Legal Risk: The Art of Compliance...

Risk Management is on the mind's of Corporate Directors and in some interesting places according to a recent poll by PWC and Corporate Board Member Magazine:

How has your personal risk as a director changed in the past 12 months?

Increased 69%
No change 30%
Decreased 1%

Some risks are tough to name...

What keeps you up at night?

Unknown risks 59%

...while others are identifiable.

Do you think regulators are more likely to investigate your company?

Yes 71%

Do you think there'll be an increase in shareholder suits?

Yes 65%

If 71% of the directors surveyed think that regulators are more likely to investigate the company where does that feeling come from? Is it the fact that the SEC and others such as the FTC, OCC and others are gearing up to facilitate greater oversight than in past years? Is it the lack of internal focus on creating a systemic Risk Management Framework? Could it be the amount of toxic assets that are still on the balance sheet? The answer is yes, yes, and yes.

So what can Directors do to make sure that management and the company are ready when the "Feds" come to town? The answer may well lie in the ability to show a history and evidence of doing the right thing and doing it with extreme diligence.

For good or bad—okay, mainly for bad, most respondents agree—the government as boardroom-player-cum-active-investor will be around for a foreseeable spell.

Regulation will rise...

Do you think there will be a big increase in regulation?

Yes 91%
No 2%

Of that 91%, 54% “strongly agree” with the premise that there’ll be more regulation, 37% “agree.”

...and spread.

Do you think other companies will have to adopt rules that the government has imposed on those receiving financial help?

Yes 54%
No 20%

Nearly 45% of the respondents say no amount of government control, whether more or less than what we got, could have prevented the severity of the economic crisis.

No to Uncle Sam as paymaster

Respondents are against the feds’ having a say in setting executive pay.

Are government limits on executive compensation justified?

No 88%

Should the government impose further limitations on pay?

No 97%

Should comp be left to the board?

Yes 76%

The only hope for "Achieving A Defensible Standard of Care" in your institution could be what Siemens and other wrongdoers have discovered. Spending hundreds of millions of dollars on "Compliance" might be a good thing when the time comes to differentiate yourself in the marketplace and negotiate with the government. Especially if you are a global enterprise doing business in countries that don't exactly have the best reputation with transparency and the rule of law. Here is what Chairman of the Supervisory Board of Siemens AG, Gerhard Cromme had to say on their efforts to date:

Wherever wrongdoing was proved beyond a doubt, we immediately took the necessary actions. Wherever there were systemic weaknesses, we identified them and corrected them. Where the necessary resources were lacking, we provided them. These demanding efforts have paid off: Today Siemens has a clear, transparent structure that no longer allows any gray areas with respect to responsibility. At the same time, these structures make Siemens more efficient, more cost-effective, and thus more competitive. The authorities took into consideration our unflinching desire to do whatever was necessary for a fresh start in determining the size of the penalties and the duration of the proceedings.

Operational Risk encompasses the actions taken by Siemens that includes the new centralized systems for payments, disbursements and other accounting functions that were previously in business units outside of Germany. This consolidation and integration of systems was not easy but represents that a discovery in the vulnerability of controls with a decentralized system warranted the investment in a new way of doing business.

Only time will tell whether any companies Board of Directors efforts to spend more resources on "The Art of Compliance" will make a difference to the regulators, investigators and litigators. One could probably bet that over time it will make a difference. But only if the "Tone at the Top" is commensurate with the actions being asked of the employees and stakeholders, doing the day-to-day tasks running the risk operations of the enterprise.

operational risk