Ethics Exchange: Should Compliance Report to the General Counsel?

By Ethics Exchange posted Jan 31,2014 15:46

Steve Priest: Jeff, one of the most contentious issues for Ethics and Compliance “insiders” is whether E&C Officers or functions should report up to the General Counsel. Is this an important question, or the equivalent of medieval theologians arguing about how many angels can fit on the head of the pin?

Jeff Kaplan: It is an important question – but within it lies two different issues which, E&C theologian that I aim to be, I feel should be separated, even though they are somewhat related. The first concerns what should be the informational reporting by the E&C officer, such as periodic reporting on the overall operation of the program and real-time reporting when allegations of wrongdoing that pose a substantial risk to the company are raised. The second concerns administrative reporting – meaning who supervises the E&C officer, determines her compensation, and so forth.

Steve: I think the contentiousness transcends these. Let’s start with some outsiders. Over ten years ago, in a public letter to Tenet Healthcare, Sen. Charles Grassley condemned them for having a General Counsel who was also Chief Compliance Officer, saying “It doesn't take a pig farmer from Iowa to smell the stench of conflict in that arrangement.” More recently US Health and Human Services has prohibited some pharmaceutical firms from having Compliance report to the General Counsel. Were Grassley and HHS right?

Jeff: What’s noticeable about these situations is that they involve only companies that have gotten in trouble. The government has had countless opportunities to make this a rule of general applicability and has declined to do so every time. To use a medical analogy, what’s essential for a patient who has had a heart attack is not necessarily indicated for those who merely have somewhat elevated cholesterol levels. So, to my mind it depends - on the company’s risks, culture, and also on what kind of informational reporting is done.

Steve: I expect a great lawyer to say “it depends.” Unfortunately, I have arrived at the same conclusion. I have seen companies with very good E&C programs where the GC is also the Ethics and Compliance Officer. And some pretty mediocre programs where the GC is the ECO. Similarly I have seen both very good and quite bad programs when the two are separated. But more critically than the conditions you mentioned—risks, culture, reporting—I believe the difference is in the people. The fundamental personal commitments of the GC, ECO, Chair of the Audit Committee and the CEO matter a lot more than the formal governance structure.

Jeff, given your expertise in conflicts of interest, do you think Sen. Grassley is right? Or have you never been a pig farmer?

Jeff: Lawyers are more often analogized to plumbers than pig farmers, although both face similar olfactory challenges in their work. And, shifting gears, I agree that the people involved are in many ways key to effective reporting and program oversight. But, to follow the wisdom of James Madison (who was a farmer and who – as the Father of the Constitution – also knew something about the law) that since men are not angels they need governments, the same applies in my view to corporate governance. So, here are my two maxims of E&C reporting. First, in all organizations there should be strong informational reporting by the E&C officer to senior management and the board on both program operations and serious allegations. Second, where the E&C officer does report administratively to the GC, the pertinent governance documentation should provide that neither her responsibilities nor her compensation can be reduced without the prior written approval of the audit committee (or other board committee charged with compliance program oversight). Do these pass your smell test?

Steve: I think you are spot on, with a couple of amendments to your maxims. Regarding informational reporting, “strong” should include “prompt.” I have seen too many audit committee chairs left in the dark too long. We can also learn from the audit profession by requiring E&C officers to meet in executive session with the audit committee.

These maxims, however, are necessary but not sufficient. E&C officers must have the courage to tell the truth, even if it might not be appreciated by other organizational leaders. And the CEO, GC and Board members must have the courage to take a medium and long term view of the organization’s success, rather than obsess on this quarter’s results. Jeff, right now regulators and public officials believe that business cannot or will not self-police. They believe business is only in it for short term financial results. And business leaders, along with many more Americans, believe that Washington politicians cannot or will not govern in the long term interest of our nation, instead focusing on the next election. Perhaps we need another James Madison to help us break through this stinky situation.

#BoardReporting #Corporategovernance