Two hats better than one for ethics and compliance outcomes, says LRN

Jun 17, 2015
<p>New report shows those in dual role as GC and chief ethics &amp; compliance officer embrace values-based approach more than independent CECOs</p>

New data released this morning by LRN, which provides ethics and compliance advisory services and education to more than 500 companies, shows that the effectiveness of corporate compliance programs has a lot to do with who leads the compliance function in the company and how much influence that person has with the CEO and business unit leaders throughout the organization.

Among programs that report directly to the CEO, those headed by individuals in the dual role of general counsel and chief ethics and compliance officer (CECO) are more effective on average than those led by a dedicated CECO, according to LRN’s 2015 Ethics and compliance effectiveness report. That’s probably because GC/CECOs are twice as likely as dedicated CECOs to understand their primary aim as building an ethical culture, seen as a key driver of program effectiveness. Those in the combined role also seem to have more support from management and access to business operations than independent CECOs as a result of the GC’s working closely with the CEO and other senior managers on business issues on a day-to-day basis. Dedicated CECOs who adopt the GC’s focus on values and cultivate relationships with business units and other corporate departments will close the gap over time, the report suggests.         

For example, 68 percent of GC/CECOs see their primary focus as ensuring alignment of decision making and conduct with the company’s core values, while only 41 percent of dedicated CECOs agree, according to the report. On the flip side, 59 percent of dedicated CECOs see their main mandate as ensuring compliance with rules and regulations, compared with just 32 percent of GC/CECOs.

‘The general counsel has historically a much greater opportunity to look out across the risk profile of the organization [by virtue of being] involved in deal-making and lots of other things to a greater degree than the chief compliance officer,’ says Wayne Brody, a member of LRN’s ethics and compliance advisory services practice.

Because of that, as well as the GC’s stronger day-to-day relationship with the CEO and other business leaders, he or she ‘has likely seen what makes the difference in E&C outcomes/behaviors is the values orientation of the organization and the business units.’

The hope is that those who have more recently assumed the role of an independent CECO will take note of this and recognize how critical it is be deeply embedded in the business and develop relationships with and become as valuable to the business unit leaders as the GCs are, he adds. In the coming years, there will be a much higher percentage of independent CECOs reporting to CEO, which is what regulators want to see and makes sense. ‘It will be important for those independent chief compliance officers to have a focus on building their organizations in that you don’t want to be a standalone, stand-aside function in that task. You really need to be as integrated into the business as are the GCs.’

Examining the behaviors and attributes of both the top and bottom 20 percent, or quintiles, of E&C programs -- with a particular focus on the impact of assessments and metrics -- LRN finds that top-performing programs conduct assessments more frequently and use more metrics than those in the bottom quintile. Tracking the use of 20 distinct metrics and seeing how often each is used in program assessment, risk assessment and board reporting, the report finds significant  differences in the program effectiveness index (PEI) scores associated with those uses.

There is also a positive correlation between how values-based an E&C program is and its PEI. Roughly half of the programs in the top quintile tout codes of conduct that consistently stress corporate values, which is associated with an average PEI score of 0.62 among those programs. For firms whose employees are likely or very likely to reference the code of conduct when confronting a decision or dilemma, the average PEI score is even higher at 0.65. That’s true of 72 percent of companies in the top quintile versus just 14 percent of those in the bottom quintile.

‘That values-based orientation is a really significant one -- one of the two reasons I think we’ve seen this result -- because the code of conduct becomes more significant to use when it’s not just used to give you policy answers but is used to give you ways to think about and refreshing your sense of the organization’s values,’ says Brody.

Employees make more active use of the code of conduct at companies with a combined GC/CECO than at those with an independent CECO, the report shows. That’s because employees receive more training across all formats -- online learning modules, classroom instruction, manager-led facilitated group discussions and mobile devices -- when the roles are combined. In particular, the use of facilitated group discussions is almost four times more prevalent under a GC/CECO than under an independent CECO (roughly 75 percent versus 20 percent). Although only 11 percent of survey respondents say their companies often or very often address ethics and compliance issues in staff meetings, operational reviews, and similar settings, the average PEI score of that cohort is 0.79, the highest noted in the report.

‘That group has huge advantages in terms of compliance-related outcomes. They’re talking about ethics and compliance in the course of regular business meetings,’ says Brody. Another telling data point is the degree to which certain types of behavior have become more common over the past three years at companies identified as having ‘E&C superstars’ in their C-suites than at other companies. Among the former group, 82 perent of respondents say higher employee engagement is more common or much more common than three year ago, versus 45 percent of respondents at the non-superstar companies.

‘That’s saying something loud and clear. When you have succeeded in building a consciousness around ethics and compliance into the business at its highest levels, that cascades deeply and meaningfully throughout the organization,’ Brody says. ‘That’s impact. That’s what it looks like and feels like.’

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