Essential Requirements For An “Effective” Ethics and Compliance Program

This article was republished with permission from Michael Volkov’s blog, Corruption, Crime & Compliance

A client recently reminded me, “Mike, it is not just an ethics and compliance program, it is an effective ethics and compliance program.”  I always learn from my clients, and this was an important reminder for me, to focus on the “effective.”

All of this came together in a recent LRN report on compliance effectiveness.  The report, which is available here, is an important  reminder for every compliance officer; give this presentation to your Board and every senior executive at your company.  Why?  The LRN report confirms what we have said for years (and will continue to say) about effective ethics and compliance programs.

Companies in which the chief compliance officers are independent and empowered have better-performing ethics and compliance programs.  That makes sense.  The CCO does not report to the general counsel, but has independent status in the company, reports to the CEO and has direct access to the Board of Directors, if necessary.

This finding confirms what we already know: an independent and empowered CCO has the ability to assign resources, report to appropriate senior managers and coordinate the design and implementation of important controls.  More importantly, the elevation of the CCO makes an important statement by itself: the company is committed to ethics and compliance.

Donna Boehme is the staunchest promoter of CCO independence, and she should be gratified to see yet another study confirming what she has been advocating for years: elevate and empower your CCO.

The LRN study has more good news: companies that are committed to creating “tone in the middle,” not just “tone at the top,” have more effective ethics and compliance programs.  We all know that middle management support is critical to any ethics and compliance program.

Companies that focus on culture and business value have more effective ethics and compliance programs.  This is the wave of the future.  Ethics and compliance programs will soon see a transformation in the industry: clear values and principles will govern business conduct and detailed policies and controls will take a secondary place in the compliance hierarchy.

For now, CCOs should enjoy the ride.  They are on the rise, but they better see the trend: companies want clear and simple messages. Values and principles give companies important guideposts.

In the years to come, CCOs will have a great challenge: rallying the company around general values and principles while ensuring sufficient attention to important policies, guidelines and internal controls.

No matter how many values and principles are promulgated, no matter how glitzy and how attractive such general statements are to the general company audience, CCOs will always have to focus on the details and specifics of how managers and employees conduct themselves and how money moves inside and outside of the company.

The LRN study also had an important finding: those companies focused on cost reduction and cash management were more likely to have “ineffective” ethics and compliance programs.  This should surprise no one.

When revenues retrench, ethics and compliance is always the first to be cut.  Why?

When survival is the priority, managers and employees are far less attentive to ethics and compliance.  In some ways, a company spiraling downward will never focus on ethics and compliance because they suffer from the traditional construct – promoting ethics and compliance is always at the expense of revenues and profits.

Nothing could be further from the truth; ethics and compliance promotes revenues and profits, but when fear is the primary motivator, humans are less apt to think and act rationally.