Conference on Moral Imagination Compliance Programs as  a Framework for Preventing and Detecting Employee Misconduct Vicki...
Compliance Program Overview <ul><li>1991 Federal Organizational Sentencing Guidelines </li></ul><ul><ul><li>New (in 1991) ...
Compliance Program Elements <ul><li>Sentencing guidelines identified 7 elements of effective compliance program. </li></ul...
Similarities of Compliance Program Elements to Findings and Recommendations in Governance and Operational Governance Liter...
Study Findings Alignment with Compliance Program Elements <ul><li>Compliance Program </li></ul><ul><li>Oversight & Delegat...
Study Supports Effectiveness of Compliance Program in Preventing Misconduct <ul><li>Proving “effectiveness” of compliance ...
The 7 elements compliance program structure provides a framework for organizations to implement the strategies supported i...
Including Values and Ethics <ul><li>Employee Perception -- Arthur Andersen Study </li></ul><ul><ul><li>The irony of referr...
Employee Perception: Program Success Factors <ul><li>Leadership </li></ul><ul><ul><li>Employees perceive executives care a...
Effect of Ethical Business Culture on Loyalty <ul><li>Customer loyalty when perceive company to be highly ethical </li></u...
Benefits of Ethics & Compliance Programs <ul><li>Maintain reputation </li></ul><ul><li>Stock value </li></ul><ul><li>Attra...
Compliance Programs What & How
Oversight & Delegation <ul><li>Structure </li></ul><ul><ul><li>Board of Directors </li></ul></ul><ul><ul><ul><li>Audit and...
Code of Conduct & Other Policies <ul><li>Code of Conduct </li></ul><ul><ul><li>Emphasize ethics and values – not just rule...
Code of Conduct & Other Policies <ul><li>Other Policies </li></ul><ul><ul><li>Multi-tiered approach </li></ul></ul><ul><ul...
Code of Conduct & Other Policies <ul><li>Contractors </li></ul><ul><ul><li>When are they subject to company’s Code of Cond...
Creating Awareness <ul><li>Employees (and contractors) can not comply unless they know what the expectations are </li></ul...
Compliance Assessments <ul><li>Monitoring </li></ul><ul><ul><li>Regularly scheduled and ad hoc internal review to assess c...
Compliance Assessments <ul><li>Exit Interviews </li></ul><ul><ul><li>Employees who resign </li></ul></ul><ul><ul><ul><li>Q...
Reporting Mechanism <ul><li>A mechanism, i.e., hotline, that employees can utilize to notify the organization’s management...
Reporting Mechanism <ul><li>Benefits </li></ul><ul><ul><li>Reduce litigation and likelihood of whistleblowers </li></ul></...
Response & Prevention <ul><li>Identify and fix it – don’t hide it </li></ul><ul><ul><li>Cover-ups worse than original offe...
Enforcement & Discipline <ul><li>Goal is to minimize need for discipline by avoiding misconduct </li></ul><ul><li>Discipli...
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Conference on Moral Imagination Compliance Programs as a ...

  1. 1. Conference on Moral Imagination Compliance Programs as a Framework for Preventing and Detecting Employee Misconduct Vickie L. McCormick Special Counsel and Consultant 612.204.4156 [email_address]
  2. 2. Compliance Program Overview <ul><li>1991 Federal Organizational Sentencing Guidelines </li></ul><ul><ul><li>New (in 1991) guidelines for financial penalties when sentencing organizations </li></ul></ul><ul><ul><ul><li>Organizations can’t go to jail, so penalties need to be financial </li></ul></ul></ul><ul><ul><li>Sledgehammer and Carrot </li></ul></ul><ul><ul><ul><li>Significant financial penalties for misconduct </li></ul></ul></ul><ul><ul><ul><li>If organization had “effective” compliance program at the time of misconduct , penalties could be reduced – lower fines. </li></ul></ul></ul><ul><ul><ul><ul><li>Recognized that organizations can not be fully accountable for all of the misconduct of its employees and agents </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Compliance program evidences organization’s efforts to prevent misconduct and should be recognized by lower penalties. </li></ul></ul></ul></ul></ul>
  3. 3. Compliance Program Elements <ul><li>Sentencing guidelines identified 7 elements of effective compliance program. </li></ul><ul><ul><li>The compliance program elements represent good business practices that well run organizations would have in place: </li></ul></ul><ul><ul><ul><li>Oversight & Delegation </li></ul></ul></ul><ul><ul><ul><li>Code of Conduct and Other Policies </li></ul></ul></ul><ul><ul><ul><li>Creating Awareness </li></ul></ul></ul><ul><ul><ul><li>Assessing Compliance </li></ul></ul></ul><ul><ul><ul><li>Reporting Mechanism </li></ul></ul></ul><ul><ul><ul><li>Response & Prevention </li></ul></ul></ul><ul><ul><ul><li>Enforcement & Discipline </li></ul></ul></ul><ul><ul><li>See non-presentation slides for detailed review of compliance program elements. </li></ul></ul>
  4. 4. Similarities of Compliance Program Elements to Findings and Recommendations in Governance and Operational Governance Literature <ul><li>Fama and Jensen </li></ul><ul><ul><li>Mutual monitoring, accounting and budgeting = Compliance Assessments </li></ul></ul><ul><li>Kinney </li></ul><ul><ul><li>Internal Controls = Policies + Compliance Assessments </li></ul></ul><ul><li>Daft & Macintosh </li></ul><ul><ul><li>“ Management Control” = Compliance Assessments + Response and Prevention </li></ul></ul><ul><li>Leatherwood and Spector </li></ul><ul><ul><li>Enforcement and Discipline </li></ul></ul>
  5. 5. Study Findings Alignment with Compliance Program Elements <ul><li>Compliance Program </li></ul><ul><li>Oversight & Delegation </li></ul><ul><li>Code of Conduct and Other Policies </li></ul><ul><li>Creating Awareness </li></ul><ul><li>Compliance Assessments </li></ul><ul><li>Response and Prevention </li></ul><ul><li>Enforcement and Discipline </li></ul><ul><li>Reporting Mechanisms </li></ul><ul><li>Study Hypotheses </li></ul><ul><li>Governance structure and compensation </li></ul><ul><li>Clear policies and procedures (#2) </li></ul><ul><li>Strong and comprehensive code of conduct (#3) </li></ul><ul><li>Formal and informal communication opportunities (## 4 & 5) </li></ul><ul><li>Formal and informal communication opportunities (## 4 & 5) </li></ul>
  6. 6. Study Supports Effectiveness of Compliance Program in Preventing Misconduct <ul><li>Proving “effectiveness” of compliance programs </li></ul><ul><ul><li>Limited empirical evidence to date </li></ul></ul><ul><ul><li>Schnatterly study supports the intuitive assumption that compliance programs can help to prevent employee misconduct </li></ul></ul><ul><ul><ul><li>Or, at least those elements of the compliance program for which there is a corresponding finding </li></ul></ul></ul><ul><ul><ul><ul><li>All of the supported hypotheses fit within one of the 7 elements of a compliance program </li></ul></ul></ul></ul>
  7. 7. The 7 elements compliance program structure provides a framework for organizations to implement the strategies supported in the study that help prevent and detect employee misconduct
  8. 8. Including Values and Ethics <ul><li>Employee Perception -- Arthur Andersen Study </li></ul><ul><ul><li>The irony of referring to an Arthur Andersen study is recognized </li></ul></ul><ul><ul><li>Key Findings: </li></ul></ul><ul><ul><ul><li>Values-driven program had the most positive effect on all seven outcomes: </li></ul></ul></ul><ul><ul><ul><ul><li>lower observed unethical conduct, </li></ul></ul></ul></ul><ul><ul><ul><ul><li>stronger employee commitment, and </li></ul></ul></ul></ul><ul><ul><ul><ul><li>a stronger belief that it’s okay to deliver bad news to management. </li></ul></ul></ul></ul><ul><ul><ul><li>Perception that ethics and compliance program exists only to protect the reputation of top management may be more harmful than having no program at all </li></ul></ul></ul><ul><ul><ul><li>Organizational culture issues matter more than the formal characteristics of an ethics and compliance program. </li></ul></ul></ul>
  9. 9. Employee Perception: Program Success Factors <ul><li>Leadership </li></ul><ul><ul><li>Employees perceive executives care about ethics and values as much as the bottom line </li></ul></ul><ul><li>Consistency between words and actions </li></ul><ul><ul><li>Employees perceive management “practices what it preaches” </li></ul></ul><ul><li>Fairness </li></ul><ul><ul><li>Fair treatment is one of the most important variables in predicting effectiveness. To employees ethics means how the organization treats them and their co-workers </li></ul></ul><ul><li>Open discussion of ethics in the organization </li></ul><ul><ul><li>Open discussion about ethics and values and integration of ethics and values into business decision-making </li></ul></ul><ul><li>Perception that ethical behavior is rewarded </li></ul><ul><ul><li>Perception of rewards of ethical behavior has greater influence on program effectiveness than punishing unethical behavior </li></ul></ul>
  10. 10. Effect of Ethical Business Culture on Loyalty <ul><li>Customer loyalty when perceive company to be highly ethical </li></ul><ul><ul><li>If highly ethical 76% strong loyalty </li></ul></ul><ul><ul><li>If not highly ethical 0% strong loyalty </li></ul></ul><ul><li>Employee loyalty when perceive company to be highly ethical </li></ul><ul><ul><li>If highly ethical 95% strong loyalty </li></ul></ul><ul><ul><li>If not highly ethical 16% strong loyalty </li></ul></ul>
  11. 11. Benefits of Ethics & Compliance Programs <ul><li>Maintain reputation </li></ul><ul><li>Stock value </li></ul><ul><li>Attract high quality board directors </li></ul><ul><li>Employee and customer loyalty </li></ul><ul><li>Save $$ - No fines, no attorneys fees, no lost/delayed opportunities. </li></ul><ul><li>Save time – No disruption by government investigation or litigation </li></ul><ul><li>Avoid government compliance plan </li></ul><ul><li>Avoid “perp walk” by executives </li></ul>
  12. 12. Compliance Programs What & How
  13. 13. Oversight & Delegation <ul><li>Structure </li></ul><ul><ul><li>Board of Directors </li></ul></ul><ul><ul><ul><li>Audit and/or Compliance Committee </li></ul></ul></ul><ul><ul><li>Senior Management Committee </li></ul></ul><ul><ul><li>Ethics/Compliance Officer </li></ul></ul><ul><li>Regular Reporting </li></ul><ul><ul><li>Metrics regarding risk areas and key impact areas </li></ul></ul><ul><li>Delegation </li></ul><ul><ul><li>Background checking of employees, agents and contractors </li></ul></ul><ul><ul><li>Question(s) on employment application </li></ul></ul><ul><ul><li>Job description and performance evaluations </li></ul></ul><ul><ul><li>Performance bonuses </li></ul></ul>
  14. 14. Code of Conduct & Other Policies <ul><li>Code of Conduct </li></ul><ul><ul><li>Emphasize ethics and values – not just rules </li></ul></ul><ul><ul><ul><li>Can’t have a rule for every situation, need to have ethical framework employees can apply to situations without clear rules </li></ul></ul></ul><ul><ul><ul><li>Employee resources, not just a rule book </li></ul></ul></ul><ul><ul><li>Comprehensive </li></ul></ul><ul><ul><ul><li>Address wide array of issues faced by employees </li></ul></ul></ul><ul><ul><ul><ul><li>Accuracy of company records; business courtesies; protecting and using company assets; conflicts of interest; employee relations; government customers; government investigations and interviews; health, safety and security; international business practices; media contact and communication; political and community activities; property rights of others </li></ul></ul></ul></ul><ul><ul><li>Relevant – real life examples </li></ul></ul><ul><ul><ul><li>Q&As that reflect the types of situations employees will face </li></ul></ul></ul><ul><ul><li>Reading level </li></ul></ul><ul><ul><li>Resource for questions and clarification </li></ul></ul>
  15. 15. Code of Conduct & Other Policies <ul><li>Other Policies </li></ul><ul><ul><li>Multi-tiered approach </li></ul></ul><ul><ul><ul><li>Holding company/corporate </li></ul></ul></ul><ul><ul><ul><li>Subsidiaries/divisions </li></ul></ul></ul><ul><ul><ul><li>Departments </li></ul></ul></ul><ul><ul><li>Cover broad areas of concern </li></ul></ul><ul><ul><ul><li>Don’t assume employees: </li></ul></ul></ul><ul><ul><ul><ul><li>Recognize issues </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Understand/know related considerations </li></ul></ul></ul></ul><ul><ul><li>Policies vs. procedures </li></ul></ul><ul><ul><ul><li>Broad guidance vs. detailed processes </li></ul></ul></ul><ul><ul><ul><li>Standard format and structure </li></ul></ul></ul><ul><ul><li>Web-based policies with links and resources </li></ul></ul>
  16. 16. Code of Conduct & Other Policies <ul><li>Contractors </li></ul><ul><ul><li>When are they subject to company’s Code of Conduct and/or policies </li></ul></ul><ul><ul><ul><li>On-site workers </li></ul></ul></ul><ul><ul><ul><li>Type of services </li></ul></ul></ul><ul><ul><li>Requirement to maintain compliance program and right to audit </li></ul></ul><ul><ul><ul><li>Contractual provisions, i.e., Ethics and Compliance Attachment to all contractor agreements. </li></ul></ul></ul>
  17. 17. Creating Awareness <ul><li>Employees (and contractors) can not comply unless they know what the expectations are </li></ul><ul><li>Types of Awareness Initiatives </li></ul><ul><ul><li>Website </li></ul></ul><ul><ul><li>Newsletter articles </li></ul></ul><ul><ul><li>Emails </li></ul></ul><ul><ul><li>Posters in commons areas </li></ul></ul><ul><ul><li>New employee orientation </li></ul></ul><ul><ul><li>Training programs </li></ul></ul><ul><ul><ul><li>Classroom </li></ul></ul></ul><ul><ul><ul><li>Self-study </li></ul></ul></ul><ul><ul><ul><li>Web-based </li></ul></ul></ul>
  18. 18. Compliance Assessments <ul><li>Monitoring </li></ul><ul><ul><li>Regularly scheduled and ad hoc internal review to assess compliance with operating or other standards. </li></ul></ul><ul><ul><ul><li>Often part of quality processes </li></ul></ul></ul><ul><ul><ul><ul><li>Not specifically directed to compliance </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Scheduled in frequency and amount of review </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Performed under direction of department being monitored </li></ul></ul></ul></ul><ul><li>Auditing </li></ul><ul><ul><li>Conducted by independent reviewer not associated with hierarchy of audited area </li></ul></ul><ul><ul><li>Attorney/Client Privilege? </li></ul></ul><ul><ul><li>Annual planning </li></ul></ul>
  19. 19. Compliance Assessments <ul><li>Exit Interviews </li></ul><ul><ul><li>Employees who resign </li></ul></ul><ul><ul><ul><li>Question of reliability of information from employees involuntarily terminated </li></ul></ul></ul><ul><ul><li>All Managers above a certain grade level </li></ul></ul><ul><ul><ul><li>Most likely to have information that could represent non-compliance </li></ul></ul></ul><ul><ul><ul><li>Reduce likelihood they become whistleblowers </li></ul></ul></ul><ul><ul><li>Ensure all allegations are investigated and resolved. </li></ul></ul>
  20. 20. Reporting Mechanism <ul><li>A mechanism, i.e., hotline, that employees can utilize to notify the organization’s management about possible misconduct. </li></ul><ul><ul><li>Ability to make anonymous reports is important feature. </li></ul></ul><ul><li>Operational Considerations </li></ul><ul><ul><li>Visibility </li></ul></ul><ul><ul><li>Credibility </li></ul></ul><ul><ul><li>Privacy and anonymity </li></ul></ul><ul><ul><li>Responsiveness </li></ul></ul><ul><ul><li>Non-retaliation </li></ul></ul>
  21. 21. Reporting Mechanism <ul><li>Benefits </li></ul><ul><ul><li>Reduce litigation and likelihood of whistleblowers </li></ul></ul><ul><ul><ul><li>If employees feel like they have a credible and reliable avenue to voice complaints, less likely they will seek other avenues </li></ul></ul></ul><ul><ul><li>Promote compliance </li></ul></ul><ul><ul><ul><li>Sense that others are watching and could report may help employees walk away from the opportunistic non-compliance </li></ul></ul></ul><ul><ul><li>Encourage managers to deal constructively with complaints </li></ul></ul><ul><ul><ul><li>If the manager doesn’t, the employee has another avenue </li></ul></ul></ul><ul><ul><li>Boost morale </li></ul></ul><ul><ul><ul><li>Organization seems to be good and fair place to work </li></ul></ul></ul><ul><ul><li>Provides feedback on how policies are working </li></ul></ul>
  22. 22. Response & Prevention <ul><li>Identify and fix it – don’t hide it </li></ul><ul><ul><li>Cover-ups worse than original offense </li></ul></ul><ul><ul><ul><li>Watergate </li></ul></ul></ul><ul><ul><ul><li>Iran-contra </li></ul></ul></ul><ul><ul><ul><li>Lewinskygate </li></ul></ul></ul><ul><li>Always respond to allegations of misconduct </li></ul><ul><ul><li>Investigation is frequent response </li></ul></ul><ul><li>Fixing and Preventing – Corrective Action Plans </li></ul><ul><ul><li>Fix current problem </li></ul></ul><ul><ul><li>Improve controls to avoid problem in the future </li></ul></ul><ul><ul><li>Establish accountability and responsibility </li></ul></ul><ul><ul><li>Audit implementation and effect </li></ul></ul>
  23. 23. Enforcement & Discipline <ul><li>Goal is to minimize need for discipline by avoiding misconduct </li></ul><ul><li>Discipline should be uniformly and consistently applied </li></ul><ul><ul><li>Inconsistent discipline affects employees’ perceptions and the credibility of the Ethics and Compliance Program </li></ul></ul><ul><li>Tracking disciplinary action for reporting to senior management and board and to ensure uniformity and consistency </li></ul><ul><li>Public disclosures regarding disciplinary actions? </li></ul>

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