Our company, Riordan Manufacturing is a global plastics manufacturer employing 550 people with projected annual earnings of $46 million. The company is wholly owned by Riordan Industries, a Fortune 1000 enterprise with revenues in excess of $1 billion. While the introduction of ethics into the curriculum is laudable, it really is not what corporate compliance is about. In a sense compliance is beyond ethics--not because compliance is a higher form of ethical behavior, but because compliance is a different issue altogether. To be compliant is not necessarily to be ethical (Baxter & Evelyn, 1999). Nevertheless, there is an obvious interplay between ethics and compliance. In many cases government regulation is designed to prohibit or constrain unethical behavior. Even where the ethical dimension is absent, compliance with regulation shares the problem of ethical behavior in that it can rarely be expressed in terms that business students and faculty can readily appreciate: profits and losses.
When corporate compliance is considered in business education, it is treated as merely another variable to be added into the equation. Most frequently it is considered just another cost of doing business--and then a cost that should be minimized or avoided, if possible. As one professor writes, while we do "try, to some degree, to teach interpersonal skills, teamwork skills, negotiating skills, and political skills . . . we don't do a very good job . . . because their mastery requires a lot of practice, and most business schools have been designed without practice fields" ( Leavitt 1989, 40). It is much easier to simply try to insert compliance with government regulation and its attendant costs into an analytical model as yet another constraint or, worse, to note its existence and then ignore it because it cannot be reduced to some number.
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The practical benefits of managerial judging are considerable and likely to result in a net improvement in the efficiency of civil litigation, notwithstanding the increased costs attendant on the more active judicial role (Lipsky & Ronald, 1998). In this respect, it should be emphasized that the consequences of delay and inefficiency in the court system extend further than simply increasing the cost of proceedings in an immediate sense: they pose a threat to the continued existence of the civil trial system itself as a viable option for civil dispute resolution (Podgor, 2006). It is significant that, in general, the legal profession also appears to favor the idea.
At an early stage of the proceedings, the judge is able to explain to the parties the advantages of alternative dispute resolution, and, based on his or her assessment of the case, can refer the parties to mediation or case appraisal in accordance with the proposed rules governing alternative dispute resolution (Lipsky & Ronald, 1998). The judge's greater familiarity with the progress of a case under a system of individual case assignment reduces the opportunity for parties or their legal representatives to exploit the system by abusing pre-trial procedures. And if any such abuse does occur, that familiarity will enable the judge to impose timely and appropriate sanctions. The judge's constant involvement in the proceedings also increases the efficiency and accuracy with which issues are defined. This in turn provides a better basis for settlement negotiations and, should the case reach this stage, reduces the time and cost of the trial. Increased judicial supervision may also encourage clients to monitor more closely the conduct of their legal representatives (Huff & Note, 2006).
Enterprise and product liability
For it to have any meaningful impact, the concept of interactive compliance must be "sold" to business faculties, students, and graduates as a more effective and efficient way of living with and prospering under government regulation. In short, given the nature of the beast that is the business school, this selling must show how being compliant makes good business sense--as measured in dollars and cents. Is it to a corporation's advantage to be compliant? On a fairly basic level, if compliance relieves the corporation of the fines and penalties of regulatory violations, sure. But this may not be enough of an incentive. The "stick" mentality has its limitations, for it is not the severity of the punishment that makes a sanction effective; it is the certainty that the punishment will be imposed. In the area of corporate compliance, detection and consequential sanction are anything but certain. So there must be a better way. This is where interactive compliance comes into play.
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The Accounting Model
An exact parallel to the interactive corporate compliance model already exists in the area of corporate financial reporting. Perhaps the quintessential example of the compliance situation is the requirement that a company's financial statements be prepared in conformity with generally accepted accounting principles (GAAP). The compliance investigation is conducted not by a government official, but by a highly trained, independent professional--the certified public accountant (CPA). The CPA conducting the audit examines the corporate records in order to express his or her opinion on the "fairness" of the financial statements. These audits are expensive--in terms of time, effort, aggravation, and, maybe most importantly, money. But the corporation can reduce the costs of the audit by engaging in interactive compliance.
In the financial reporting sphere, interactive compliance takes the form of an internal control structure. All companies have an internal control mechanism that is designed to safeguard the company's assets and give some assurance that the accounting numbers being spewed out of the accounting system are reasonably reliable. However, not all internal control systems are created equal. Some are well designed, manned by certified internal auditors (or CIAS, a fitting acronym) who report directly to an independent internal audit committee, which is outside the "line of fire" and influence of management (Lipsky & Ronald, 1998). Others are considerably weaker. Clearly, the stronger the internal control structure is, the more expensive it will be to create, implement, and maintain. So where is the payoff?
The first advantage of a strong system of internal control is found in the enhanced quality of the information being provided to executives, managers, investors, and other users. However, while this advantage is unquestionably important, it is blunted somewhat by the fact that it is difficult to put a price tag on the improvement of information quality. For those who like to "crunch numbers," as accountants do, the cost-benefit trade-off is uncertain at best. More "selling" is required before the corporation will "buy" into this. A second advantage is a bit more quantifiable (BusinessWeek, 2002). The stronger the internal control system, the less likely that defalcations and other employee misdeeds will go undetected. Still, the actual savings cannot be calculated with any precision, and even if they could, the total dollar amounts involved may not be that significant. As with the first advantage, it would be difficult to justify the additional costs of a stronger system of internal control in terms of dollars-and-cents benefits. To make matters worse in trying to draw an analogy, neither of these advantages carries over to the broader field of corporate compliance (Baxter & Evelyn, 1999). However, a third advantage of a strong system of internal control--the reduced cost of compliance--does.
Enterprise and product liability
Corporations should view codes of conduct and compliance programs as desirable goals, irrespective of the legal implications of those codes. A litany of good reasons supports the adoption of a corporate code. Internally, the code offers an unambiguous statement of normative standards for those employees who want to conform their behavior to corporate rules. Employees are less apt to violate such rules if they know the company is serious about enforcing its standards. Corporate codes also provide a meaningful message to the public; a corporate defendant is less likely to be viewed with the disdain reserved for lawbreakers when the company in question did all it could to prevent the violation. Moreover, prosecutors at least will consider--even if they will not credit--the existence of an effective compliance program before asserting liability against a company whose carefully formulated and enforced code of conduct has been violated by an errant employee (Huff & Note, 2006). Consequently, even if the law governing codes remains in its present ambiguous state, the development of corporate codes is likely to continue unabated.
The adoption of a code, however, is rarely a purely voluntary act and is less likely to be a voluntary act in the future. While the decision to develop a code may technically be "voluntary," the ambient circumstances surrounding the adoption of most codes create many subtle--and not so subtle--incentives to foster compliance programs. Moreover, some companies are under a statutory obligation to develop such programs. For example, ITSFEA represents one instance in which Congress required corporations to develop internal standards [15 U.S.C.A. sec. 780(f) (Supp. 1989)] (Lipsky & Ronald, 1998). Similarly, agencies with prosecutorial power are turning toward codes of conduct as part of the settlement process. These codes, and other examples of corporate self-governance such as internal corporate investigations, are becoming a regular staple among the conditions on which favorable settlements can be based in negotiations with government agencies. Corporate codes of conduct are a product of the pressures created by the current regulatory environment.
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The current state of the law deprives society of the benefits that would accrue from widespread state-of-the-art compliance programs. Despite cynicism that is sometimes well grounded, corporate self-regulation provides a valuable check against antisocial behavior. The corporation is in the best position to predict sources of potential misconduct and to develop the most appropriate controls. The controls that the corporation develops are likely to be more efficient than a system imposed by the government. While no system of self-regulation can, or should, exist completely unchecked, corporate self-regulation gives society an additional measure of protection that is worth promoting and facilitating.
Finally, corporate self-regulation provides a superior alternative to tort or criminal liability as a means to effect society's expectations of business. Criminal penalties and burgeoning punitive damages awards exist primarily to shape employer behavior. Corporate liability has widespread social effects. Unbridled tort liability imposes a hidden tax on the American economy; the criminalization of administrative offenses usurps limited prosecutorial resources and adds a harrowing dimension to often murky areas of the law. Corporate self regulation provides a controlled, efficient, and rational alternative (Podgor, 2006). Common law rules governing the effect of employers' instructions evolved in another era--before the age of corporate codes, compliance departments, employee hotlines, and other procedures adopted by modern corporations (Baxter & Evelyn, 1999). The legal standard should be adapted to this new reality.
Legal forms of business
The corporate compliance community consists primarily of lawyers and those closely aligned with corporate legal staffs. They tend to be legalistic in approach and to be caught up primarily by precedents. That is, there is a tendency to use only those compliance devices that have been used by others. There tends not to be an emphasis on measurable results unless such measurements are required by government (e.g., in EEO programs). Those who participate in this effort tend to be very sincere in their desire to assure compliance with the law. They also tend, however, not to identify with the moral language of the business ethicist, although they are equally sincere in their devotion.
The second group is those who are involved in the business ethics movement. They tend to focus primarily on individual decision making and value analysis. There is great devotion to following the values of society, but too often there is an absence of practical orientation in this program. They also tend to understate the role of groups and institutional dynamics in their focus on individual decision making. Their message may be an important one, but its impact is far too transitory. The business ethicists are correct, however, to go beyond the requirements of the law and to look beyond precedents. Those who understand this point in the corporate compliance environment also advise their clients that they need be concerned not only with what the law currently requires, but also with how the law will probably be expanded if businesses attempt to exploit loopholes. The business ethics effort has also developed some activists who focus on practical efforts to inculcate ethics. In these activities the business ethicists come closest to the corporate compliance community.
The third group focuses on enforcement and policy analysis. Too many in this school tend to be hindered by their dedication to criminal enforcement and avoid further analysis or attention to the results. The members of the old guard in this field are content to push for increased penalties or new punitive measures and to avoid the intellectual rigors of questioning their underlying assumptions. There are, however, those in public policy like Louis S. Bezich who are concerned with finding techniques that will work in the attempt to understand and change the dynamics of corporate conduct. Those in the old guard of this community are right in their assessment that willful misconduct must be punished. But they have much to learn from their colleagues who are willing to try a mix of negative and positive techniques to achieve the desired result. According to some people, corporate lawbreaking appears to be the norm in an anything-goes business world. Insider trading, government contract fraud, bid rigging, and uncontrolled hazardous waste dumping are all part of the "popular" image of business. And what of the lawyers who deal with the corporate behemoths? They are neatly divided into the white hats and the black hats. The white hats are worn by the embattled plaintiffs' lawyers who bring villainous corporate scoundrels to their knees and by the U.S. attorneys who replace pinstripes with prison stripes (Huff & Note, 2006). The villains in black represent the defendants' bar and are known as unctuous mouthpieces who help the rich wrongdoers escape the law.
In this setting what is the role of the corporate counsel who is the legal representative of the corporation? Is it his or her responsibility to prevent the company from breaking the law? Are corporate counsel the designated conscience of business? For some corporate counsel the answer is that compliance is management's responsibility. They see their role as advisor, or as pit bull--but not as watchdog. Some managers see the law as the business of the lawyers. They believe that counsel should take care of the "legal stuff," while they run the business (BusinessWeek, 2002).
Neither of these descriptions is correct, but they both contain a certain amount of wisdom (BusinessWeek, 2002). The best corporate legal advice includes all the steps necessary to anticipate and avoid risks; it also includes a forecast of the long-term legal consequences of corporate actions. If the corporate client fails to consider the legal environment, in the long run it will face the painful consequences of punitive legislation, business taxes, abusive consent decrees, disruptive litigation, and the spread of an unsympathetic legal system. In the simplest terms, the difference between doing what is "legal" and doing what is "ethical" may be just the length of one legislative session (Podgor, 2006). It may not take Congress or a state legislature very long to get even with companies that try to live on loopholes.
Even beyond the dollars-and-cents duty to the client, corporate counsel, as members of the legal profession, are subject to other obligations. The general apathy that has created a void where effective compliance programs should be is not in the interest of our children, our neighborhoods, or our wallets: All are the victims of ethical sloth in business. If corporate counsel do not wish to help guide business behavior, someone else is likely to fill the void. Corporate counsel who ignore these professional responsibilities may find themselves wearing the black hat due to their inaction (Huff & Note, 2006). Accepting that corporate counsel has a duty to do more than just blindly follow the orders of company management, how is that duty defined? Given that many management officials are not motivated even to discuss a compliance program until a grand jury subpoena arrives, it is therefore corporate counsel's role to help management implement compliance programs, acting as a catalyst, a guide, and a tool.
Sadly, corporate counsel practicing preventive law and fulfilling their professional responsibility through compliance initiatives bear the additional responsibility of explaining to the corporate client the dangers of a compliance program that is too good (Podgor, 2006). An ambitious compliance program, including audits and evaluations of employees' legal performance, can be a very risky business for the company. Government prosecutors, plaintiffs' lawyers, and skeptical judges will all look to the materials produced in such campaigns as necessary for use in lawsuits attacking the corporation's failures in the realm of compliance, while at the same time debunking corporate protests as mere obstructions to the search for "everyman's evidence" (Lipsky & Ronald, 1998). In one case, a plaintiff actually incorporated a copy of a company's business conduct guidelines into its complaint.
What Is Needed For A Compliance Program?
If counsel, or any other compliance-oriented corporate groups, are inclined to push for effective compliance programs, what must they do? Certainly there are many programs in many companies, and thrifty counsel might be tempted to save time and effort by just picking up what has been done somewhere else and bringing it home (Podgor, 2006). Is there really a need for anything more than this? With all of the attention that has been given to at least some areas of corporate compliance, a debilitating narrowness of focus has remained in this work. Nor can those who work in compliance point proudly to outstanding results. One need only look at each morning's Wall Street Journal headlines on the latest business indictments to reach this conclusion.
To gather some insight on why this might be, we can look at a hypothetical situation involving Riordan Manufacturing. Riordan Manufacturingââ‚¬â„¢s sales are off; management has decided to recast its sales program and calls in two experts--a compliance expert and a sales manager (BusinessWeek, 2002). Applying what they have learned from their own activities, what type of program would each set up?
One suspects that the compliance expert would do this: He would start with a 25-page booklet written by an accountant--or, more likely, five different accountants--explaining the importance of selling. He would have a financial analyst write a statement for the company's chief executive officer to sign, announcing the company's commitment to selling. Once a year he would bring in another high-priced financial analyst to give a lecture on the importance of selling and to warn of dire consequences if sales fall flat. The compliance expert's bottom line message would be "Bad things will happen if you don't sell." This program would offer no rewards, no bonuses, no controls, and no excitement. In fact, the compliance expert has no real knowledge of what works, but he does know that he has always used these methods before.