Commentary | Compliance
Focussing on corporate culture The compliance revolution has had a dramatic impact on numerous actors in the corporate governance world, including chief compliance officers, internal auditors, human resources and finance officers. Additionally, we have seen new strategies, controls and procedures to maximise the impact of ethics and compliance programmes. Yet for all these changes, we have failed to see any significant changes where it matters most – at the corporate board level. Corporate board members devote significant time to financial oversight and strategy, while ignoring steps needed to protect and promote its most important intangible asset – its culture and reputation. Corporate board members would rather discuss strategy issues and ignore the important questions surrounding its culture. Corporate boards are due for a rude awakening – compliance expectations and competing stakeholders are demanding more effective oversight. Over the last 10 years, we have witnessed corporate scandals and misconduct that could have been prevented or, at least, mitigated by a corporate board’s proper oversight and management of a company’s culture and compliance programme. All too often, corporate boards fail to identify
EFFECTIVE SUPERVISION Every company should have a former or current compliance officer on the board 14 Ethical Boardroom | Spring 2019
The fundamental disconnect between corporate boards and ethics and compliance Michael Volkov
CEO and owner of The Volkov Law Group potential red flags of serious misconduct issues, or ignore obvious risks that result in corporate disasters, reputational harm and significant enforcement actions, coupled with collateral litigation. In this era of accountability and increasing demand by corporate stakeholders, including activist owners and shareholders, corporate boards have to step up and bring about a new and improved level of performance.
High-profile corporate board oversight failures
The corporate governance landscape is littered with failures and corporate disasters. These scandals occurred under the watch and oversight of allegedly sophisticated boards. Let’s consider three examples: ■ Wells Fargo Bank suffered serious legal and reputational harm at the hands of a multitude of scandals, which have only highlighted the board’s failure to implement appropriate risk management and ethics and compliance programme oversight. Wells Fargo has yet to emerge with a new and effective risk management system with adequate resources to support an independent and effective ethics and compliance programme ■ Theranos was a multi-billiondollar blood testing company that ultimately collapsed because it was built on CEO-directed fraud. Theranos’s allegedly highprofi le corporate board failed to detect this pervasive fraud, despite numerous warning signs
and red flags. Former CEO and COO, Elizabeth Holmes and Ramesh ‘Sunny’ Balwani await a federal criminal trial on fraud charges ■ Volkswagen and its related companies have suffered from a massive fraudulent emissions-cheating scandal that was orchestrated at the CEO and senior management level of the company. The VW board, however, was a significant contributing part of the problem. A former VW executive described the scandal as ‘all but inevitable’, due to ‘the company’s isolation, its clannish board and a deep-rooted hostility to environmental regulation among its engineers’. It is easy to imagine but hard to accept that VW would have chosen the same path had the board and its executive team been trained and understood the implications of its misguided strategy to avoid environmental regulatory requirements In picking through the rubble of a corporate scandal and disaster, it is always important to examine what the board knew or should have known and what might have occurred under proper oversight and management. The old adage – pennywise but pound foolish – applies when a company fails to invest in its board ethics and compliance programme responsibilities, especially when considering the consequences to a company that suffers from a corporate scandal like those listed above.
Bringing the board up to speed Let’s face it – corporate boards are not adept at overseeing a company’s ethics and compliance programme. Every company should have a former or existing compliance professional serving on its board. In the absence of one or more compliance professionals appointed to a corporate board, it is imperative that corporate boards devote more time and attention to learning how to monitor and effectively supervise an effective ethics and compliance programme. In the absence of a board member who has prior compliance expertise, corporate boards either ignore or struggle to fulfi l their compliance oversight responsibilities. Corporate board performance is suffering from this serious gap between compliance responsibilities and capabilities. Corporate boards are under increasing pressure to improve their performance, including in the area of compliance. There are five steps that corporate boards have to undertake: