10 Questions to Operationalizing Compliance

Thomas Fox - Compliance Evangelist

A Harvard Business Review (HBR) article, entitled “Does Management Really Work? by Nicholas Bloom, Raffaella Sadun and John Van Reenen, provided some succinct advice about what a business can do to improve its management practices. I found it to be an excellent way for a Chief Compliance Officer (CCO) or compliance practitioner to consider the operationalization of a corporate compliance program.

The authors tested three essential practices which they believe can address even the most complex global problems. The three principles which they considered to be the essentials of good management are:

  • Targets: Does the organization support long term goals with tough but achievable short-term performance benchmarks?
  • Incentives: Does the organization reward high performers with promotions and bonuses while retraining or moving underperformers?
  • Monitoring: Does the organization rigorously collect and analyze performance data to identify opportunities for improvement?

Another way to consider these three concepts is around operationalization. Based upon this article I have developed 10 questions which you might want to put use as a starting point for operationalizing your compliance initiatives going forward. I would challenge you to think about some of the answers to these questions in the context of your compliance program.

  1. Interconnectedness of Targets – How are compliance goals cascaded down to individual workers? Everyone recognizes the importance of ‘tone-at-the-top’ as it is enshrined in every description of a best practices compliance program. However, operationalizing compliance means moving towards an appropriate tone in the middle and at the bottom. As stated in the Department of Justice (DOJ) Evaluation of Corporate Compliance Programs (Evaluation), under Prong 1, “How have senior leaders, through their words and actions, encouraged or discouraged the type of misconduct in question? What concrete actions have they taken to demonstrate leadership in the company’s compliance and remediation efforts? How does the company monitor its senior leadership’s behavior? How has senior leadership modelled proper behavior to subordinates?”
  2. Clarity and Comparability of Goals – Does anyone complain that your compliance targets are too complex? Certainly the initial role out of a compliance program can be quite a large undertaking. Perhaps another approach might be to focus on high risk areas and remediate them by rolling out initiatives to manage those risks first and then move to other areas. Many companies have reviewed and remedied the third party sales side of their business but are only now looking at the Supply Chain or Procurement side of the equation. If you work on one such problem at a time, it can help move the overall process forward in a more orderly fashion.
  3. Consequence Management – How do you deal with repeated compliance failures in a specific business segment or compliance program area? This is certainly one question that you would want to consider carefully. Do you have problems with one business unit or one geographic area from the compliance perspective? Are gifts in China, for example, an ongoing issue for your company? What about travel and entertainment? Consider this carefully as the DOJ asks the following about accountability in the Evaluation, “What disciplinary actions did the company take in response to the misconduct and when did they occur? Were managers held accountable for misconduct that occurred under their supervision? Did the company’s response consider disciplinary actions for supervisors’ failure in oversight? What is the company’s record (e.g., number and types of disciplinary actions) on employee discipline relating to the type(s) of conduct at issue?”
  4. Instilling a Mind-Set – How does your company show that attracting and developing talent who will engage in ethical business conduct is a top priority? This is a key part of operationalizing your compliance program and one where your Human Resources (HR) Department should take the lead. If top management will make a commitment to this, you should work to create the appropriate mind-set of doing business the right way throughout your organization.
  5. Removing Poor Performers – How long is compliance underperforming tolerated? The DOJ asks in the Evaluation, “Has the company ever terminated or otherwise disciplined anyone (reduced or eliminated bonuses, issued a warning letter, etc.) for the type of misconduct at issue?” I think that many companies would clearly say that they will discipline, up to and including discharge, any employee who engages in practices that violate the Foreign Corrupt Practices Act (FCPA). But this question drills deeper and forces a more rigorous analysis on not just FCPA failures by employees but poor ethical choices which may be less than full FCPA violations.
  6. Unique Employee Value Proposition – What makes it distinctive to work at your company? What is the culture of your organization? Is it to do business ethically or simply make your numbers no matter how unrealistic they are aka Wells Fargo? More pointedly, how can your compliance challenges be turned into business leadership opportunities? Ethisphere annually shows that its top list of the Most Ethical Companies out performs the Standard & Poor (S&P) 500. If you more fully operationalize your compliance program into your company, it could well make your business not only more efficient but at the end of the day, more profitable.
  7. Continuous Improvement – How do compliance programs that are not working typically get exposed and remediated? There is a difference between auditing and monitoring. Monitoring is a commitment to reviewing and detecting compliance programs in real time and then reacting quickly to remediate them. A primary goal of monitoring is to identify and address gaps in your program on a regular and consistent basis. Auditing is a more limited review that targets a specific business component, region or market sector during a particular timeframe in order to uncover and/or evaluate certain risks, particularly as seen in financial records. A robust program should include separate functions for auditing and monitoring. While unique in protocol, the two functions are related and can operate in tandem. Monitoring activities can sometimes lead to audits. For example, if you notice a trend of suspicious payments in recent monitoring reports from a country in the Far East, it may be time to conduct an audit of those operations to further investigate the issue.
  8. Performance Tracking – What key compliance indicators do you use for compliance tracking? What metrics have you developed around the operationalization of compliance. A good starting point can be with your hotline or helpline. What can you determine from the calls or reports submitted through these systems? What if you have not had any reports for several years, what should that be telling you about your communication to your employee base? Or does it mean that people have not been properly and effectively trained that a hotline or helpline exists and is available for their use or, more ominously, are afraid to make any reports for fear of retaliation or even losing their jobs? This is certainly something you should consider, whichever way the metrics are going for your company.
  9. Root Cause – For a given compliance problem, how do you identify the root cause? The DOJ asked in Root Cause Analysis – “What is the company’s root cause analysis of the misconduct at issue? What systemic issues were identified? Who in the company was involved in making the analysis?”Clearly the reason is that if you do not know what the cause of a problem is, you cannot successfully work towards remedying that problem. This does not simply mean firing any persons involved in a potential FCPA violation. You need to dig down and found out what allowed this issue to arise. I once heard that the difference between Japanese and American post-incident investigations is that in the US there is an attempt to assess blame, conversely in Japan there is an attempt to find a solution to the problem. This is the approach that I believe compliance practitioners should take, to try and find a solution by determining the root cause of a compliance failure.
  10. Retaining – What are you doing to retain your top employees from the compliance perspective? This is not a question that is typically asked in the compliance department, however it fully encapsulates the entire concept of operationalization. Have you considered what your company is doing to retain, promote and take to senior management those employees who do business in an ethical manner and in compliance with your company Code of Conduct?

I found the article to be very useful when applied to the compliance practitioner by not only using the triumvirate of targets, incentives and monitoring as a management practices but also the questions that the authors posed in the context of your company’s own compliance program. Compliance practitioners continually face the challenge of keeping up with the ever-evolving compliance best practices with little or no budget increase. By asking yourself and of your compliance program these questions you may create a road map to more fully operationalize your compliance regime.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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Thomas Fox - Compliance Evangelist

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