conference on moral imagination compliance programs as a framework for preventing and detecting...

Conference on Moral Imagination

Compliance Programs as a Framework for Preventing and Detecting Employee

Misconduct

Vickie L. McCormickSpecial Counsel and Consultant

[email protected]

May 9, 2003 Conference on Moral Imagination 2

Compliance Program Overview

1991 Federal Organizational Sentencing Guidelines New (in 1991) guidelines for financial penalties when

sentencing organizations Organizations can’t go to jail, so penalties need to be financial

Sledgehammer and Carrot Significant financial penalties for misconduct If organization had “effective” compliance program at the time

of misconduct, penalties could be reduced – lower fines. 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.


Compliance Program Elements

Sentencing guidelines identified 7 elements of effective compliance program.

The compliance program elements represent good business practices that well run organizations would have in place:

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.


Similarities of Compliance Program Elements to Findings and Recommendations in Governance and Operational Governance Literature

Fama and Jensen Mutual monitoring, accounting and budgeting =

Compliance Assessments Kinney

Internal Controls = Policies + Compliance Assessments

Daft & Macintosh “Management Control” = Compliance Assessments

+ Response and Prevention Leatherwood and Spector

Enforcement and Discipline


Study Findings Alignment with Compliance Program ElementsCompliance Program Oversight & Delegation

Code of Conduct and Other Policies

Creating Awareness

Compliance Assessments Response and Prevention Enforcement and Discipline

Reporting Mechanisms

Study Hypotheses Governance structure and

compensation

Clear policies and procedures (#2) Strong and comprehensive code of

conduct (#3)

Formal and informal communication opportunities (## 4 & 5)

Formal and informal communication opportunities (## 4 & 5)


Study Supports Effectiveness of Compliance Program in Preventing Misconduct

Proving “effectiveness” of compliance programs Limited empirical evidence to date Schnatterly study supports the intuitive assumption that

compliance programs can help to prevent employee misconduct

Or, at least those elements of the compliance program for which there is a corresponding finding

All of the supported hypotheses fit within one of the 7 elements of a compliance program


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


Including Values and Ethics

Employee Perception -- Arthur Andersen Study The irony of referring to an Arthur Andersen study is

recognized Key Findings:

Values-driven program had the most positive effect on all seven outcomes:

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.


Employee Perception: Program Success Factors

Leadership Employees perceive executives care about ethics and values as much as

the bottom line

Consistency between words and actions Employees perceive management “practices what it preaches”

Fairness 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 Open discussion about ethics and values and integration of ethics and

values into business decision-making

Perception that ethical behavior is rewarded Perception of rewards of ethical behavior has greater influence on program

effectiveness than punishing unethical behavior


Effect of Ethical Business Culture on Loyalty

Customer loyalty when perceive company to be highly ethical

If highly ethical 76% strong loyalty

If not highly ethical 0% strong loyalty

Employee loyalty when perceive company to be highly ethical

If highly ethical 95% strong loyalty

If not highly ethical 16% strong loyalty


Benefits of Ethics & Compliance Programs

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

Compliance ProgramsWhat & How


Oversight & Delegation

Structure Board of Directors

Audit and/or Compliance Committee Senior Management Committee Ethics/Compliance Officer

Regular Reporting Metrics regarding risk areas and key impact areas

Delegation Background checking of employees, agents and contractors Question(s) on employment application Job description and performance evaluations Performance bonuses


Code of Conduct & Other Policies Code of Conduct

Emphasize ethics and values – not just rules 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 Address wide array of issues faced by employees

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 Q&As that reflect the types of situations employees will face

Reading level

Resource for questions and clarification


Code of Conduct & Other Policies

Other Policies

Multi-tiered approach Holding company/corporate Subsidiaries/divisions Departments

Cover broad areas of concern Don’t assume employees:

Recognize issues Understand/know related considerations

Policies vs. procedures Broad guidance vs. detailed processes Standard format and structure

Web-based policies with links and resources


Code of Conduct & Other Policies

Contractors

When are they subject to company’s Code of Conduct and/or policies

On-site workers Type of services

Requirement to maintain compliance program and right to audit

Contractual provisions, i.e., Ethics and Compliance Attachment to all contractor agreements.


Creating Awareness

Employees (and contractors) can not comply unless they know what the expectations are

Types of Awareness Initiatives Website Newsletter articles Emails Posters in commons areas New employee orientation Training programs

Classroom Self-study Web-based


Compliance Assessments

Monitoring Regularly scheduled and ad hoc internal review to assess

compliance with operating or other standards. Often part of quality processes

Not specifically directed to compliance Scheduled in frequency and amount of review Performed under direction of department being monitored

Auditing Conducted by independent reviewer not associated with

hierarchy of audited area Attorney/Client Privilege? Annual planning


Compliance Assessments

Exit Interviews Employees who resign

Question of reliability of information from employees involuntarily terminated

All Managers above a certain grade level Most likely to have information that could represent non-

compliance Reduce likelihood they become whistleblowers

Ensure all allegations are investigated and resolved.


Reporting Mechanism

A mechanism, i.e., hotline, that employees can utilize to notify the organization’s management about possible misconduct.

Ability to make anonymous reports is important feature.

Operational Considerations Visibility Credibility Privacy and anonymity Responsiveness Non-retaliation


Reporting Mechanism

Benefits Reduce litigation and likelihood of whistleblowers

If employees feel like they have a credible and reliable avenue to voice complaints, less likely they will seek other avenues

Promote compliance 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

If the manager doesn’t, the employee has another avenue

Boost morale Organization seems to be good and fair place to work

Provides feedback on how policies are working


Response & Prevention

Identify and fix it – don’t hide it Cover-ups worse than original offense

Watergate Iran-contra Lewinskygate

Always respond to allegations of misconduct Investigation is frequent response

Fixing and Preventing – Corrective Action Plans Fix current problem Improve controls to avoid problem in the future Establish accountability and responsibility Audit implementation and effect


Enforcement & Discipline

Goal is to minimize need for discipline by avoiding misconduct

Discipline should be uniformly and consistently applied 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?

conference on moral imagination compliance programs as a framework for preventing and detecting...

Documents

compliance programconference

valuesdriven program

moral imaginationthe

lower penalties

recognizedkey findings

time of misconduct

employee misconductconference

employee misconductvickie