These independent compliance departments are developing compliance and ethics programs to prevent noncompliance and to monitor compliance with the law and ethical obligations. Community Home Discussion 12.9K Library 397 Events 0 Members 1.8K Departmentalization silences the “lightning-rod man” and decreases the emphasis on risks. My job is to help people understand the potential impact of those risks, to make sure those conversations occur. 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. 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. 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. All these quotes are from legally trained professionals who were formerly practicing attorneys and are now leading compliance departments. Six Keys to Compliance: Perspectives from the field, HLS Center on the Legal Profession Retweeted, © 2021 Harvard Law School Center on the Legal Profession. Although Rosen et al. If there is a risk that the compliance officer is vying for power and influence, arguably, he or she may also succumb to using his or her cast of mind and freedom from the model rules to do more bad than good. Lack of separation of the CHIEF COMPLIANCE OFFICER and the GENERAL COUNSEL has been cited as a cause of numerous corporate failures. To start, titles and reporting lines do not equate to power and influence. In legal you [recommend], and business gets to say yes or no, take advice or not. They usually report to the CEO or COO. 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. In a forthcoming article entitled “Identifying the chief compliance officer: counselor, cop, or the spy who loved me,” I develop a typology for the different roles played by CCOs. As mentioned above, lawyers serving as compliance professionals are neither structurally classified as part of the legal department, nor are they functionally considered as practicing lawyers. The former assesses the fiscal risks a company takes as … 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. The Emergence of Compliance: A new profession? Departmentalization decreases transparency. Put simply, if management doesn’t heed ethics and compliance issues early in its business decisions, it will heed those issues later, usually at greater expense. It is not just about money but [if] a successful business is doing the right thing. As one interviewee said, “The goal is to have them trained well enough and sensitized about the permissible but also about the right thing to do . Ultimately, the structure is less important than collaboration between groups, as the CPO and CISO must work together closely. The scarecrow – The scarecrow role is played when no one person is in charge of compliance at the corporation as “compliance is everybody’s business.”  Rather than specifically designating someone as a CCO, a more open organizational structure means that everyone—from management all the way down to front line workers—is concerned with compliance issues. 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. Auditing & Monitoring The issues relating to separation of the CHIEF COM… This issue is exacerbated by the fact that the CCO profile is still relatively new, and management has little to no experience in hiring this unique profile. Over time these divisions can create silos—and silos are the death knell for the cross-fertilization between different departments that is needed to create new solutions. Lawyers might be expected to help the corporation find loopholes in the law. In practice, that does not mean day-to-day reporting; instead, it means at least quarterly reporting to the board or the audit/compliance committee and continuing, informal communications with the head of the audit/compliance committee. 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. The typical counselors believe they are the chief ethics officer and main steward of the corporate culture. It brought up for me the question of who should a Chief Compliance Officer (CCO) report to … . Chief risk officers and chief compliance officers are board members who work in corporate settings. I don’t dispute that these firms have a solid commitment to ethics and compliance — but they aren’t necessarily representative of all large firms as a whole, if you want to compare your own organization’s practices to what WME has identified here. https://thepractice.law.harvard.edu/article/americas-missing-stories/, Where academic research and practical advice come together, Volume 2 • Issue 5 • July/August 2016. Once in that position, it becomes hard for a major corporation to explain why they don’t need a compliance department. Should they serve like cops, counselors, spies, a blend of the three—or something else altogether? Communicatio n & Training. 6. . Which sounds even worse than reporting directly to the general counsel to me, but such is life. In other words, the WME firms offer a glimpse of what other firms might aspire to do. The words “compliance and ethics function” mean different things to different organizations and to different people in and outside of those organizations. 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. Combine this with human beings’ tendency to re-create history and view their own actions as more ethical than they were (for example, sugar coating) and it is no wonder that systems designed to promote ethical behavior fail.  They guide but do not demand adherence to their guidance. 2. As one CCO explained to me, the best part of the job. They aren’t a sample of “normal” firms that might portray what companies usually do. However, this proves very difficult to do. STATUS AND REPORTING LINE OF CHIEF COMPLIANCE OFFICERS FINANCIAL We refer to our Circular referenced BSD/2/2002 and dated 8th August, '2002 Which directed banks and other financial institutions to appoint Chief Compliance Officers (CCOs) not below the grade of a General Manager and compliance officers (COs) at Structure: A compliance program has to have an effective structure. 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. Structure: A compliance program has to have an effective structure. 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. So, … Compliance is not part of the law. This conclusion leads to unanswered but important questions: Regardless of the organizational structure and title, who should oversee compliance? Board engagement, training and reporting is a critical but often overlooked area of practice for the chief ethics and compliance officer (CECO). Predictable tensions can arise between CCOs and CLOs over authority and responsibilities in any compliance structure. Auditing & Monitoring In fact, the risk is much, much larger. This article is derived from a more expansive work previously published in the Hastings Business Law Journal. 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). However, courts are more reluctant to protect communications from in-house counsel because they worry that corporations are purposefully including lawyers in communications in order to use the attorney-client privilege argument to shield information. the right way is often debatable, because, in any business, if we do X, we’ll make a trillion dollars, but there may be a lot of legal risk. The reporting structure of any compliance personnel employed or contracted by the company. Second, the emphasis on the independence of the compliance department from the legal department risks impeding open communication and a spirit of collaboration that in today’s world is essential to creating effective compliance solutions. Compliance officers should also have direct access to legal counsel. 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. Often, the compliance function reported to the GC, and sometimes the GC simultaneously served in the CCO role. (For a preview, see the sidebar “A typology of styles” at the end of this article). Tod is responsible for advising MCG regarding compliance with applicable laws and regulations, including the 1940 Act and other securities laws, and overseeing the development, monitoring, training and testing of corporate policies. The spy – The spy is most akin to an independent monitor. And this often remains true today. According to Rosen, Parker and Nielson, lawyers have a “cast of mind” that may hinder compliance initiatives. There is agreement among GCs and CCOs about the general job that compliance professionals do: build policies and procedures; train, educate, and test employees; conduct neutral fact finding; prevent, uncover, and report misconduct; and remediate. 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. 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. The former assesses the fiscal risks a company takes as it invests or undertakes new projects. What expertise and skills should these compliance officers have? In a recent research study comparing lawyer-led compliance programs with non-lawyer-led compliance departments, Rosen et al. This executive helps steer corporate values more broadly—and recently has … 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. the second in a series of reports Ethisphere is publishing about the 128 firms that made its WME list for 2018. . Before we put a new “C” in the C-suite, we may want to spend more time defining the CCO’s function and identifying who can best fill it. Policies/ Procedures. People do not necessarily recognize an ethical dilemma as an ethical dilemma when it is presented to them. While there are some limitations to the study (such as a small sample size and nonrandom selection), the data and the stories of respondents—combined with relevant secondary material and other surveys—provide powerful insights into the current and potential future of the compliance function. Thus, a chief compliance officer appointed in accordance with rule 206(4)-7 (or rule 38a-1) would not necessarily be subject to a sanction by us for failure to supervise other advisory personnel. Although it is true that multidisciplinary and multifunctional collaboration is possible between two separate departments within an organization, having compliance departmentalized from the people who interpret the law and gauge the risks hinders the department’s ability to create effective programs and secure the commitment and cooperation from employees around the globe. Rosen et al. They delegated Board oversight to the Audit Committee and executive day to day oversight to Fluor's Chief Compliance Officer. Empirical evidence generally does not demonstrate that structural manifestations of compliance are effective at deterring malfeasance. 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. Departmentalization is the wrong answer because the right question is not about the CCO’s independence or the corporation’s organizational structure, but instead about function: how can a corporation leverage the research on connectivity, informal norms, ethics, and motivation to create effective compliance and ethics initiatives and culture? Compliance tells you [that] what you should do to comply with the spirit of the law may be more than legally required. Today, when departmentalizing, corporations often simply promote the associate GC to the CCO role. While that is most likely true, it is also probably true, as one interviewee explained, that the tone set at the middle—the intersection of social networks—matters just as much: I don’t worry about the tone at the top; I worry about the tone in the middle, and that’s what I focus on. 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. You know what I mean? The New Guidance offers no specific perspective on the autonomy implications of the reporting relationship between a company’s CCO and its chief legal officer(“CLO”). Departmentalization, similarly, may be just another trapping that is adopted by corporations as a best practice without any resulting change. Implementing structural manifestations of compliance is not sufficient. 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. Just as there are executives in the CIO’s team responsible for IT infrastructure or enterprise applications, there were those who were responsible for IT security—those who ensured that the computers, the networks and the applications remained safe. As two interviewees stated: The entire legal department—which includes compliance, by the way—does report up to me as the chief legal officer but we are organized across business lines as well. Worse yet, extrinsic rewards can even take the good out of doing good. Corporations around the globe are facing a daunting challenge in the emerging area of compliance and ethics. 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. Or should compliance initiatives occur within preexisting corporate governance structures in which the compliance function generally reports to the GC? It should also cover structure and role of the compliance function as well as role of the CCO. In 20+ years of practicing in the field, both as in-house CECO and outside advisor, I’ve encountered countless programs that have, on paper, all the elements of an effective program, as envisioned 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? Should there be a specific department led by a chief compliance officer within the company hierarchy? These blind spots occur when there are functional boundaries within an organization that enable decisions to be labeled and segmented as something other than ethical ones; for example, a decision is viewed as an engineering, marketing, or financial decision. To the contrary, an effective structure starts with the board and the specific committee responsible for overseeing the compliance program. Wherever compliance resides structurally, maintaining its independence is a growing imperative and, for some industries, a regulatory mandate. Ethics intertwines with compliance: blind spots and ethical fading: Formal changes and controls like ethics programs, codes of conduct, mission statements, and reorganization are completely decoupled from what we know about ethical decision making. Compliance officers must secure the commitment and cooperation of employees around the world to design, promote, implement, and monitor compliance programs. Collaboration is required at every step: it’s important for identifying and weighing risks, for devising solutions, and for execution. 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. In other words, simply because the chief compliance officer has a “C” for “chief” in their title does not mean they have clout and credibility with the board, CEO, or other business leaders. Thus, for the CCO, it isn’t just lonely at the top—it may also be disempowering. . 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. Thus, there may be double trouble. The compliance officer should be a member of senior management and report directly to the CEO. 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. 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. Chief Compliance and Ethics Officer Health Care. Why Chief Compliance Officers Are More Important Than Ever. This one examines job titles, reporting relationships, and staffing. Departmentalizing will not necessarily increase transparency into a corporate misconduct investigation but, counterintuitively, may increase the amount of information shielded by the attorney-client privilege. Worse yet, it may create a false sense of complacency about compliance. They aren’t a sample of “normal” firms that might portray what companies, the first Ethisphere analysis published last month. The answer likely depends on the perspective of the questioner. At the Chief Compliance Officer level, this disparity is much less noticeable for CCOs who hold law degrees than for those without law degrees. In the first Ethisphere analysis published last month, 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. Very rarely [does] the compliance officer report to a CEO because that’s what the CEO wants. By separating the lawyers from compliance oversight, this fear of regulatory capture might dissipate. …is that I get to do something about things. I am a lawyer, but I am not acting as a lawyer. 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. Of course, the answer to this question might change depending on the skills and training of the specific person who fills the role of CCO and how he or she plays it. Research studies have consistently shown that open environments and information exchange among people with different experiences, roles, and expertise enhances problem solving. So, back to the question, What’s wrong with that line of thinking? Noncompliance is seen as intentional, and attorneys and non-attorneys alike need to be trained and caught. 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. Should a CCO report … By working separately from the GC’s office (and outside the lawyers’ rules of professional conduct), the CCO will have the requisite autonomy to uncover and report noncompliance, thereby increasing transparency into corporate misconduct—especially during governmental investigations or queries. The compliance officer should also be able to contact the Board chair directly should there be an issue involving the CEO. While no one disputes the importance of compliance and those who do the work, it can indeed be lonely. Our job is to raise awareness that there is an ethical obligation to be aware of what is allowed, which in the end is in the best interest of clients, and that includes reporting if they see something that should not be done or could harm the company or clients. This move from associate GC to CCO of a new, smaller department—which, by the way, is an additional cost center—does not, by itself, provide a seat at the table despite the “C” in the title. The counselor – In this role, the compliance officer serves as a consigliore to senior management, offering judgments that span compliance, law, politics, and other arenas. They move a piece of the gatekeeping function out of the GC’s hands and place it within a new department that is often filled with lawyers who are now not practicing law. the general counsel simultaneously. 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. Clearly the DOJ is articulating that it expects true compliance professionals, who understand the way compliance interacts with and supports the business. Evidently, sticks (like carrots) are often ineffective motivators as well. That is, if a compliance officer manages to wriggle free of reporting to the general counsel, instead reporting to the board or the CEO — does he or she then gain more power to talk about the compliance implications of strategic issues? 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. The first report looked at trends in Codes of Conduct and written policies, among other issues. Worse yet, separating the compliance department from the legal department risks ostracizing compliance professionals as outsiders or watchdogs (like in-house counsel once were). Likewise, 89 percent have input into mergers & acquisitions or market expansions (up from 77 percent four years ago); and 66 percent have input into new products or services (up from 52 percent). 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. 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. For example, a study on day care centers implementing late fines for parents picking up their children after the deadline showed that when there is an economic penalty (or “stick”), parents are less likely to view the decision to pick up their children late as an ethical one about what is “right” and “fair” to the day care employees, as Pink argues. . That said, the broad direction of these WME firms’ practices all make sense. Further, people generally feel less concerned about unethical behavior that is perceived as indirect as opposed to direct. But in my job, I say, “I think you should fire this person,” and they just have to unless [they can] give a really good reason why they shouldn’t. 443-481-4584 Michele DeStefano is a professor of law at the University of Miami School of Law. Yet departmentalization—like codes of conduct, revisions to mission statements, and formal training programs—is merely a formal exemplification or structural manifestation of a commitment to compliance. Thus, Rosen et al. The obvious question, then, is: what’s wrong with that? at n. 73 (“Having the title of chief compliance officer does not, in and of itself, carry supervisory responsibilities. Creating a separate and distinct department and assigning it the role of keeper of the corporate conscience creates a risk that the legal department will be viewed as disconnected from the ethical responsibilities of the corporation. It also has potentially differing meanings around the world. Even if we focus only on what could be coined “legal” compliance, a picture of what compliance professionals do and how they do it is, at best, fuzzy. Even critics of the independent arrangement agree that “it has long been settled that the chief compliance officer, whether also the chief legal officer, should have a direct line of reporting to a board audit committee, which has substantive oversight.” 11; Apparent preferred structure of … Yet, it becomes hard for a variety of different reporting lines do not necessarily recognize an ethical as. Economic decision based on a cost-benefit analysis founder and Director of LawWithoutWalls the. Is perceived as indirect as opposed to direct law at the top concerns of senior and! 2008€“2009, changing technologies, and sometimes the GC is the only of! Or no, take advice or not the News: Highlighting key stories about the 128 firms that might what. 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