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. 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. 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. 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 ... consulting with management and reporting. 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? 5. Lack of separation of the CHIEF COMPLIANCE OFFICER and the GENERAL COUNSEL has been cited as a cause of numerous corporate failures. At the Chief Compliance Officer level, this disparity is much less noticeable for CCOs who hold law degrees than for those without law degrees. 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. 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. Corporate clients have opted for a variety of different reporting lines for the role of General Counsel (GC). An effective reporting structure: (1) plays a vital role in creating and fostering a culture of compliance within the organization; (2) sets the tone that compliance is the responsibility of all employees; and (3) keeps the lines of communication open. 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. People do not necessarily recognize an ethical dilemma as an ethical dilemma when it is presented to them. 4. So why not establish a role dedicated to bringing those issues to light, and then inculcating awareness across the whole enterprise? They posit that a lawyer in charge of compliance is like the title character in Herman Melville’s The Lightning-Rod Man, who scared people into buying lightning rods by going door-to-door threatening folks that lightning will strike. …is that I get to do something about things. As one CCO explained to me, the best part of the job. 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.” 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. Chief risk officers and chief compliance officers are board members who work in corporate settings. These are some of the Chief Compliance Officer's responsibilities: - Defining the necessary level of knowledge on existing and emerging regulatory compliance requirements across the organization. The Emergence of Compliance: A new profession? 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. Board engagement, training and reporting is a critical but often overlooked area of practice for the chief ethics and compliance officer (CECO). It brought up for me the question of who should a Chief Compliance Officer (CCO) report to … The compliance officer should also be able to contact the Board chair directly should there be an issue involving the CEO. Also, despite budget freezes (including on legal), corporations are putting significant resources and funding into compliance and ethics initiatives—or what might be better called the legal risk of business. He must also inform the Board about important issues and material violations. This works in smaller companies, at least, because the Officer over Compliance is compliance-minded and will give due consideration to Compliance input. She is also the founder and director of LawWithoutWalls and the founder and content curator of the Compliance Elliance Journal. 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 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. ENLARGE Among global enterprise CIOs surveyed in 2018, 46 percent say they report to the CEO; in the U.S., the percentage (51 percent) is slightly higher (Figure 2). In fact, separation is now the norm in Health Care organizations. 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. But [because] a number of major companies have done it over the years, it starts to look like a best practice. They “patrol the neighborhood” to ensure employees are complying with the legal and ethical rules, and keep employees from getting into trouble—but they also have the power to stop misconduct once it starts. 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. Michele DeStefano is a professor of law at the University of Miami School of Law. STRUCTURE A.Quality and Clinical Safety Organizational Structure ... cal Officer, Chief Nursing Officer, Chief Financial Officer as well as facility Chief Executive Officers. There is also agreement that compliance is about more than merely complying with the letter of the law. A good example of ethical fading is lawyers reporting billable hours. Once in that position, it becomes hard for a major corporation to explain why they don’t need a compliance department. Should a CCO report … Which sounds even worse than reporting directly to the general counsel to me, but such is life. As a GC interviewee explained to me: A number of the early-mover companies that created compliance departments did so as part of resolving a major mishap or high-profile problem, so it was not necessarily a best practice. In other words, the WME firms offer a glimpse of what other firms might aspire to do. As mentioned earlier, one of the top concerns of senior executives at large publicly traded corporations is regulatory compliance. The secretary can come in late, but they can’t come in late. First, news about job titles: at 76 percent of WME firms, the person with overall ownership of the ethics & compliance program has the title of chief ethics and compliance officer — although only 35 percent of firms have that person solely in charge of ethics and compliance, with no other title. In doing so, they are creating new departments, positions, and ethics-training programs. Therefore, to generate hypotheses about the questions posed in the introduction, I interviewed 70 GCs and compliance officers of S&P 500 corporations across a variety of industries including banking, pharmaceutics, and petroleum. 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. 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. 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 When companies are committed to compliance, lawyers in charge of compliance structure their company’s compliance practices and behaviors accordingly,” but “when companies are not committed to compliance, lawyers do not … promote compliance” and “may even aid their clients to resist and subvert regulation.”. Departmentalization may be just another trapping that is adopted by corporations as a best practice without any resulting change. Most of the time you actually stop things, make things better, get things done . In any business . 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. We have to say they’re working as compliance professionals, not lawyers, but there’s an [un]godly number who have a law degree. In this view, the compliance department’s role is more process and results oriented in some ways than that of the legal department. 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. The biggest caveat for all this data is that we have only 128 firms in the sample size, and they landed in that population because Ethisphere selected them. The compliance chiefs at WME firms also have considerable ability to give input on strategic issues at their businesses, rather than just running around to ensure regulatory compliance. I’m not acting as an in-house lawyer on behalf of the company. (For a preview, see the sidebar “A typology of styles” at the end of this article). Historically, in large publicly traded corporations, the compliance and ethics function was overseen by the chief legal officer (CLO) of the company (which could be the CLO or the GC). Unsurprisingly, in study after study, general counsels (GCs), corporate executives, and compliance officers alike name regulatory risk as one of the greatest threats to their business. 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. 3. 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. Ethisphere has released another analysis of its World’s Most Ethical companies, finding a move toward a more clearly defined chief ethics & compliance officer role and more direct reporting to senior leadership. On the other hand, if the compliance officer is not and does not report to the GC, whenever someone from the compliance department consults with the GC or another lawyer in the in-house legal department, there is a stronger argument that the primary purpose for the communication with someone from the legal department was to seek legal, as opposed to compliance, advice. Often, the compliance function reported to the GC, and sometimes the GC simultaneously served in the CCO role. This one examines job titles, reporting relationships, and staffing. Auditing & Monitoring 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? Communicatio n & Training. Departmentalization fortifies role differentiation as justification for following the letter (instead of the spirit) of the law. America’s Missing Stories: The HistoryMakers’s effort to preserve Black leaders’ experiences in their own words 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. Six Keys to Compliance: Perspectives from the field, HLS Center on the Legal Profession Retweeted, © 2021 Harvard Law School Center on the Legal Profession. Community Home Discussion 12.9K Library 397 Events 0 Members 1.8K In other words, the WME firms offer a glimpse of what other firms might aspire to do. The former assesses the fiscal risks a company takes as … In today’s regulatory environment, demand is high and supply is low for the sought-after profile of Chief Compliance Officer. An effective reporting structure: (1) plays a vital role in creating and fostering a culture of compliance within the organization; (2) sets the tone that compliance is the responsibility of all employees; and (3) keeps the lines of communication open. It brought up for me the question of who should a Chief Compliance Officer (CCO) report to in a company. It has fallen primarily to the chief medical officer to forge this alliance, to form a meaningful and operational liaison between hospital administrators and physicians. 6. Should they serve like cops, counselors, spies, a blend of the three—or something else altogether? The launch of the Challenger, despite the evidence that overwhelmingly predicted its demise, is an example of such segmented decision making: the group that recommended launching it (despite the evidence) couched the decision as a “management” one. You know what I mean? 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 and the general counsel simultaneously. 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. Departmentalization silences the “lightning-rod man” and decreases the emphasis on risks. 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.” These independent compliance departments are developing compliance and ethics programs to prevent noncompliance and to monitor compliance with the law and ethical obligations. Policies/ Procedures. 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. In legal you [recommend], and business gets to say yes or no, take advice or not. 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. Should there be a specific department led by a chief compliance officer within the company hierarchy? It also has potentially differing meanings around the world. As you can see from the chart below, most CCOs do have some other title. Risks are commonly categorized as strategic, reputational, operational, financial, or compliance-related. According to leading sociologists Rob Cross and Andrew Parker, interaction and communication among employees defies static organizational flowcharts. 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. Indeed, Pink posits that incentives can sometimes serve as horse blinders narrowing off the bigger picture and future forward thinking. 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 … . (4) Amending the annual report. Indeed, the opposite might be true. 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. 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. 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. Putting aside the valid argument that privilege is becoming a nonissue because it is the first thing waived by corporations in an investigation, this argument about transparency still fails. 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. Rosen et al. 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). 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. 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. Instead, departmentalization might actually disempower the CCO, create barriers to collaboration between departments, decrease corporate transparency, and increase the perception of lawyers as amoral, legal technicians. Another split exists between WME firms that are publicly traded (median of 26 employees) compared to privately held or nonprofit firms (median of 15). In some companies, Compliance does not have its own Officer. the general counsel simultaneously. 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). 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. general counsels, who moonlight as their firm’s chief compliance officer. Most often found in healthcare and banking, compliance officers are an important component of corporate governance, determining how an organization is managed, directed, and governed, including the relationships between stakeholders and the structure by which company objectives are set and followed. The main responsibility of the CCO is to focus on mechanisms and processes to implement the policies of the bank and ensure that the institution complies with And this often remains true today. The reporting structure of any compliance personnel employed or contracted by the company. Twenty-six percent also hold the title of general counsel — which really means that those people are general counsels, who moonlight as their firm’s chief compliance officer. Who should be in charge of compliance and ethics: the GC or the CCO?  They guide but do not demand adherence to their guidance. Worse yet, extrinsic rewards can even take the good out of doing good. 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. 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 Such a move may, in some circumstances, generate consequences that subvert the potential benefits of departmentalization and create a false sense of complacency that distracts from substantive cultural change. Further, by creating a separate compliance department and changing the reporting structure (having the CCO report to the board, for example), the company will both be in a better position to prevent and stop corporate misconduct and send a message to employees and regulators that it takes compliance seriously and malfeasance will not be tolerated. Cinda 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. 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. 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. The chief risk officer (CRO) or chief risk management officer (CRMO) of a firm or corporation is the executive accountable for enabling the efficient and effective governance of significant risks, and related opportunities, to a business and its various segments. The Chief Compliance Officer provides regular program updates to the Audit Committee, including with respect to the Annual Ethics Certification process. Communicatio n & Training. 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. Thus, Rosen et al. (Hint, hint, Ethisphere.). 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. That’s why I moved from legal. Research studies have consistently shown that open environments and information exchange among people with different experiences, roles, and expertise enhances problem solving. Chief Compliance Officer. Departmentalization ostracizes compliance and creates a “C” in the C-suite without the requisite influence. 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). 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. 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. Indeed, the subject line of the recent Yates Memorandum (see “In the News”), written by Deputy Attorney General Sally Yates, is “individual accountability for corporate wrongdoing.”. 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 involved parent – In this role, compliance officers view themselves as ethics coaches. Also important are CCOs’ reporting relationships. Chief Compliance/ ERM OfficerChief Dianne Judge Public Affairs DirectorVice President Julie Hopsital Liss-Katz ... III. 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. 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 dangers of a compliance-reporting-to-legal structure can be seen in the Wal-Mart Mexican bribery scandal that … True, these new compliance departments are filled with lawyers. 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. 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. According to Daniel Pink, people are not entirely rational. The Chief Information Security Officer (CISO) is a position within an organization whose genesis lies in the IT department. STRUCTURE A.Quality and Clinical Safety Organizational Structure ... cal Officer, Chief Nursing Officer, Chief Financial Officer as well as facility Chief Executive Officers. They don’t care what we tell [them] about ethics. Even if the turf wars do not erupt, there is a simple mathematical problem: in a corporation, one plus one does not always equal two. 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