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Compliance and the Reckoning

The compliance profession cannot rest on its achievements and become complacent.  There are two significant events that are on the horizon and inevitably will occur.

Compliance professionals have grown in number and in influence.  At the same time, compliance professionals are enjoying unprecedented independence and authority.  As the compliance profession rises, however, so will accountability – fair or unfair, it is soon about to hit.

Companies that invest in compliance programs continue to suffer from a narrow understanding of compliance.  I recently listened to a CEO speak to her compliance department and she emphasized over and over how important it is for the company to stay “compliant.”  The CEO missed the mark – compliance has a broader function; compliance is not measured by whether or not the organization violates a law, regulation or its code of conduct.

When a company suffers a serious violation and enforcement action, everyone can expect the CEO and the board to turn to the CCO and ask, “what happened?”  The CEO’s question will suggest that somehow the compliance program did not work, or that the CCO failed to do his or her job.

For the CCO, it is important to remember that when living on a pedestal, there is only way off the pedestal and that is down.  Many in the corporate governance world – directors and CEOs – are under the mistaken belief that investing in a world-class ethics and compliance program prevents the occurrence of misconduct.  Unfortunately, the world does not work that way, and the sooner CCOs prepare for this event, the better.

The compliance profession’s accountability (whether fair or not) will extend into the political sphere as well.  In response to the rampant corporate fraud in the early 2000s, Congress enacted Sarbanes-Oxley and transformed the auditing profession.  Congress returned to reform the financial industry after the economic recession hit in 2008, and Dodd-Frank brought us SEC whistleblowers and major financial reforms.

Whenever the next financial bump in the road occurs, guess who will be the new savior?  Yes, the compliance profession.  Building on all of the standards, guidelines, and enforcement direction on compliance programs, Congress will enact and prescribe comprehensive ethics and compliance program requirements for companies.  Congress will reach out to the most available solution, grab onto a few experts and start drafting legislative requirements for compliance.

Companies will be mandated to invest in compliance program requirements.  Companies that fail to implement mandated compliance will be punished, and directors and senior executives will be required to certify under penalty of criminal prosecution as to the effectiveness and adequacy of a company’s compliance program.  The seeds for all these ideas are being planted by prosecutors, regulators and politicians.

I am not trying to scare anyone – the compliance profession has overcome many more difficult challenges.  After all, the compliance profession brings creativity, integrity and commitment to the task.

The two challenges, however, are distinct.  CCOs have to spend more time training and explaining compliance functions to corporate boards and senior leadership.  Education is critical in this area.  Board members and CEOs think they understand compliance but in fact most have a very rudimentary understanding of a compliance program.  In those cases where the board has a member with compliance expertise, the situation is different – the board member can help the other board members to understand how to conduct oversight and to monitor a compliance program.  Such a knowledge base is invaluable and makes the CCOs job that much easier.

The compliance profession faces an even more daunting challenge when seeking to educate Congress on the compliance function.  Congressional staff are not known for engaging in a deep dive on such subjects, especially given the press of business and other topics.  Congress will rely on a small cadre of experts to help them develop legislation and such drafting will inevitably raise concerns.  In the end, the compliance profession will need to develop a broader policy presence on Capitol Hill – it will eventually happen, and the sooner the better.

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