The proliferation of electronic data is astounding. Studies regularly tell us that more than 90% of all business records are now created in electronic format only, and that less than one-third of all of this data is ever converted to paper. The “evolution” of company records from a paper to electronic format is the most remarkable change in communications since Guttenberg invented the printing press. We know from experience that important paper records are likely to survive even if a company has no effective record-retention program. But the same is not true for electronic records. Electronic data can be more easily deleted or lost -- computers are replaced, hard drives crash, and back-up tapes are accidentally recorded over or lost. This means there is a greater need to create an electronic-record retention program; a program that saves company records needed for business, tax and legal purposes.
Equally important is the need to develop a program that provides for the regular and routine destruction of electronic data that does not serve any legal or business reasons. Your employees exchange dozens of e-mails a day to convey important and essential business information. But they also send messages to their co-workers and friends that are often trivial, reckless, or whose meaning could be easily misconstrued. These non-official employee e-mails might cause problems for the Company later if they are not routinely destroyed on a daily or near daily basis. More often than not, employee e-mails are not seen by company management until somebody wants to use those emails against the Company. By then, it is too late. In addition, if non-essential electronic data is not eliminated from your computer system on a regular basis, your systems will soon store a mountain of data, and no-one will be able to quickly locate the “useful” e-mails from the irrelevant or harmful ones. Moreover, locating and reviewing electronic communications on a case-by-case basis can consume hours and hours of human-resources time and attorney time. Much of this work -- and potential trouble for the Company -- can be prevented if a policy is developed for the routine deletion of non-essential electronic communications. Such a policy should also include rules and procedures that prevent employees from autonomously saving or destroying company-owned data.
Courts Are Punishing Companies And Their Executives For Failing To Preserve Records.
The federal courts have begun to punish companies and their executives for failing to take steps to preserve electronic data. The Courts have encountered too many cases where corporate management orders a “purge” of electronic data on the eve of litigation. To prevent this loss of potential “evidence,” the Courts now expect senior executives to issue “litigation-hold” memos to their managers and employees when a lawsuit is “reasonably anticipated.” The Courts are also sanctioning corporate officers for not issuing “litigation-hold” memos to managers and employees in order to prevent critical electronic documents from being deleted before litigation is filed by or against the Company. New court rules relating to the production of electronic data once a lawsuit is filed have created additional burdens for companies. These changes in the court’s perspective on preserving electronic data before litigation is filed, and the Court’s new rules on the turn-over of this data after a lawsuit is filed, make a record-retention policy essential.
J-SOX Takes Effect in April of 2008.
In addition, the law known in Japan as “J-SOX,” inspired by the U.S. law commonly known as Sarbanes- Oxley (“S-OX”), will take effect in Japan in April of 2008. This law impacts the American subsidiaries of companies that are “listed” in Japan (that is, publicly-traded companies). J-SOX, which is actually a section of a law known as the Financial Product Transaction Act, requires listed companies to improve internal audit and internal control systems. This has been interpreted to mean that a “uniform” system of control is required; a system that allows the Japanese parent to control the systems of the subsidiary to make certain that subsidiaries have the necessary audit and control systems in place. Management of the Japanese parent must also prepare an annual “Internal Control Report” which confirms compliance with the Company’s internal controls. To some degree, these requirements will have to be met by the American subsidiaries, as well. In addition, J-SOX requires listed companies to preserve all records relating to “internal control” for five (5) years. It remains to be seen what records will constitute “internal control” records for purposes of J-SOX. But in all likelihood, even draft accounting and financial reports and e-mails regarding the creation of such reports and internal audit documents will fall into the category of “internal control” records that must be preserved. Therefore, compliance with J-SOX requires the development of a record-retention policy by the subsidiaries of listed companies.
The Need to Be “Green.”
Finally, there is a growing awareness for companies to adopt “green policies.” To be a good corporate citizen, companies need to develop document-retention and destruction policies that preserve energy and natural resources. Such a policy can include limiting the printing of e-mails or other electronic data, as well as converting your billing practice to an electronic-invoice-only format. Being “green” is becoming a priority among companies, and a practical record-retention policy can help to conserve resources and energy.
For all of the above reasons, companies that do not have a document-retention policy, need to develop one now. The initial challenge, of course, is recognizing that developing a document-retention program is a complicated task that will vary from industry to industry and from company to company.