head had begun to throb. She thanked him and walked slowly out of
his office, and on the way a photograph caught her eye.

Geoffrey Latimer with Hank Bodine and Jim Rawlings. Aboard

Rawlings’s famous 400-foot, German-built yacht, their arms around
each other. Like three frat brothers. • • •

“Is everything all right?” Jackie asked.

Cheryl, surprised by the tenderness in Jackie’s voice, attempted a smile

as she passed her assistant’s desk. She needed to be alone, to think. Late
morning light flooded her office, making her headache worse.

Her first day as a CEO, and for the first time in years she felt almost
paralyzed by indecision. She’d always been able to draw on an inner
core of strength, to get through the hard times, to make the tough
decisions. She’d once overheard a couple of guys at Boeing refer to her
as Ice Queen, and no doubt people had said worse. She didn’t
particularly care. But her detractors, both men and women, wrongly
assumed that beneath her sometimes flinty exterior was even more flint.

Her first day as a CEO, and for the

first time in years she felt almost
paralyzed by indecision.

If only that were true.

She sat behind her desk and finally located the damned telephone. It
was concealed in a desk drawer. Who knew what else Jim Rawlings was
concealing? She picked up the handset, listened to the dial tone for a few
seconds, then put it down.

Weren’t quarterly filings due in a couple of weeks? The Sarbanes-Oxley

Act required her to approve them, to certify them as “true, correct, and
complete.” But what if she signed a financial statement that she had
reason to believe might be inaccurate—and then it turned out that there
really was some kind of slush fund? Wouldn’t she herself be in legal
jeopardy?

Whom should she ask about this? Geoffrey Latimer wasn’t her personal
lawyer, after all. And after seeing that picture of him and Hank Bodine
on Jim Rawlings’s yacht, she had to wonder whether his real motivation
was to protect his buddies.

But she couldn’t just do nothing. Not anymore. She’d already started
asking questions, and she couldn’t exactly unring this bell.

Picking up the phone again, she dialed a Washington, DC, number: the
direct line of a man named Hamilton Wender, a senior partner at the
high-powered law firm Craigie Blythe. She’d gotten to know Tony, as he
was called, when he did some brilliant defense work for Boeing. What a
nightmare that was.
 And this could be worse.

“Tony,” she said, trying to control the anxiety in her voice. “It’s Cheryl
Tobin.”

Should Cheryl initiate an investigation at her new firm?

Harry “Skip” Brandon (smithbran@aol.com) is a founding partner of

Smith Brandon International, a company based in Washington, DC, that
specializes in business intelligence, risk assessment, and litigation
support. He is a former FBI deputy assistant director who had
responsibilities in national security and counterterrorism.

When Tony Wender finishes his conversation with Cheryl Tobin, he

might just pick up the phone and call a company like mine. As
specialists in international investigations (95% of our work is outside the
U.S.) we get many such calls—sometimes from companies concerned
that actions they’re contemplating might cross a line, and sometimes, as
in this story, because they fear a mistake has already been made. We
don’t take every case. Occasionally we turn down business because we
deduce, whether from obvious or veiled clues, that we’re being hired to
cover something up. But when we’re convinced that the client wants to
know the truth, we’re usually eager to get to work.

The relevant federal statutes in this case are the Foreign Corrupt
Practices Act, enacted in 1977 to halt bribery as a means of obtaining
foreign business, and the Sarbanes-Oxley Act of 2002, which increased
the personal accountability of corporate directors. The laws, while
separate, have become intertwined in their enforcement by a
Department of Justice that is more focused on these types of crimes in
the wake of recent corporate scandals.

To get to the bottom of things, we would begin by asking Cheryl for

documents from Hammond’s last audit. Then we would subject the
working papers to a forensic evaluation. It would be up to the CEO
whether and how to explain to audit staff why she needed those
documents; such a request from a new CEO would not necessarily raise
eyebrows. If large bribes were paid, the money came from somewhere.
Forensic auditors, who are trained in investigative practices, know how
to look behind the numbers and find the holes.

At the same time, we would quietly review Hammond’s contracts with

foreign governments over the past five years. Given our extensive
experience in this area, some of these contracts would jump out at us.
We would assess whether their terms left financial wiggle room for
bribes. Telephone records from the previous two years would also
interest us. Reviewing them is not as automated as you might think. It’s
laborious work. But offshore slush funds tend to reside in well-known
locations, and we might spot a pattern of calls and a possible recipient of
a bribe.

An important part of an investigator’s work is finding knowledgeable

people, including disaffected former executives and even current
employees who may be in the thick of the suspicious activity. Often the
moment comes when a key insider can be persuaded to do the right
thing. The experienced investigator knows when it’s too early to bring
that person over to the bright side and when the time is right. Cheryl’s
assistant is an obvious recruitment target.

It’s easy to understand Cheryl’s hesitation to put this affair on the board
of directors’ radar screen. It’s a big step. We have worked with CEOs who
kept things close to the vest. In one case, the whole point was to help the
CEO identify whom on the board he could trust not to engage in cover-
ups. As a practical matter, however, when the expenditures for the
investigation start to mount, someone will notice them. Ultimately, if
corruption is discovered, not only the board but also the DOJ will have
to be notified.

We usually find fire behind the

smoke. However, about 25% of the
time, we find no proof of a
violation, only smoke.

Ideally, that won’t happen. When we are called in to investigate, we

usually find fire behind the smoke. However, about 25% of the time, we
find no proof of a violation, only smoke. (Many investigations are
spurred by anonymous tips, often from the competition. It’s dog-eat-dog
out there.) When there’s no fire, we simply generate a report that can be
produced should government investigators ever come knocking. It’s the
client’s decision how public to make it. Most often it is quietly shelved.

Christopher E. Kubasik is the chief financial officer at Lockheed

Martin, based in Bethesda, Maryland.

James B. Comey, the company’s general counsel, is a former deputy

attorney general of the United States. Kubasik chaired Lockheed
Martin’s internal ethics and business conduct committee from 2003 to
2005, and Comey has chaired it since.

It appears at the end of the case that Cheryl Tobin is trying to be

discreet. She believes that if she airs her concerns any more openly than
she already has, and they turn out to be groundless, her new
management team will turn against her. She’s right to pursue the
matter, but she’s wrong to think that she can get to the truth on the sly.
To uncover the facts, someone will have to sift through phone records,
executives’ calendars, expense reports, bank statements, and other
documents owned by the company. To gain access to those, her outside
lawyer would have to explain his purpose—and that would create much
more of a stir than would a purely internal inquiry.

Where should Cheryl begin within Hammond Aerospace? We’re not told
anything about the structure of its board. As a publicly traded U.S.
company, Hammond would be required to have compensation, audit,
and nominating committees. It might also have established an ethics
and corporate responsibility committee, as Lockheed Martin and other
major government contractors have done. Such a committee would
certainly be concerned by the possibility that company executives
resorted to bribery to win contracts.

Our advice, however, would be that Cheryl stop short of putting the
matter into the board’s hands, at least for the moment. This isn’t
because we side with Geoffrey Latimer, Hammond’s legal counsel. His
recommendation to take something up the chain only if there is
“concrete evidence of corruption” makes clear he has no interest in
going beyond the letter of the law to do the right thing. Cheryl does have
a duty of inquiry in our opinion, but she needs more to go on before
making too big a deal of it. Even the FBI, when it conducts criminal
investigations, does not go from zero to 60 right out of the gate. Its
agents undertake a preliminary inquiry before launching a full-field
investigation. Cheryl should do the equivalent. If this were Lockheed
Martin, the clear first call would be to the vice president of ethics, an
executive who reports directly to the CEO and also to the board’s ethics
and corporate responsibility committee. If Hammond lacks a corporate
ethics officer, Cheryl should go to whoever runs its internal audit
organization.

It is unfortunate that Cheryl has to do this just as she arrives in a

challenging new position. At the best of times if you are the new CEO
from outside the company, a third of the people in the firm want you to
succeed, a third want you to fail, and a third don’t care. Cheryl may find
herself with more like two-thirds against her. The silver lining, though,
is that there is no better device than a crisis to reveal people’s true
colors. If she sends a clear message that hints of wrongdoing will be
investigated, her executives will react in various ways. She can use that
to separate the people she wants on her management team from those
she does not.

If the CEO sends a clear message

that hints of wrongdoing will be
investigated, her executives will
react in various ways. She can use
that to separate the people she
wants on her team from those she
does not.

More broadly, this is an opportunity for Cheryl to put her fingerprints on

the culture. Our own organization goes to great effort to encourage
people to speak up about suspected ethical violations without fear of
retaliation. We constantly communicate the fact that some of the
allegations will pan out while others will not—and that’s okay. No one
resents the effort spent checking out the latter. (And concerns can be
communicated anonymously in any case.) The most important goal
Cheryl could have as CEO is to cultivate the right culture at Hammond,
and this is the moment to set the tone from the top.

Eric A. Klein (eric.klein@kattenlaw.com) leads the West Coast mergers

and acquisitions and securities law practices for Katten Muchin
Rosenman in Los Angeles. He advises boards of directors, corporations,
and institutional investors on fiduciary duty and management issues,
mergers and acquisitions, and growth strategies.

Whether it’s pretexting at Hewlett-Packard or Merck’s handling of

Vioxx, corporate investigations are front and center in today’s news. The
underlying problems that prompt such investigations are complex, as
are the ramifications of the inquiries themselves. Boards of directors
and senior management must have strategies to prevent missteps and,
thereby, avoid significant liability and damage to their own and their
company’s reputations.

Rule number one is to manage the process, not the crisis. Rather than
rushing off to launch an inquiry, CEO Cheryl Tobin first needs to assess
the scope of the possible bribery and carefully choose a course of action.
Some questions for her to answer: Does Hammond have an antibribery
compliance program? Has the board of directors established a procedure
for this type of situation? Has the company undertaken previous
investigations, and if so, how were they conducted and what lessons
were learned?

Next, Cheryl must determine whether she has information that gives her
a legal responsibility to act. Until she pressed her assistant about the
rumors of bribery, the CEO had no direct knowledge and probably no
fiduciary obligations. If she suspected bribery only at a lower level of the
company, Cheryl would certainly have more flexibility. However, since
the activity is serious enough to worry her and could implicate the
highest levels of management, she clearly should report it, as a matter of
common sense and good corporate governance, to the board of directors
or the appropriate board committee. Under the Sarbanes-Oxley Act and
other applicable laws, this CEO may have a legal obligation to reveal
what she knows to the board and may place herself and the directors at
personal risk if she does not. Reporting also enables her to ally herself
with the board, to shape the direction of the inquiry, and to be seen as a
leader who protects the company’s and the directors’ interests.

Until she pressed her assistant

about the rumors of bribery, the
CEO had no direct knowledge and
probably no fiduciary obligations.

Along with duty, Cheryl must consider the potential costs and benefits
of an inquiry. A wide-ranging corporate investigation, such as that
undertaken by Merck, can be very expensive. However, a focused,
proactive investigation by an experienced law firm ultimately can be
cost-effective and let the company get ahead of the problem. In the
process of conducting investigations, my firm has uncovered gaps in
clients’ corporate procedures, fixed them before they became widely
known, and persuaded government agencies to forgo or limit
enforcement action against the clients.

The issues of duty and cost merge when you contemplate the
possibilities of civil and criminal liability under the Sarbanes-Oxley Act
and the Foreign Corrupt Practices Act. FCPA enforcement actions are
becoming much more common, and the financial consequences more
severe. For example, in FCPA bribery cases in the oil industry this year,
Baker Hughes paid a settlement of $44 million, and Vetco Gray was
fined $26 million. Increasingly, companies, directors, and officers are
also facing follow-on civil plaintiff actions when the firms fail to disclose
material facts in compliance with the law; insurance policies for
directors and officers may not cover fines and penalties stemming from
these civil lawsuits. Interestingly, 17 of 20 recent FCPA enforcement
actions commenced because companies voluntarily disclosed their
internal investigations to the Department of Justice or the SEC,
probably in response to greater liability exposure under Sarbanes-Oxley.
In 2006, Schnitzer Steel used the voluntary approach to avoid criminal
prosecution.

At Hammond or any other firm, the option for voluntary disclosure

should influence how a corporate investigation is structured and
conducted, and how internal audit and compliance programs are
developed. Periodic, ongoing training by experienced legal counsel also
can help directors and officers to prepare for and face their next crisis. In
short, good management of the process leads to good corporate
governance.

William J. Teuber, Jr. (vicechairman@emc.com) is the vice chairman

of EMC, based in Hopkinton, Massachusetts. He served as the firm’s
chief financial officer from 1997 to 2006.

Cheryl Tobin had concerns about possible corruption at Hammond

while she was at Boeing, and she should have satisfied herself on that
point before accepting her new position. She did not, and now she
cannot very well stick her head in the sand.

Rather than taking matters entirely into her own hands, however, she
should immediately communicate her concern to the chairman of the
board. Given that he has just gone through the process of recruiting her
and must have selected her over Hank Bodine, he and Cheryl should
have a good working relationship. So it would be natural for Cheryl to
pick up the phone, disclose what she has heard, and ask for advice on a
course of action that will get to the facts but protect the company as
much as possible.

If I were the chairman and got that call from the new CEO, I would not
immediately inform the full board, given the facts in this case. After
considering Cheryl’s information, I might help her devise a few well-
phrased questions for the CFO, whose answers could give her comfort or
create additional concerns. Depending on the CFO’s response, it might
be appropriate to ask Hammond’s internal audit organization to gather
more information. If, on further investigation, the matter did indeed
seem serious and warranted further follow-up, I might put together a
very small board committee to provide Cheryl with the assistance that a
new CEO who is already drinking from a fire hose, so to speak, might
need.

The special committee probably would call on an external lawyer, like

the one Cheryl contacts at the end of the case, given that internal
counsel might be compromised. Should that process start, I would
advise Cheryl to stop digging for dirt herself. She needs to be running
the day-to-day business and cannot afford to be consumed with an
investigation. An outside firm—better suited to separating whispers and
innuendo from solid facts—would ultimately advise Hammond whether
disclosure is required.

I would advise the CEO to stop

digging for dirt herself. She needs
to be running the day-to-day
business and cannot afford to be
consumed with an investigation.

Cheryl’s failure to take this sensible approach is unfortunate because

she otherwise appears to have the makings of a good leader. In a
situation where someone else might be tempted to let sleeping dogs lie,
she has the courage to probe for the truth. When her gut tells her she’s
being stonewalled by members of her new management team, she takes
note. To be sure, trusting your gut exclusively is not always the key to
great decision making; it’s usually better to pursue the facts, assess their
implications as objectively as possible, and then use your intuition. Very
few people, however, get to be CEO without good instincts to guide them
through periods of uncertainty.

It is Cheryl’s choice to act as a lone ranger that is the red flag. If I were
Hammond’s chairman, I would be upset to later discover that something
as significant as a possible bribery scandal was not brought to my
attention. When I did find out, I would remind Cheryl that the board is
there to provide oversight and guidance to senior management. No CEO
—let alone a brand new one—is expected to figure out everything on his
or her own. More pointedly, I would remind Cheryl that a CEO serves at
the discretion of the board. After all, if she can’t trust them, there will be
bigger problems to come. Cheryl needs to ask herself whether she’s with
Read more on Cross-cultural
the right company, and the chairman needs to ask himself whether he
management or related topics
has hired the right CEO. Business ethics and Crisis
management
A version of this article appeared in the October 2007 issue of Harvard Business Review.

Joseph Finder (joe@josephfinder.com) is an

JF award-winning writer of best-selling corporate

thrillers such as Killer Instinct, Company Man,
and Paranoia. This fictional case is a prequel to
his latest novel, Power Play (St. Martin’s Press,
2007).

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