conference on moral imagination compliance programs as a framework for preventing and detecting...
TRANSCRIPT
Conference on Moral Imagination
Compliance Programs as a Framework for Preventing and Detecting Employee
Misconduct
Vickie L. McCormickSpecial Counsel and Consultant
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.
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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.
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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
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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)
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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
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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
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.
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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.
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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
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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
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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
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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?