Financial Regulatory Forum

Pressures of high revenues, growth, fuel compliance shortcuts, study finds

By Guest Contributor
July 26, 2012

By Julie DiMauro and Stuart Gittleman

NEW YORK, July 26 (Thomson Reuters Accelus) – Most Fortune 500 companies have the components of a comprehensive compliance program, but many have too many employees who feel pressured to compromise standards, a recent nationwide survey revealed. Pressures intensify in periods of growth and high profits, the survey’s sponsor said.
The National Business Ethics Survey (NBES) study, for the nonpartisan research group Ethics Resource Center (ERC), polled adult employees in a wide range of job titles working at least 20 hours per week for U.S.-based for-profit companies with yearly revenues of $5 billion or more.


The workers were asked last month about how their firms embodied the principles effective compliance program, as described by the U.S. Sentencing Commission Guidelines for Organizations, the Sarbanes-Oxley Act of 2002 and current professional standards for formal ethics and compliance programs.
Such principles, as outlined by the  Sentencing Guidelines, are the comprehensiveness of the program; the staff and resources devoted to the program, including auditing efforts; whether employees are adequately informed of the program and are convinced of the organization’s commitment to the program; and whether the program is tailored to detect the types of misconduct most likely to occur in the organization’s line of business.

Measurements include the pervasiveness of the criminal conduct throughout the organization; the seriousness, duration, and frequency of the misconduct; any remedial efforts undertaken such as restitution, disciplinary action, and revisions to the compliance program; the promptness of any disclosure of the wrongdoing to the government; and the level of cooperation given during any governmental investigation.

Employees surveyed said their companies’ compliance programs are generally comprehensive and have a strong commitment from senior management. A full 60 percent of the companies whose employees were surveyed operate compliance programs that feature all six of the core elements of a comprehensive ethics and compliance program. This number is fairly high, particularly when compared to the 41 percent of the rest of U.S.-based companies, the ERC said.

Another strong point is that 81 percent of the respondents said they believe discipline for wrongdoing would apply across the board at their job, from the most junior employee to the top C-level suite.

But higher revenues entail more risks. The higher-revenue companies ($9 to $30 billion), facing significant public scrutiny, have the greatest number of employees who feel stressed and thereby pressured to compromise compliance standards in their job. A full 27 percent of Fortune 500 employees who watched the stock price throughout the work day said they felt pressured to break the rules. And 90 percent of those stressed employees said they observed misconduct on the job by colleagues. This was twice the rate reported among those who did not feel pressured to compromise standards.

“When the economy is strong, the focus is on profits and growth, and the risks assumed to get there are more tolerated. When growth and profits are down, the company shifts its priorities to avoiding problems such as regulatory investigations and fines, and risks go down,” ERC President Patricia Harned said in announcing the report’s release.
Merger and acquisition activity can also make risk-taking more commonplace, and these structural changes occur more in larger companies like the Fortune 500 ones at the heart of the survey and can add stress to employees. The survey reported that 58 percent of employees in merging companies observed misconduct, which was more than in companies not undergoing this type of activity.
Written standards for ethical conduct are only the first step, the survey warned. “Although Fortune 500 companies have done a great job in assembling the components of a comprehensive ethics and compliance program, there are further steps to be taken by such companies,” said Amy Horton, associate general counsel for NASDAQ OMX Group, Inc.

Indeed, only half the respondents felt that ethical behavior was rewarded by their companies, and over half of them – 52 percent – felt that they could not report misconduct they had observed, because they doubted the confidentiality of the process.

“There are several things companies can do to address this problem. First, don’t isolate compliance into one department alone. The management team and board are important persons to include in the process, but to improve the ethical fabric of a whole company, you need to deputize some regular workers to take on this task. At all levels of the organization, get people willing to work on compliance issues and have them meet periodically to discuss them,” Horton said.
Compliance monitoring and practice should be a part of every manager’s job description and performance review, Horton added. A strong ethical culture that is well-managed and well-communicated to a firm’s employees will result less observed misconduct and more reporting of any detected violations, because the employees will see that ethics is a top business priority, the survey noted.

Investigations cost money and time and may cause reputational damage to a company, when the same effort could go into compliance development and training, Harned added. She suggested that companies work with industry associations to share strategies that work and to benchmark their policies and results.
“ROLE MODELSs”
“Fortune 500 companies are the leaders of our economy, with a lot of revenue and jobs. Our country also needs them to be ethical role models. The [ERC] report shows that that most companies have strong compliance programs than can help them do better in the years ahead,” said Michael Oxley, ERC board chairman and of counsel at the law firm Baker Hostetler LLP.
Oxley previously served 25 years as an Ohio Republican Congressman, where he co-authored the Sarbanes-Oxley Act following the collapses of Enron and WorldCom through accounting frauds.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)

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