Boards of Directors Fall Short on Ethics Oversight, According to New Study by LRN Corporation

Too Little Time, Priority, Depth, and Strategy on Ethics and Compliance, say Chief Ethics and Compliance Officers; They Feel Like “Second-Class Citizens”

NEW YORK, May 31, 2018 (GLOBE NEWSWIRE) — Ethics and compliance (E&C) – the function designed to help companies’ meet their legal and ethical responsibilities and protect their reputations – is too often neglected by boards of directors at major companies, say many Chief Ethics and Compliance Officers (CECOs) in new research from LRN Corporation.

“It is settled law and policy that boards of directors are required to oversee company compliance with law and regulation, but it’s not shocking that boards may not give E&C its due, considering their huge range of responsibilities,” says David Greenberg, LRN’s special advisor, about LRN’s new report: “What’s the Tone at the Very Top? The Role of Boards in Overseeing Corporate Ethics and Compliance.

“But the failure to oversee E&C robustly can have huge consequences, since the ethics and compliance function is tied directly to the board’s central concerns: value and reputation. An ethics and compliance failure can and does 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.”

The report, 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 that 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.

Giving E&C short shrift is tied to many of the corporate scandals that boards seek at all costs to avoid. Says Greenberg, a former CECO and current governance committee chair of an NYSE-listed company: “Even if ethics and compliance oversight were not a requirement, boards would still be well advised to take a hands-on approach. Smart boards do, as they recognize that one of the first questions that comes up when a compliance failure happens is, ‘Where was the board?’”

The report quotes individual CECOs on the relationship between boards and the E&C function, and the CECOs remarks underscore the gap between E&C and most boards. 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 don’t phrase it nicely or in a way that looks good for your 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. 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.

Click here to download the report.