Too Little Time, Priority and Depth on Ethics and Compliance on the Part of Directors, say Chief Ethics and Compliance Officers; This Carries Real Dangers for Companies and Board Members
NEW YORK, Aug. 21, 2018 (GLOBE NEWSWIRE) — Failure by boards of directors to robustly oversee ethics and compliance (E&C) – the function designed to help companies’ meet their legal and ethical responsibilities and protect their reputations – can have dire legal and financial consequences for companies as well as board members themselves.
And, this represents a significant problem, as many Chief Ethics and Compliance Officers (CECOs) say that boards tend to give E&C short shrift, according to a new report from ethics and compliance firm LRN Corporation.
“Neglecting E&C is tied to many of the corporate scandals that boards seek at all costs to avoid,” says David Greenberg, LRN’s special advisor, a former CECO and current governance committee chair of an NYSE-listed company. “One of the first questions that comes up when a compliance failure happens is, ‘Where was the board?’”
Case in point: the Weinstein Company’s board failed to act against its founder’s sexual abuse until it absolutely had to, and the company ultimately declared bankruptcy after immense public backlash. And the Weinstein board is hardly an anomaly. Despite the minefield presented by potential E&C meltdowns, LRN’s report, “What’s the Tone at the Very Top? The Role of Boards in Overseeing Corporate Ethics and Compliance,” based on in-depth interviews with 26 present and past CECOs of large companies, found that:
- Only about 40% of CECOs reported that their boards have metrics in place for measuring E&C effectiveness.
- Only 40% of CECOs say that their boards of directors are willing to hold senior executives accountable for misconduct.
- Nearly half say that their board has not received education and training on their E&C responsibilities.
- Over 50% say their boards spend two hours or fewer working on E&C each year.
- About 40% say their boards have not done a “deep dive” on compliance failures and scandals, despite recent Department of Justice regulations requiring them to do so.
“Ethics and compliance failures can have huge consequences, since the ethics and compliance function is tied directly to the board’s central concerns: value and reputation. Such lapses on the part of boards can and do blow up companies, devastating their reputation and valuation alike,” says Emily Miner, member of the E&C advisory team at LRN. “And individual board members may also be in jeopardy in the event of E&C failures.”
Says Greenberg, “Beyond damage to the company, since it’s settled law and policy that boards of directors are required to oversee company compliance with law and regulation, the worst compliance meltdowns can cause legal damage to individual board members. These situations may affect them for the rest of their lives.”
Bringing to life the dangerous disconnect between boards and E&C, the report quotes individual CECOs on the relationship between boards and the E&C function. For instance:
- “The board should think of compliance as beyond FCPA and Sarbanes Oxley. Board members’ understanding beyond those two statutes is fuzzy at best.”
- “Unless there is a big issue, the tendency is to [just] make ethics and compliance part of the board’s pre-read packet.”
- “Boards don’t often ask ‘Tell us something we don’t know. Where are the difficult issues that we should know about that we haven’t been talking about?’”
- “The board is passive – it doesn’t have a plan or strategy for ethics and compliance. It needs one.”
- “The problem is the board doesn’t spend enough time on any ethics and compliance issue. We’re last on the agenda and often there is not time at all.”
- “I want the board to ask for an open, honest report on the status of compliance, and [not to] phrase it nicely or in a way that looks good for [my] CEO.”
- “We don’t measure ethical culture, but we should.”
- “The board should be asking senior management something – anything – about ethics and compliance. Neither the CEO nor CFO need to report what they have done.”
Not all the findings in the study are bad news, however. LRN and the report emphasize how important it is for boards and leaders to create business operations and company cultures in which E&C is “built in” rather than “tacked on.” In fact, “the high-functioning boards in the companies we studied see ethics and compliance as foundational to the business, hold leadership accountable for E&C outcomes and develop a long-term game plan and rigorous metrics for the E&C function,” says Miner.
“Ultimately, the gulf between CECOs and boards can be bridged – and the companies that get it right in our study show the way – but it requires boards to take meaningful steps to acknowledge the very real financial, tactical, and moral benefits of the E&C function. Ethics and compliance needs more support and scrutiny from boards if it is to safeguard company reputation and performance,” Greenberg says.
LRN offers education solutions that help boards become more hands-on with E&C, which include one-hour sessions exploring the evolving E&C landscape; half-day sessions using case studies to open discussions around the role of boards in E&C; full-day sessions featuring strategies for the board to oversee E&C; and off-the-shelf content that E&C leaders can use to facilitate interactive training with their board.
Click here to download the report.