Our forefathers realized that angels do not govern men, and that rules were needed to successfully govern. Corporations are the same. While most employees and managers have good intentions, rules are needed to successfully run the business. In its 2011 National Business Ethics Survey, the Ethics Resource Center, which releases a survey of corporate ethical standards every two years, found disturbing trends that may require companies to step up their ethics and compliance policies.
The survey found that the percentage of employees who perceived pressure to compromise standards in order to do their jobs climbed five points from 2009, to 13 percent. While misconduct witnessed by U.S. workers declined from the 2009 survey, 45 percent of respondents still stated they had witnessed misconduct, and reporting of misconduct is now at near highs. The survey also found that employees working for organizations with effective compliance programs feel less pressure to compromise standards, see less misconduct, report misconduct more frequently and are not as likely to suffer retaliation for reporting.
Employment lawyers are quite familiar with how an effective anti-discrimination and anti-harassment compliance policy can help reduce civil liability. But an effective compliance policy should be much broader and more robust. One rogue executive or manager can create criminal liability for the corporation, but an effective compliance policy can help limit corporate liability. Thus, in addition to helping employers define what is expected of their employees, an effective corporate compliance policy can be the cheapest insurance policy a business can buy.
Recent attention on laws such as Sarbanes-Oxley and Dodd-Frank has created a common misconception that only publicly-traded companies need compliance policies. While compliance policies are mandated for some institutions, an effective compliance policy is helpful for companies of all sizes. Twenty years ago, the United States Sentencing Commission established sentencing guidelines to establish a uniform framework for punishing corporations and other organizations that break the law. These Federal Sentencing Guidelines (FSGs) apply to all organizations, not just publicly traded companies. They establish detailed ethics and compliance guidelines by which the risk of corporate liability for ethical misdeeds can be substantially reduced.
For example, the FSGs require judges to consider whether a convicted corporation had established an “effective compliance program” prior to the violation taking place; in other words, whether the corporation had taken appropriate steps to prevent and detect violations of the law. The FSGs use a carrot and stick approach—a company can receive reduced penalties for having a compliance program, but substantial penalties are levied for corporations that tolerated or condoned improper behavior.
Under the FSGs, the range of potential fines for a criminal conviction can be significantly reduced—in some cases up to 95 percent—if an organization can demonstrate that it had an effective compliance and ethics program in place and that the criminal violation represented an aberration within an otherwise law-abiding business. By way of contrast, an organization where senior personnel played a role in the federal offense, did not cooperate in the investigation of the offense and had no effective compliance program faces a fine as much as 80 times higher than a company that was not saddled with these negative factors. Thus, by being proactive, taking preventive steps and complying with the established guidelines, business organizations can dramatically decrease the likelihood of being penalized for a federal violation.
Looking ahead, the question of whether a compliance and ethics program is “effective” is likely going to be the subject of a more rigorous review.
In part II, we will analyze what makes an effective compliance policy.