Is Your Company At-Risk for a Government Enforcement Action?

For some reason, I have always believed that picking successful stocks should not be very difficult. Unfortunately, my record in the stock market does not back up my self-assessment.

On the other hand, when it comes to compliance and corporate misconduct, I am confident about identifying and defining “at risk” companies.

What is an “at-risk” company?

An at-risk company is a company that suffers both governance and compliance weaknesses significant enough to create a real and substantial risk of misconduct and possible government investigation.

Governance risks relate to corporate management and oversight, primarily in the structure and procedures used within a company to ensure proper reporting and management.  If you combine governance risks with an ineffective ethics and compliance program, a company is “at risk” for government investigation.

An at-risk company is more likely to experience litigation risks, including shareholder, employee, and commercial disputes and litigation, as well as code of conduct and legal violations that may result in government enforcement actions. This situation can combine into a perfect storm of performance that reduce corporate profitability and sustainable growth and undermine employee morale.

Here are some of the indicators of an “at-risk” company:

  1. CEO serves as chairperson of board. In response to corporate governance concerns, more companies are avoiding appointment of the CEO as Chairperson of the Board of Directors. The rate of common CEO/Board appointments has declined over the last ten years from approximately 75 percent to 50 percent.  (See HERE).   It is critical that an independent board conducts oversight of the CEO and holds the CEO accountable. When a CEO serves as Chairperson of a corporate board, this important check is absent.
  2.  Board and CEO lip service to ethics and compliance. A Board of Directors and CEO who talk the talk but fail to promote ethical behavior create serious risks for misconduct and ineffective internal controls. Lip service is dangerous to corporate ethics and compliance, promotes complacency and cynicism, and undermines basic cultural and work environment conditions needed to establish a positive ethical culture.
  3. Unreasonable focus on quarterly financial results. A board, CEO and C-Suite obsessed with quarterly financial results and short-term strategies is a red flag indicator of potential culture and misconduct problems. A culture of narrow success, defined in quarterly targets restricts corporate investment and attention to longer-term issues of sustainability and planning. If success is defined in such narrow terms, a company’s value structure tends to suffer and ethics and compliance takes a back seat to short term goals. Corporate investments that reflect a broader time frame can easily incorporate investments of resources into creating an ethical culture that is premised on long term returns measured by productivity, morale and financial performance.
  4. An inoperable ethics and compliance program. A compliance program that has not been operationalized is nothing more than a “paper” program. A CCO is only as good as his or her compliance team, including human resources, legal, financial and other natural partners critical to the compliance function. When a CCO operates in a compliance silo, the company’s compliance program is nothing more than window dressing and bound to fail.
  5. The absence of trust in reporting employee concerns. When employees do not trust a company’s basic system for reporting employee misconduct, either to a supervisor or through a hotline/communications tool, a company will lose a critical source of source of information needed to identify and respond to risks.

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