In legal you [recommend], and business gets to say yes or no, take advice or not. The thinking is that the privilege will not be applied because the compliance officers—even those who are lawyers—are not part of the legal department, not acting as lawyers, and not providing legal advice. As mentioned earlier, one of the top concerns of senior executives at large publicly traded corporations is regulatory compliance. Chief Compliance/ ERM OfficerChief Dianne Judge Public Affairs DirectorVice President Julie Hopsital Liss-Katz ... III. While no one disputes the importance of compliance and those who do the work, it can indeed be lonely. So I tell people, “We can have great tone at the top, but the people in the warehouse look at their supervisor, they look at their manager. In any business . Focuses on the strategy of human capital and how HR programs grow revenue and the organization for the broad and often global organization and for the longer term. In spite of numerous recommendations to separate the two functions, there is general agreement that the roles are closely related and frequent collaboration is required. Contributing to this confusion is the excess of secondary material on compliance and the lack of scholarly, qualitative research about the compliance function in large publicly traded corporations. Risks are commonly categorized as strategic, reputational, operational, financial, or compliance-related. 4. But [because] a number of major companies have done it over the years, it starts to look like a best practice. Thus, many ethical violations are unintentional. Vice President of HR. Predictable tensions can arise between CCOs and CLOs over authority and responsibilities in any compliance structure. 00011247-1 Annual Compliance Report to Board of Directors [DATE] Dear Sirs and Mesdames: As you are aware, National Instrument 31-103 - Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”) requires that I, as hief Compliance Officer, provide [FIRM]’s (the “Company”) oard of Directors with an annual report concerning my assessment of compliance by the A year-over-year comparison shows the percentage of CIOs reporting to the chief executive has been trending upward for the past three years (Figure 1). This essay, however, focuses not on who should fill the role of compliance officer or how, but instead on the structure and organization that corporations adopt to effectuate compliance. By Thomas Fox I have noted with interest the excellent posts by Walker and Kaplan on the role of the Board of Directors in an effective compliance program. This one examines job titles, reporting relationships, and staffing. One main reason for this is that structural manifestations, such as changing the organizational chart or departmentalizing, do not account for: Impact of internal networks on communication and culture: It is wrong to focus on the formal organizational structure of a corporation to gauge the effectiveness of its compliance program. Corporations around the globe are facing a daunting challenge in the emerging area of compliance and ethics. Organizational Structure Options • Centralized – The compliance department has more employees who report through the Chief Compliance Officer and are responsible for overseeing and implementing the compliance and ethics program. Evidently, lawyers have (or portray that they have) a heightened awareness of risk that creates the impression that the regulator is watching—that lightning will strike at any moment—unless action is taken. If employees don’t heed ethics and compliance issues in their daily operations, that will bring the organization to the same uncomfortable place too. 1 Depending on the institution, some functions of the Chief Compliance Officer (CCO) may be allocated to the Chief Risk Officer (CRO), Chief Financial Officer (CFO), and others. Sometimes in this model, the Compliance Officer or Director is the only member of the Compliance Department. Many GCs of publicly traded companies either oversee or serve as the heads of compliance—for instance, Mark Chandler of Cisco holds both the GC and CCO titles. A common emphasis is on the importance of the tone at the top in establishing a culture of compliance. Chief risk officers and chief compliance officers are board members who work in corporate settings. As one CCO interviewee aptly explained, for some, “compliance is the world’s longest four-letter word, and it initiates a negative response in people.” The interviewee went on, “Compliance officers are often seen as outsiders, not good team players.” The last person employees want to see strolling down the hall is the CCO. Because it was nearly impossible to decide on which of the many options a specific service falls into, let alone with six-minute intervals, lawyers had to guesstimate. A chief data officer (CDO) is a corporate officer responsible for enterprise-wide governance and utilization of information as an asset, via data processing, analysis, data mining, information trading and other means.CDOs usually report to the chief executive officer (CEO), although depending on the area of expertise this can vary. According to Pink, this is because “it tainted an altruistic act and ‘crowded out’ the intrinsic desire to do something good,” which is commonly held as the motivation for donating blood. at n. 73 (“Having the title of chief compliance officer does not, in and of itself, carry supervisory responsibilities. , that report explored how the firms were trying to be more transparent with employees (and even outsiders) about what the ethics & compliance function actually did; and how the firms were using technology to give employees a better, more interactive experience when reading the Code of Conduct and written policies. In October 2016, the SEC fined and censured a registered investment advisor for failing to conduct required annual compliance reviews and for appointing a chief compliance officer … Even if we accept this view as true, it does not necessarily follow that less information about corporate misconduct will be able to be shielded by claims of privilege. So, back to the question, What’s wrong with that line of thinking? Although many of the GCs and CCOs interviewed claimed that their relationships were open and collaborative, the message that formal departmentalization sends to middle and lower management is one that prizes independence and separation as opposed to interdependence and collaboration, which are essential to effective compliance program development and adherence. Why Chief Compliance Officers Are More Important Than Ever. It also has potentially differing meanings around the world. Should there be a specific department led by a chief compliance officer within the company hierarchy? Departmentalization silences the “lightning-rod man” and decreases the emphasis on risks. Governance, Risk and Compliance (GRC) systems, CROs can now be found in many other industries such as energy, oil and gas, large multi-nationals and ... reporting directly either to the board or to the CEO for example. If this is what the job entails, the job of a compliance officer is measurably more complicated, and the level of influence and power, along with the personal, leadership, and communication skills of the compliance officer, become even more important. Most of the time you actually stop things, make things better, get things done . Also important are CCOs’ reporting relationships. Ultimately, my analysis indicates that we shouldn’t rush to put a new “C” in the C-suite. This is no wonder, given the economic downturn of 2008–2009, changing technologies, and rapid globalization. Byrne says part of what is driving the shift in reporting structure toward the chief executive role is an increasing “recognition on the part of companies that, in order for compliance to be seen in the organization as a strategic function, the compliance officer has to have a seat at the senior table.” Indeed, the opposite might be true. In essence, the expectation that the lawyer play the role of legal technician devoid of any ethical “should” function traps lawyers in an attorney-client relationship that is one of agency wherein the lawyer, as agent, owes a duty to his or her client (the corporation) to promote the client’s interests above all else. The words “compliance and ethics function” mean different things to different organizations and to different people in and outside of those organizations. This month we will discuss the advantages and disadvantages of reporting to the Chief Financial Officer (CFO). In a recent research study comparing lawyer-led compliance programs with non-lawyer-led compliance departments, Rosen et al. According to Rosen, Parker and Nielson, lawyers have a “cast of mind” that may hinder compliance initiatives. As mentioned above, one of the three goals of departmentalization is to create a culture of ethics that is ingrained in the organization so that malfeasance is deterred and prevented. general counsels, who moonlight as their firm’s chief compliance officer. The Reserve Bank of India (RBI) has prescribed guidelines for ‘Compliance Functions in Banks and Role of Chief Compliance Officer (CCO)’ to bring … Research by Robert Eli Rosen, Christine Parker, and Vibeke Lehmann demonstrates that a corporation’s perception of legal risk is heightened when practicing lawyers are in charge of compliance. Research found that once lawyers started to make small guesses, guessing became acceptable in general, and eventually turned into larger and larger guesses and rough estimates. Indeed, Pink posits that incentives can sometimes serve as horse blinders narrowing off the bigger picture and future forward thinking. So why not establish a role dedicated to bringing those issues to light, and then inculcating awareness across the whole enterprise? Choosing the Wrong Reporting Structure The government recommends the CCO report directly to the board of directors with an administrative dotted line to the CEO. And how people classify a decision is impacted by the structural hierarchies that exist within the organization that help disconnect people from the decision’s impact and work to protect groups and people from internalizing their actions or blaming the people they work with. Clearly the DOJ is articulating that it expects true compliance professionals, who understand the way compliance interacts with and supports the business. Wherever compliance resides structurally, maintaining its independence is a growing imperative and, for some industries, a regulatory mandate. I spent a decade thinking about and writing this book, often in conversation with many of you here, and it is finally going to be out in the world @PrincetonUPress in a few weeks. the general counsel simultaneously. Ethics takes it a step further [and] tell[s] you to ask yourself, [even though] it may be legal and it may be within the spirit of law, is it really in the best interest of [your] client and [your] firm? HR Organizational Reporting Structure for Large Companies (more than 1,000 employees) Chief Human Resources Officer (CHRO). https://thepractice.law.harvard.edu/article/americas-missing-stories/, Where academic research and practical advice come together, Volume 2 • Issue 5 • July/August 2016. The CCO must report directly to the Chief Executive Officer. In this article, I have attempted to focus on the underemphasized drawbacks to departmentalization, such as the disempowerment of the CCO, the creation of barriers to collaboration between departments, a decrease in corporate transparency, and the potential evolution of lawyers into amoral, legal technicians. Another contributing factor is “ethical fading.” Ethical transgressions are a slippery slope in that people become desensitized to them the more they occur, and if they occur in small increments, they pile up without notice. Indeed, much has been written about the time it took for GCs to get their seat in the C-suite—to move from being considered second-class citizens to being one of the highest-ranking, highest-paid, and most influential corporate executives at large publicly traded corporations. By examining the literature and conducting interviews with 70 GCs and CCOs, I hypothesize that preemptive departmentalization may not be in the public’s best interest due to potential unintended consequences that offset the alleged benefits of departmentalization. To start, titles and reporting lines do not equate to power and influence. The reporting structure of any compliance personnel employed or contracted by the company. Chief Compliance Officer Chief Compliance Officers … It is not just about money but [if] a successful business is doing the right thing. If this is all true, then one starts to wonder why government and regulatory bodies are asking corporations to change their organizational charts and adopt other structural manifestations of compliance when these recommended tactics don’t take into account how to develop compliance programs that incent real compliance and create a culture of ethics at the top, middle, bottom, and in between. The problems posed to multinational corporations today are more complex than ever before, requiring teams of people with different expertise to collaborate to understand what the regulations require, where to apply them, and, most important, how to comply and implement them. That reflects, I hope, an awareness among board directors and senior executives that. Last month’s column addressed the security organization reporting to the General Counsel, which studies show is one of the more common reporting relationships for security executives. Implementing structural manifestations of compliance is not sufficient. The dangers of a compliance-reporting-to-legal structure can be seen in the Wal-Mart Mexican bribery scandal that … Evidently, sticks (like carrots) are often ineffective motivators as well. However, this proves very difficult to do. There is sometimes some confusion within the law department itself as far as that distinction is concerned, and there is also sometimes confusion from internal clients [who] think, “Oh, I can just go straight to the [CLO] for legal advice,” and I have to tell them, “I’m glad to talk to you, but I’m not acting as a lawyer; what we’re talking about is not privileged; and if you want legal advice, you will probably have to go down the hall to somebody else.”. Where the Chief Compliance Officer ... corporate information and reporting system, which the board concludes is adequate, exists, and that failure to do so under some circum-stances, may, in theory at least, render a … the right thing sometimes is more than the legal thing.” But, when it comes to identifying who is in charge of the corporate conscience, who is the creator of the corporate ethical culture, who is supposed to tell senior management what they “should” do versus what they “can” do, there is major disagreement between GCs and CCOs. By closing this banner, scrolling this page, clicking a link, or continuing to browse this site, you agree to this use. And this often remains true today. care regulatory compliance context through a careful look at the roles of the general counsel and the chief compliance officer, to a specific look at corporate responsibility and health care quality. People do not necessarily recognize an ethical dilemma as an ethical dilemma when it is presented to them. Departmentalization risks turning in-house lawyers into mere legal technicians. The general counsel’s job is more black and white; [for example,] ‘These are the legal risks.’”. Proponents of departmentalization contend that separating the compliance function from the legal department increases transparency into corporate conduct during corporate investigations or inquiries because it weakens the corporation’s ability to shield information under the corporate attorney-client privilege. Many are creating a new “C” in the C-suite—the chief compliance officer, or CCO—and departmentalizing the compliance gatekeeping function from the legal department so that the CCO does not report to the general counsel (GC). Worse yet, it may create a false sense of complacency about compliance. Considering the range of opinions on how to comply with the requirement of Article 38(3), a direct reporting to the company’s general counsel/head of legal or chief compliance officer (as the data protection compliance effort generally lies with either legal or compliance), may be an efficient and sufficient solution. If the only things wrong with departmentalization are what opponents emphasize—such as the risks of turf wars, inefficiencies, and the demonstrated success of lawyers in managing the conflicts of interest that exist between compliance-reporting obligations and protecting the corporation—then what’s the big deal? Such structural reorganization may applaud form over function, thereby creating a false sense of complacency that distracts from the substantive cultural change that should be integrated throughout all levels of the organization. Although they are motivated by external or economic incentives (“carrots”) to perform routine tasks, this is not necessarily the case when it comes to more complex work or decision making that involves using judgment, ethics, and creativity. Thus, there may be double trouble. Intrinsic and extrinsic motivation: the problem with carrots and sticks: Formal manifestations of compliance and basic, routine check-the-box processes do not take into account complicated intrinsic motivation factors. While the Updated Compliance Guidance incorporates and addresses the same general issues and topics as the 2017 Compliance Guidance, the new document provides additional factors, in the form of questions, that prosecutors may consider when assessing cases, and an overall framework … , when you’re implementing specific controls and processes. Average staffing levels are drifting upward overall, from 28 employees in 2017, to 30 in 2018, to 31 this year — but that’s the average for all WME firms together, so I’m not sure how useful that point of data is given the large disparities that exist among different types of firms. Ultimately, the structure is less important than collaboration between groups, as the CPO and CISO must work together closely. On staffing levels, a huge different exists (understandably) between highly regulated firms and everyone else. Compliance tells you [that] what you should do to comply with the spirit of the law may be more than legally required. Although consistent with some forms of practice, such an attitude is the opposite of the way most GCs view their role, which is one that includes being responsible for gatekeeping, creating culture, and protecting the corporate conscience of the company. A recent study showed that people were less apt to donate blood when offered a monetary reward. Research studies have consistently shown that open environments and information exchange among people with different experiences, roles, and expertise enhances problem solving. With the increased emphasis on—and resources devoted to—the compliance and ethics function at large publicly traded corporations during the past 10 years, a debate has begun over who should be in charge. Thus, departmentalization may not change the status quo in the way it is intended, and it may fortify a lawyer cast of mind that enables more corporate misconduct as opposed to less. found that when a lawyer, as opposed to another type of professional, is in charge of compliance, the company has a higher perception of being watched, has increased awareness of the risks associated with noncompliance, and is more fearful about regulatory breaches. A good example of ethical fading is lawyers reporting billable hours. For example, 95 percent have “significant input” into supplier and procurement processes, compared to only 67 percent in 2015. According to leading sociologists and legal scholars, one of the reasons for this is that compliance initiatives do not recognize that employees, like cars, have “blind spots,” as Max Bazerman and Ann Tenbrunsel have noted. Communicatio n & Training. To outsiders (and maybe even insiders), an apt metaphor to the compliance and ethics function at large publicly traded corporations is a black box with mystery contents. In this view, the compliance department’s role is more process and results oriented in some ways than that of the legal department. Now we have this report, showing that more CCOs among this group have input into strategic issues. On the other hand, 28 percent still report to the general counsel; and within the 24 percent who report to “Other,” that includes some portion of CCOs who report to both the chief executive. found that lawyers are not as adept as other professionals at creating effective programs and procedures to prevent risk, their research supports a structure in which the lawyers are the ultimate superintendents of it. As you can see from the chart below, most CCOs do have some other title. What expertise and skills should these compliance officers have? Departmentalization may be just another trapping that is adopted by corporations as a best practice without any resulting change. Whether these moves represent best practice or knee-jerk reactions, they have potential repercussions that run deeper than a simple change in the organization chart. Departmentalization ostracizes compliance and creates a “C” in the C-suite without the requisite influence. Reports to company CEO. The structural manifestations put the corporation and its employees at ease that compliance and ethics are being covered when the manifestations are actually ineffective at creating real change and, indeed, have been identified as the weakest part of the ethical infrastructure of an organization. Worse yet, it may create a false sense of complacency about compliance. It attempts to answer whether the CCO should be a new “C” in the C-suite (that is, in charge of a compliance department that is separate from the legal department and does not report to the GC). Although Rosen et al. By Thomas Fox I have noted with interest the excellent posts by Walker and Kaplan on the role of the Board of Directors in an effective compliance program. Another example is the Ford Pinto. The typical counselors believe they are the chief ethics officer and main steward of the corporate culture. The first report looked at trends in Codes of Conduct and written policies, among other issues. Those in favor of preemptive departmentalization invariably purport that it is in the public’s interest and will increase: The common argument for separating compliance from legal goes as follows: Lawyers, given the rules and standards of the profession and their duties to their clients, are not independent enough to be able to report corporate malfeasance. This is extremely problematic in a large organization where decisions can be segmented by department (or cultural and geographical) lines, making it difficult to get a bird’s-eye view or foresee the domino effect. As one CCO interviewee (who was formerly the associate GC) explained: Even if the chief compliance officer reports to the [board] or CEO, [he or she is] going to have the same problem, because chances are, the CEO is going to want to listen to the [GC] . The common view in the literature, in many governmental agencies and regulatory bodies, and in my interviews is that compliance professionals—even if they have a law degree, passed the bar, and/or have served as lawyers for the corporation in the past—are not acting as lawyers or providing legal advice when performing compliance functions. As one CCO explained to me, the best part of the job. As such, the former lawyers, now compliance officers, may not consider themselves bound by the model rules of professional conduct. Sometimes doing good really is its own reward. From the Journals: Compliance in an interconnected world. Should they have legal, management, or other training like psychology, sociology, or organizational motivation? . Thus, the risk is that an economic incentive can induce people to choose the quicker road over the higher road. Chief risk officers and chief compliance officers are board members who work in corporate settings. Collaboration is required at every step: it’s important for identifying and weighing risks, for devising solutions, and for execution. Policies/ Procedures. Today, when departmentalizing, corporations often simply promote the associate GC to the CCO role. In doing so, they are creating new departments, positions, and ethics-training programs. In other words, the WME firms offer a glimpse of what other firms might aspire to do. Increased global complexity and new demands for privacy and data protection have required companies in virtually all industries to deal with new regulations across multiple jurisdictions, higher penalties for noncompliance, and more-stringent application of the rules. the second in a series of reports Ethisphere is publishing about the 128 firms that made its WME list for 2018. . Interestingly, the CCO interviewees—even those who were formerly practicing attorneys and often associate GCs within the legal department—distinguished between lawyers and compliance professionals, saying that whereas lawyers tell you what the law says and are concerned with legal liability and vigorously defending the corporation at all costs, compliance officers: … care about doing the right thing the right way for the right reasons. Departmentalization applauds form over function. The Chief Information Security Officer (CISO) is a position within an organization whose genesis lies in the IT department. One would assume so; I’d just like to see a longitudinal, data-driven analysis of that. Many, though not all, of the agreements with governmental agencies and regulatory bodies state that the CCO “may seek legal advice from internal or external attorneys outside the Compliance Department without waiving any applicable privilege.” Arguably, before departmentalization, corporations padded their argument for privilege in much the same way by hiring external counsel. The cop – Cops are there to help and to make sure employees are behaving. Further, people generally feel less concerned about unethical behavior that is perceived as indirect as opposed to direct. The Chief Compliance Officer is responsible for the continuous improvement of the program. Compliance, on the other hand, is also about ethics: Legal tells you what you can do to comply with the law—what you literally need to do to comply with the law. And each of these stakeholders likely has different goals for the organization and the structure of the compliance department, ranging from increasing power and influence, to mitigating repercussions of future misconduct, to protecting reputation, to deterring misconduct. Michele DeStefano is a professor of law at the University of Miami School of Law. The first report looked at trends in Codes of Conduct and written policies, among other issues. 3. That’s good. And that “Other” category at 38 percent includes lots of “vice president of…” titles, but substantively, those people are devoted to ethics and compliance full-time. In this essay, I use this research mainly to animate otherwise underemphasized potential problems that may result from departmentalizing the compliance and ethics function by removing the GC from the role of compliance gatekeeper. 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