Transcript No Slide Title

Conference on Moral Imagination
Compliance Programs as a Framework for
Preventing and Detecting Employee
Misconduct
Vickie L. McCormick
Special Counsel and Consultant
612.204.4156
[email protected]
Compliance Program Overview
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1991 Federal Organizational Sentencing Guidelines
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New (in 1991) guidelines for financial penalties when
sentencing organizations
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Organizations can’t go to jail, so penalties need to be financial
Sledgehammer and Carrot
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Significant financial penalties for misconduct
If organization had “effective” compliance program at the time
of misconduct, penalties could be reduced – lower fines.
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Recognized that organizations can not be fully accountable for all
of the misconduct of its employees and agents
 Compliance program evidences organization’s efforts to
prevent misconduct and should be recognized by lower
penalties.
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Compliance Program Elements
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Sentencing guidelines identified 7 elements of
effective compliance program.
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The compliance program elements represent good business
practices that well run organizations would have in place:
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Oversight & Delegation
Code of Conduct and Other Policies
Creating Awareness
Assessing Compliance
Reporting Mechanism
Response & Prevention
Enforcement & Discipline
See non-presentation slides for detailed review of
compliance program elements.
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Similarities of Compliance Program Elements to
Findings and Recommendations in Governance
and Operational Governance Literature
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Fama and Jensen
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Kinney
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Internal Controls = Policies + Compliance Assessments
Daft & Macintosh
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Mutual monitoring, accounting and budgeting = Compliance
Assessments
“Management Control” = Compliance Assessments +
Response and Prevention
Leatherwood and Spector
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Enforcement and Discipline
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Study Findings Alignment with Compliance
Program Elements
Compliance Program
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Oversight & Delegation
Study Hypotheses
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Code of Conduct and Other Policies
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Creating Awareness
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Compliance Assessments
Response and Prevention
Enforcement and Discipline
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Reporting Mechanisms
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Governance structure and
compensation
Clear policies and procedures (#2)
Strong and comprehensive code of
conduct (#3)
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Formal and informal communication
opportunities (## 4 & 5)
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Formal and informal communication
opportunities (## 4 & 5)
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Study Supports Effectiveness of Compliance
Program in Preventing Misconduct
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Proving “effectiveness” of compliance programs
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Limited empirical evidence to date
Schnatterly study supports the intuitive assumption that compliance
programs can help to prevent employee misconduct
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Or, at least those elements of the compliance program for which there
is a corresponding finding
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All of the supported hypotheses fit within one of the 7 elements of a
compliance program
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The 7 elements compliance program structure
provides a framework for organizations to
implement the strategies supported in the study
that help prevent and detect employee misconduct
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Including Values and Ethics
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Employee Perception -- Arthur Andersen Study
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The irony of referring to an Arthur Andersen study is recognized
Key Findings:
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Values-driven program had the most positive effect on all seven
outcomes:
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lower observed unethical conduct,
stronger employee commitment, and
a stronger belief that it’s okay to deliver bad news to management.
Perception that ethics and compliance program exists only to protect
the reputation of top management may be more harmful than having
no program at all
Organizational culture issues matter more than the formal
characteristics of an ethics and compliance program.
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Employee Perception: Program Success Factors
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Leadership
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Consistency between words and actions
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Fair treatment is one of the most important variables in predicting effectiveness. To
employees ethics means how the organization treats them and their co-workers
Open discussion of ethics in the organization
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Employees perceive management “practices what it preaches”
Fairness
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Employees perceive executives care about ethics and values as much as the bottom
line
Open discussion about ethics and values and integration of ethics and values into
business decision-making
Perception that ethical behavior is rewarded
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Perception of rewards of ethical behavior has greater influence on program
effectiveness than punishing unethical behavior
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Effect of Ethical Business Culture on Loyalty
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Customer loyalty when perceive company to be highly ethical
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If highly ethical
76% strong loyalty
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If not highly ethical
0% strong loyalty
Employee loyalty when perceive company to be highly ethical
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If highly ethical
95% strong loyalty
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If not highly ethical
16% strong loyalty
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Benefits of Ethics & Compliance Programs
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Maintain reputation
Stock value
Attract high quality board directors
Employee and customer loyalty
Save $$ - No fines, no attorneys
fees, no lost/delayed opportunities.
Save time – No disruption by
government investigation or
litigation
Avoid government compliance plan
Avoid “perp walk” by executives
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Compliance Programs
What & How
Oversight & Delegation
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Structure
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Board of Directors
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Senior Management Committee
Ethics/Compliance Officer
Regular Reporting
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Audit and/or Compliance Committee
Metrics regarding risk areas and key impact areas
Delegation
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Background checking of employees, agents and contractors
Question(s) on employment application
Job description and performance evaluations
Performance bonuses
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Code of Conduct & Other Policies
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Code of Conduct
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Emphasize ethics and values – not just rules
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Can’t have a rule for every situation, need to have ethical framework employees
can apply to situations without clear rules
Employee resources, not just a rule book
Comprehensive
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Address wide array of issues faced by employees
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Accuracy of company records; business courtesies; protecting and using company
assets; conflicts of interest; employee relations; government customers; government
investigations and interviews; health, safety and security; international business
practices; media contact and communication; political and community activities;
property rights of others
Relevant – real life examples
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Q&As that reflect the types of situations employees will face
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Reading level
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Resource for questions and clarification
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Code of Conduct & Other Policies
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Other Policies
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Multi-tiered approach
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Holding company/corporate
Subsidiaries/divisions
Departments
Cover broad areas of concern
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Don’t assume employees:
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Policies vs. procedures
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Recognize issues
Understand/know related considerations
Broad guidance vs. detailed processes
Standard format and structure
Web-based policies with links and resources
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Code of Conduct & Other Policies
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Contractors
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When are they subject to company’s Code of Conduct and/or
policies
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On-site workers
Type of services
Requirement to maintain compliance program and right to audit
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Contractual provisions, i.e., Ethics and Compliance Attachment to all
contractor agreements.
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Creating Awareness
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Employees (and contractors) can not comply unless they know
what the expectations are
Types of Awareness Initiatives
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Website
Newsletter articles
Emails
Posters in commons areas
New employee orientation
Training programs
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Classroom
Self-study
Web-based
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Compliance Assessments
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Monitoring
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Regularly scheduled and ad hoc internal review to assess
compliance with operating or other standards.
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Often part of quality processes
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Not specifically directed to compliance
Scheduled in frequency and amount of review
Performed under direction of department being monitored
Auditing
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Conducted by independent reviewer not associated with hierarchy
of audited area
Attorney/Client Privilege?
Annual planning
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Compliance Assessments
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Exit Interviews
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Employees who resign
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All Managers above a certain grade level
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Question of reliability of information from employees involuntarily
terminated
Most likely to have information that could represent non-compliance
Reduce likelihood they become whistleblowers
Ensure all allegations are investigated and resolved.
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Reporting Mechanism
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A mechanism, i.e., hotline, that employees can utilize to notify
the organization’s management about possible misconduct.
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Ability to make anonymous reports is important feature.
Operational Considerations
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Visibility
Credibility
Privacy and anonymity
Responsiveness
Non-retaliation
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Reporting Mechanism
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Benefits
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Reduce litigation and likelihood of whistleblowers
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Promote compliance
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If the manager doesn’t, the employee has another avenue
Boost morale
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Sense that others are watching and could report may help employees
walk away from the opportunistic non-compliance
Encourage managers to deal constructively with complaints
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If employees feel like they have a credible and reliable avenue to voice
complaints, less likely they will seek other avenues
Organization seems to be good and fair place to work
Provides feedback on how policies are working
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Response & Prevention
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Identify and fix it – don’t hide it
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Cover-ups worse than original offense
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Always respond to allegations of misconduct
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Watergate
Iran-contra
Lewinskygate
Investigation is frequent response
Fixing and Preventing – Corrective Action Plans
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Fix current problem
Improve controls to avoid problem in the future
Establish accountability and responsibility
Audit implementation and effect
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Enforcement & Discipline
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Goal is to minimize need for discipline by avoiding misconduct
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Discipline should be uniformly and consistently applied
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Inconsistent discipline affects employees’ perceptions and the
credibility of the Ethics and Compliance Program
Tracking disciplinary action for reporting to senior management
and board and to ensure uniformity and consistency
Public disclosures regarding disciplinary actions?
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