Ethics Whisperer

Friday, January 23, 2009

Of Mice and Lawyers

One puzzle of current attempts to defang the compliance function is why it seems to some, particularly members of the Legal Department, a good idea to have the Chief Compliance Officer report to the Legal Department. The idea would be laughable except for the fact that it is carrying the day. This is one of the few things in compliance that can be made perfectly clear.

Go back to the beginning which is the Federal Sentencing Commission in the mid-1980s. The country had survived the scandals in the defense industry but was in the throws of economic collapse at the hands of a sick financial system run by scoundrels. Some folks refer to this as “the S&L Crisis” which was thought to be the financial crisis to end all financial crises. Maybe not.

In response to this perceived increase in corporate misconduct, the Federal Sentencing Commission decided to develop guidelines for sentencing companies convicted of criminal conduct. It was intended that such companies be assured of suitable and consistent punishment.

But the Commission conceded the obvious fact that even the best corporations may have individual members who do reprehensible things in the name of the corporation. Thus, the Sentencing Guidelines specified a model of what counts as a good citizen corporation even in cases in which an individual or individuals have committed crimes in the name of the corporation.

The idea is that good citizen corporations will have ethics or compliance programs designed to detect, prevent and correct misconduct by individuals prone to wrong doing even at the highest levels of the corporation. The Commission defined an effective ethics or compliance program as including seven elements which are now the recognized building blocks of all reputable ethics and compliance programs.

The Sentencing Commission was not under the delusion that savings and loans, banks, and brokerages had committed wrong doing because their legal departments were understaffed. In fact, they had armies of loophole seeking, regulation side stepping attorneys. It was obvious to all that legal departments had failed to detect, prevent and correct the wrong doing that resulted in the economic crimes of the late 1980s and early 1990s. An additional system of checks and balances was to be instituted to allow members of the organization to point out wrong doing at even the highest levels of the organization and without fear or retaliation from those high levels – even if those high levels include members of the legal department. The Commission was not trying to add staff to the legal function but instead was trying to add a separate element to a system of check and balances.

This is not to say that lawyers can not or do not make good compliance officers. Some do and some don’t. Former Naval Commanders, former CEOs, the theologically or philosophically trained, CPAs, internal auditors, social workers and many others sometimes make good compliance officers. But none can succeed if they are thwarted by an ill-conceived organizational structure that places them in the executive team’s harem.

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