You've Been Indicted. The Most Feared Words in the Boardroom...

Over two years ago this corporate governance article appeared in Corporate Board Member Magazine.

June 25, 2003
You've Been Indicted. The Most Feared Words in the Boardroom

By Peter L. Higgins

Every Fortune caliber organization from financial services to health care has already implemented a pervasive compliance program to mitigate the risk of ending up with the SEC or US Attorney in the lobby.

The catalyst behind these initiatives is generated from the U.S. Sentencing Commission's Organizational Sentencing Guidelines. They allow for more lenient sentencing if an organization has evidence of an "effective program to prevent and detect violations of law."

The Guidelines contain criteria for establishing an "effective compliance program."

These include oversight by high level officers, effective communication to all employees, and reasonable steps to achieve compliance such as:

* Systems for monitoring and auditing
* Incident response and reporting
* Consistent enforcement including disciplinary actions

Yet the corporate incivility continues. Why is it that we can’t pick up the morning paper or listen to the news on the way to work without hearing about a new indictment of a top ranking officer?

Here lies the question many Board of Directors are scratching their heads about these days. How can we avoid these ethical and legal dilemmas and how can they be addressed without creating a state of fear and panic?

The answer lies in the human factors of what motivates people’s behavior. This requires programs, controls and good old fashioned vocational counseling. However, the real facts are that all of these alone will not be able to stem the tides of corporate malfeasance.

A guest column by Jacob Blass
President, Ethical Advocate highlights the past few years:

The number of companies around the world that reported incidents of fraud increased 22% in the last two years according to the 2005 biennial survey by PriceWaterhouseCoopers (PWC), which interviewed more than 3,000 corporate officers in 34 countries. In England, a recent Ernst & Young survey of the Times Top 1000, indicated the average cost of each fraud exceeded $200,000.
But fraud is not the only problem. There's also misconduct, unethical behavior, lying, falsification of records, sexual harassment, and drug and alcohol abuse.

PWC found that “accidental” ways of detecting fraud, such as calls to hotlines or tips from whistleblowers, accounted for more than 33% of the cases. Internal audits were responsible for detecting fraud about 26% of the time.

If these latest figures are correct than this means that 59% of the detection was a result of effective operational risk management. Let's just hope that the remainder is the result of corporate managers and leaders doing their job to mitigate new risks on a daily basis.

As indicated, the great manager can impact the lives of tens or hundreds of people in your company. Conversely, the uncivil manager can wreak havoc with a similar numbers of lives. The position of management is ever so powerful to influence those around them.

Your company wide compliance initiative has the elements that provide guidance for creating a program that the government is likely to look favorably upon. The problem is that these same criteria inadvertently communicate the message that implies building a program based on this formula is enough. It isn’t.

Maybe it’s time the Board of Directors looked into who is managing the organization into a future of civil or uncivil destiny. We have a clear choice.

operational risk