A “moral hazard” moment for the Department of Justice?

Last week Deputy Attorney General Lisa Monaco spoke at an ABA conference on the federal prosecution of corporations. Among the new or enhanced policies in this area that she addressed was promoting the use of incentives in compliance programs.

“Our goal is simple: to shift the burden of corporate wrongdoing away from shareholders, who frequently play no role in the misconduct, onto those directly responsible. We intend to encourage companies who do not already factor compliance into compensation to retool their programs and get ahead of the curve.”

This and other recent Justice Department speeches represent a major development for the C&E world. 

But whether it lives up to its promise may require  planting deep roots in developing and implementing the Justice’s Department’s compensation-related  expectations. This won’t be easy. To succeed it may be useful to apply a “moral hazard” framework.

By way of background, “moral hazard” exists where there is a misalignment of incentives between those with a capacity to create risks and those likely to bear the costs of such risks.  It is precisely what Monaco is concerned about.

What would such an approach entail?

First and foremost is risk assessment.  The risk assessment component of moral hazard should include financial incentives of the sort, (e.g., salary, bonus, etc.) likely to be reviewed by Justice. This is pretty clear cut – at least in theory.

Second, the risk assessment should also include non-financial moral hazard incentives, including reputational benefits. It is obviously tricky but important, at least at some companies.

Third, key personnel should be trained on identifying and addressing moral hazards. Included here are HR, finance, risk, law and various members of management.  This can be done as part of broader training.

Fourth, audit and C&E should develop procedures for assessing compliance in this area. Included here are questions in culture surveys.

Fifth, to the extent possible personnel evaluations should include moral hazard risk. But for some companies this might be a bridge too far.

Indeed, generally I am not saying that  all organizations need to engage in a full- fledged version of each of these steps. That would indeed be overkill for many. But all organizations should at least consider generally what their moral hazard C&E needs are and should respond appropriately.

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