Korea is unique in the world with regards to the extent to which directors on a company board and chief executive officers can be held personally liable for a wide range of corporate liabilities. Considering this situation, if you don’t already have Directors & Officers (D & O) Insurance, then you need to spend some time considering how you could be liable in the event of a catastrophe - man-made or otherwise - and may want to access the risk with a professional.
Obviously, to protect the BOD as well as officers from frivolous lawsuits, including shareholder actions, a company should purchase directors and officers insurance (D&O insurance). Whether to use D&O insurance is a question that must be decided in the context of legal risk management.
Good corporate governance requires the board to be fully informed as to the major risk issues facing the company. D&O insurance may be necessary to protect the BOD as well as executive management from lawsuits stemming from fiduciary responsibilities or lack thereof.
For American companies operating in Korea this is particularly relevant. Corporate governance scandals brought about Sarbanes-Oxley Act (SOX) in the United States in 2002. SOX requires, among other things, that proper internal financial controls be established in publicly traded companies as well as whistleblower provisions and compliance policies.
In fact the U.S. laws and regulations regarding compliance requires that the board of directors (BOD) are not only trained in compliance but also has compliance oversight.
Similar measures have been passed in other jurisdictions as well. The result of SOX and other laws in other jurisdictions was to force upon the BOD the obligation of ensuring that not only proper financial controls are in place and properly maintained but that the Board be apprised of all relevant risk management process as well.
Hence, risk management processes in general must be considered by the board of directors in light of the board’s fiduciary and legal responsibilities. As director’s have a duty of care to the company, they have a duty to protect corporate assets and IP, review risk management plans, including crisis management plans and take all actions that a prudent businessman or businesswoman would take to protect the company.
The fiduciary obligation directors’ have to their respective corporations includes the duty to be fully informed and knowledgeable on major issues of risk. Whether it is compliance issues, currency risk, antitrust, or, geopolitical risk, etc., the BOD must be fully informed to make the appropriate decisions involving the management of the company.
Due to its very nature, the BOD cannot escape its fiduciary obligations with regard to understanding and approving risk management processes.
Considering the potential litigation directors might face in light of geopolitical events, such as the current situation concerning North Korea, it is prudent to consider D&O insurance. What is the status of D&O insurance in your company? Have you examined the legal risks facing your directors and CEO recently?
What happens if things fall apart or the situation dramatically deteriorates? If you haven’t addressed the situation, the wise thing to do would be to sit down with your insurance broker, if you have one, and discuss the pros and cons of such insurance policies.
Recently, Korean media reported that the Prosecutor’s Office in Korea is investigating a claim that McDonald’s Korea may have violated food safety rules based on the allegation by a family that their daughter contracted hemolytic-uremic syndrome (“hamburger disease") after consuming a hamburger at a McDonald's outlet in Pyeongtaek, Korea. This was the second claim during the same day that a McDonalds store in Korea served an uncooked meat patty.
Though McDonald's has denied responsibility, the investigation into McDonalds Korea, brings back memories of the Jack In the Box e-coli crisis that resulted in the near destruction of the Jack in the Box brand. It also highlights the issues facing food franchises caught up in an international or cross border crisis. See the following link for more info.
One of the reasons that Jack in the Box failed to handle the e-coli crisis was its failure to communicate with the press, stakeholders and yes, the public, properly. The principle focus of any crisis management strategy, especially in an international contest, is communications. All crisis management plans call for effective crisis communications, which many times are not always executed. Inadequate or failed communications lead to bad publicity, unhappy stakeholders, and potential disaster. An effective crisis communication strategy is necessary for any international crisis. It should be noted that a number of companies failed to defuse an international crisis because of poor communications. McDonalds Korea should take heed.
An ineffective crisis response caused by a failed communications strategy can significantly harm a company’s reputation, operations, and even its position in the marketplace. Whether a company survives a crisis or not is determined less by the severity of the impact than the response to the crisis. A company that responds effectively with a clear communications strategy will not only survive but find that its reputation has been enhanced. A company that does not respond with a clear communication strategy may not survive.
Look at some of the crisis in the past which were not defused properly because of a lack of attention to communication- Toyota, perhaps being one of the more recent. Though Toyota spent time and money to find out the issue surrounding the brake issue, its failure to communicate in a timely fashion lost the goodwill of many customers and hurt the brand.
An effective crisis communication strategy is necessary when dealing with an international crisis. In order to implement an effective crisis communication strategy, a number of processes must be implemented such as:
In order for McDonalds Korea to come out of the crisis in Korea unscathed, it must implement a crisis communication strategy. The “patty controversy” has not yet been properly addressed by McDonalds from a communication/PR standpoint which can lead to further reputational harm and negative financial impact. As claims of uncooked meat or even e-coli have haunted restaurants (especially hamburger or food related franchises) in the past, it is advised that regardless of the outcome, McDonalds and other franchises should have a crisis communication plan or strategy already set up and ready to implement.
Korean media has recently reported that the Prosecutor's Office in Korea is investigating a claim that McDonald's Korea may have violated food safety rules based on the allegation by a family that their daughter contracted hemolytic-uremic syndrome ( "hamburger disease") after consuming a hamburger at a McDonald's outlet in Pyeongtaek, Korea. Though McDonald's has denied responsibility, the investigation into McDonalds Korea, brings back memories of the Jack In the Box e-coli crisis that resulted in the near destruction of the Jack in the Box brand. It also highlights the issues facing companies caught up in an international or cross border crisis.
Managing an international crisis or a crisis with cross border implications can be a daunting task. Especially if it requires internal investigations to be conducted at a foreign venue or an overseas subsidiary. Conducting an investigation can be an emotion-charged, time-consuming process that requires expertise and effective planning. Are you ready to handle one? Managers and other staff who investigate sexual harassment claims in an organization or even claims involving corruption or bribes, harassment, or theft as well as other allegations should be prepared to conduct interviews and document the investigation in a proper and thorough manner.
Among the issues that add to the complexity of an international investigation are of course issues dealing with foreign laws, culture, communication, personnel security as well as data security and even differences in time. All of the issues combine to make international investigations very complex and rather daunting. For instance, who will handle the investigation? What privacy rights do employees have and what data privacy rights do they have. What laws will govern the investigation? And do the rules of attorney-client privilege and work product apply? These questions will have to be answered in order to set the stage for the investigation and to provide the framework needed for setting the ground rules of the investigation itself.
In most cases, courts will very closely scrutinize the employer’s internal investigation processes when deciding whether to find in favor of the employer or the employee. The employer will be held to a very high standard, and mistakes, slowness, inadequate documentation and other problems could make the difference between winning and losing the case. It may also decide whether a company faces criminal liability or criminal penalties.
The ultimate goal of an investigation is to enable the company’s decision-makers to resolve matters fairly and effectively. The immediate goal of an investigation is to obtain the facts. Therefore, to be effective, an investigation must be:
The investigative team involved in the investigation, if from the home office may face visa, medical and personnel safety issues that others don't face. The team may also be denied access to sensitive data that they are normally given access to back at home or they may have a hard time accessing databases that would allow them to track property ownership and court filings. These issues must also be taken into consideration when handling an international internal investigation.
To successfully handle or manage an international internal investigation as well as the international crisis itself requires a great deal of planning. The more planning that is done the easier the investigation will be.
President Moon Jae-in and his administration (the “Moon Administration”) have pledged to roll out changes to competition regulations as well as reinforce the fair trade regulatory framework in order to achieve his goal of “economic democratization”. Changes include: (i) strengthened enforcement measures that will include a stepping up of criminal enforcement, an expansion of the investigatory powers of the Korea Fair Trade Commission (the “KFTC”); (ii) stricter regulation of conglomerates (Chaebols) to ensure transparency in their corporate governance structures; and (iii) prevention of abuse of superior economic power. Though some of these measures are expected to be implemented as of this year, others are expected later. They include:
For a discussion of President Moon’s new Trade Policies that will be implemented to achieve some of the above goals please join me at the KBLA’s Corporate Governance Forum on June 30 at the Hyatt Hotel in Seoul, Korea for Retired Ambassador Seokyoung Choi’s presentation on President Moon’s Trade Policy.
Registration information is set forth in the link below:
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