Continuing with my list theme for the week, it is important to remind everyone that a culture of compliance begins with the board of directors, filters to the CEO who commits to promoting ethics and compliance in the company, and finishes with a fabric of ethics and compliance that is built on trust and integrity.
I recognize I have said more than a mouthful but it is important to keep everything in perspective. In the absence of a board committed to ethics and compliance, a company’s culture is doomed to die on the vine and increase operational risks for the company. CCOs know this and sometimes they keep plugging along, knowing that they are likely to run into frustrating brick walls.
When it comes to corporate boards, there are several important issues that I commonly observe in the ethics and compliance space. These include:
1. Lack of Board Education and Training: Too often, CEOs and CCOs are unwilling to tackle the ethics and compliance issues head on and educate the board on the nuances to some very important risks. Instead, they often sit back and rely on the board members’ own experiences in other companies or in prior senior leadership positions to push the board to understand and face important risks. For example, I often observe that one board member will educate the other board members based on their own experiences as to certain risks. By failing to face the issues head on, the CEO and CCOs usually miss an important opportunity to outline the risks and the importance of compliance strategies.
2. Audit Committee Obsession with Financials: The Audit Committees of companies have an important duty under Sarbanes-Oxley to ensure the accuracy of company financials, and to maintaining a robust system of internal controls. It is a very important responsibility and one that should continue even when the Audit Committee has responsibility for the company’s compliance program. However, the priorities are usually out of skew, meaning 80 percent of the Audit Committee’s efforts and attention are focused on financials without proper regard for the importance of ethics and compliance. There is no magic formula for success in this area – some companies have established a separate Risk and Compliance Committee, but that does not guarantee success – the issue always boils down to one question – does the company’s board understand the significance of ethics and compliance to the overall success of the company?
3. Requiring Candid and In-Depth CCO Reports: Corporate boards often like to hear “happy talk” reports and CCOs take their cues from the boards’ expectations. If the board is committed to an honest reporting system, one that fleshes out the strengths and weaknesses of ongoing compliance, the company and the CCO will step up to the challenge. Corporate boards that insist on a real and candid dialogue from the CCO are far and few between – hopefully, this will change as corporate governance systems are being challenged.
4. Improving Quality of Compliance Information: Board members read materials provided to them in advance of a board meeting. CCOs are often too busy to give careful consideration to the information they provide the board on a regular basis, and most importantly, prior to a board meeting. CCOs have to look for opportunities to communicate with the board as a way to educate and gain support from the board. CCOs often fear that negative information about the company’s compliance program reflects poorly on them and jeopardizes their position in the company. To the contrary, a fair and honest written report prior to the board meeting is critical to gaining the board’s understanding and support on important issues.
5. Build Personal Alliances: A company treats the corporate board like “superstars” and are reluctant to humanize individual board members. What a mistake. CCOs have to reach out o the board members, seek time with them on an informal basis for coffee, lunch or regular conversations. People are people, and they put their pants or dresses on in the same way that the CCO does. There is no need to idolize or treat board members as high and mighty – they are people too and they have the same experiences as CCOs. It is important for CCOs to build personal relationships with the board members to facilitate informal communications and enhance relationships.