Compliance risk – and mitigation – at the top

 

Many years ago, the CEO of a client company told me that he wanted to fire another corporate officer there. I asked him what basis he had for this contemplated action and he said it was that the officer had failed to take mandatory compliance training. I responded by asking if he – the CEO – had taken the training, to which he replied (without a trace of irony)  that he had not.

In recent months, the unprecedented sexual misconduct allegations against (among others) high ranking officials in prominent businesses has brought unprecedented attention to the need to prevent and detect such wrongdoing using high-level solutions. For instance, writing recently in the Harvard Law School corporate governance blog , Subodh Mishra, Executive Director at Institutional Shareholder Services, Inc., identifies the following five components of an effective sexual misconduct risk management policy:

– Sexual misconduct risk is specifically enumerated and oversight assigned to a board committee.

– The board has expertise in workplace and employee issues.

– Material penalties are in place for perpetrators and abettors.

– Executive compensation structures—at a minimum—contain incentives for creating a safe and equitable workplace.

– The company models the behavior it seeks to promote.

These seem like generally sound observations, but the point of my post is not to add to the conversation on this particular area of risk but rather to suggest that ideas of this sort can and should be applied to compliance risks more broadly.

Certainly, assigning  a board-level committee compliance  responsibility with an emphasis on risks (such as corruption or antitrust ones) at the top, would be a sound measure generally for companies to take.  And the board having expertise regarding compliance issues is compelling for the same reason that having such expertise in workplace/employment issues is – though for both areas expertise can (in my view) sometimes be provided by access to an outsider adviser rather than appointment to a seat on the board.

Moreover, I certainly think that the emphasis on penalties for those engaged in misconduct is important to preventing wrongdoing of various kinds at the top, particularly the suggestion that “These policies may also be extended to any individuals that willfully concealed violations or engaged in retaliation against whistleblowers.” And, on the other side of the coin, reflecting compliance success generally in executive compensation structure makes sense just as it does for promoting diversity (part of Mishra’s recommendations), although doing so with the former may be more methodologically challenging than it is with the latter. Still, it can be done.

Finally, the point about modeling behavior is every bit as important to promoting compliance generally as it is to preventing harassment and discrimination in particular. For a board committee overseeing compliance at the top, this aspect of effective risk management has implications for a wide range of conduct – both substantive (e.g., how conflicts of interest are dealt with by senior managers) and procedural (such as ensuring that managers take the required training, to go back to the example at the top of this post).

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