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31 Days to More Effective Compliance Programs

One Month to a More Effective Compliance Program: Day 13 – Compliance Performance Appraisal Review

One of the ways to operationalize compliance and to drive it into the DNA of an organization is through a performance review. Indeed, the 2023 ECCP stated:
Incentive System…Have there been specific examples of actions taken (e.g., promotions or awards denied) as a result of compliance and ethics considerations? Who determines the compensation, including bonuses, as well as discipline and promotion of compliance personnel?
Most HR experts will opine that properly executed performance appraisals are crucial to organizational productivity as well as the development of employee skills and employee morale. Moreover, they can serve a couple of different functions for a best practices compliance program. First, and foremost, they communicate to each employee their job performance from a compliance perspective.

However, one key is not to approach the performance appraisal review as an isolated event but rather a continual process. This means that instead of trying to play catch-up at the last minute, supervisors should provide feedback and assess job performance throughout the year so annual reviews are grounded in a year’s worth of experience. This includes the compliance component of each job. The second area performance appraisals impact is compensation. The DOJ expect that your compliance program will have both discipline and incentives. But those incentives need to be based upon something. The score or other performance appraisal metrics will provide to you a standard which you can measure and use to evaluate for other purposes such as employee promotion or advancement to senior management going forward.
Three key takeaways:

  1. To incentivize compliance, you must be able to accurately appraise senior managers and employees around compliance.
  2. Clearly communicate your compliance expectations, then fairly evaluate employees on them.
  3. Consider conducting an ongoing review.

For more information, check out The Compliance Handbook, 4th edition here.

 

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31 Days to More Effective Compliance Programs

One Month to a More Effective Compliance Program: Day 12 – Succession Planning Around Compliance

Another area where Human Resources can help to more fully operationalize compliance is in succession planning. Succession planning is just as important as governance, enterprise risk management and strategic oversight. In other words, it is just as important. Sadly, many companies fail to give it the attention it requires. A PricewaterhouseCoopers (PwC) survey, found nearly one-half of the more than 1,000 directors gauged reported dissatisfaction with their companies’ succession plans. Imagine what that number would be if they took into account the compliance aspect of succession planning. Some of the questions you might consider are the following. How did you fully operationalize compliance into the business unit that you managed? What controls did you put in place? And then what did you do when you found out about it?

Every time I perform a risk assessment and speak to the company’s HR lead, they immediately understand the role than can play in moving forward a company’s compliance program. Even if the HR role is limited in the hiring process, they can ask potential candidates their views to determine underlying business ethics. HR can also begin the compliance inculcation process, even pre-hiring, by talking about the company’s values in the interview process. This sets an expectation that can be built upon if a candidate is selected and in every HR touch point going forward, including looking at employees in the succession planning process.
Three key takeaways:

  1. Succession planning is just as important as governance, enterprise risk and strategic oversight.
  2. Do not begin your succession planning when a senior manager announces their retirement.
  3. You are always being evaluated (or you should be).

For more information, check out The Compliance Handbook, 4th edition here.

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31 Days to More Effective Compliance Programs

One Month to a More Effective Compliance Program: Day 9 – Clawbacks

In this podcast series, host Tom Fox explores the growing emphasis on clawback provisions in compliance programs and employee compensation.

Tom Fox delves into the crucial topic of clawback provisions in compliance programs and employee compensation. In light of the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) prioritizing individual accountability for misconduct, clawbacks have become essential in promoting ethical behavior and ensuring compliance. So, let’s dive in and explore the significance of clawbacks in today’s evolving compliance landscape.

Understanding Clawbacks and Incentive-Based Compensation:

Clawbacks, as discussed in the podcast, are provisions that enable organizations to reclaim incentive or bonus funds from employees engaged in misconduct. They serve as a powerful deterrent and hold individuals accountable for their actions. Previously, clawbacks were not seen as necessary, but the DOJ now mandates their inclusion in compensation agreements.

The DOJ’s Focus on Ethical Business Practices:

The DOJ, in its pursuit of punishing officers and employees who fail to conduct business ethically, has made clawbacks a part of best practices compliance programs. To evaluate a company’s compliance program, the DOJ and SEC consider whether the organization has appropriate disciplinary procedures in place. Publicizing disciplinary actions internally and under local law can have a deterrent effect, emphasizing the importance of transparent consequences for misconduct.

The Role of Clawbacks in Compliance Programs:

Having clawback provisions is now seen as a crucial aspect of a good corporate compliance culture. It promotes compliant behavior and demonstrates a company’s commitment to its compliance program. The DOJ investigates whether corporations have included clawback provisions in their compensation agreements and taken steps to execute on such agreements. This highlights the significance of documenting and reflecting these policies and procedures in a company’s own compensation practices.

The SEC’s Final Rule on Clawbacks:

The SEC’s final rule, titled “Listing Standards for Recovery of Erroneously Awarded Compensation,” directs issuers to establish policies for recovering incentive-based compensation in the event of required accounting restatements. This rule applies to both Big R and Little R restatements and provides guidance in the anti-corruption world. Companies are now required to claw back incentive compensation erroneously received by current or former executives during the three-year period preceding the required restatement date.

Ensuring Compliance with Clawbacks:

It is essential for companies to construct well-documented clawback programs that align with the SEC’s guidance. The recoverable amount may differ from what executives would have received based on the required restatement, emphasizing the need for clarity and transparency in compensation agreements. Additionally, the SEC’s final rule prohibits companies from obtaining indemnity insurance to protect executives from clawbacks, further reinforcing the importance of accountability.

Conclusion:

As we’ve explored in this episode, clawbacks play a vital role in promoting ethical behavior and compliance within organizations. The DOJ’s emphasis on individual accountability and the SEC’s final rule on clawbacks demonstrate the evolving landscape of compliance. By implementing well-documented clawback provisions, companies can deter misconduct, hold individuals accountable, and showcase their commitment to ethical practices. Remember, incorporating clawbacks into your compliance program is not just a regulatory requirement but a practical step towards fostering a culture of integrity and responsibility.

 Three key takeaways:

1. The DOJ now mandates clawbacks in a compliance program.

2. The SEC has passed a clawback rule apart from the Monaco Memo.

3. Your clawback program should be well-documented.

For more information, check out The Compliance Handbook, 4th edition, available on LexisNexis.com.

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31 Days to More Effective Compliance Programs

One Month to a More Effective Compliance Program: Day 8-Executives and Compliance Compensation Incentives

The lack of personal consequences for senior executives responsible for corporate malfeasance is explored in this podcast episode. Executives are incentivized to take excessive risks, knowing they won’t have to pay any fines, while shareholders bear the brunt of penalties. Proposed solutions include the concept of “skin in the game,” where executives contribute a portion of their compensation to a pool of money that can be used to pay penalties. Another suggestion involves forfeiting the performance bond of senior management in the case of large fines. A third approach suggests creating a contract that would enforce a reduction in pay for failures of corporate governance. These proposals aim to hold senior executives personally accountable for compliance failures and align executive compensation with compliance objectives. HR professionals play a crucial role in designing and implementing positive incentives to foster a culture of compliance and ethical conduct within organizations.

When it comes to compliance failures, the penalties are usually paid by shareholders, leaving senior executives largely untouched. This lack of personal accountability creates a disconnect between executive actions and the consequences of those actions. It’s high time we bridge this gap and ensure that senior executives are held personally responsible for compliance failures. What are some proposed solutions:

1. “Skin in the Game”. One proposed solution, advocated by William Dudley, former president of the Federal Reserve Bank of New York, suggests that senior management and material risk takers should forfeit their performance bond in the case of large fines. This approach would discipline individual behavior and decision-making, incentivizing individuals to flag issues when problems arise.

2. Automatic Pay Reductions. Another approach, proposed in an article titled “Ties That Bind Codes of Conduct,” suggests automatic reduction of pay for officers, directors, and advisors for failures of corporate governance. Executives would agree to pay back a portion of their gross compensation for a specified period before the beginning of any improprieties, regardless of their knowledge of misdeeds within the company.

Benefits of Accountability for Senior Executives:

1. Aligning Incentives. Corporate leaders cannot afford to turn a blind eye to compliance failures anymore. Holding senior executives accountable ensures that their compensation is directly tied to compliance objectives, aligning incentives and promoting ethical business practices.

2. Addressing Perverse Incentives. Perverse incentives in corporate pay, such as additional compensation based on company performance, can lead to unethical behavior and non-compliance. By implementing accountability measures, we can address these perverse incentives and create a culture of ethical behavior within organizations.

3. Driving Positive Change. Creating positive incentives within organizations is crucial to driving ethical behavior and compliance. HR professionals play a pivotal role in designing and implementing these incentives, ensuring that they are effective in promoting a culture of compliance.

Three key takeaways:

1. Perverse incentives are named that for a reason; they really are bad.

2. How can you create positive incentives in your organization?

3. There is a business response to this legal issue. Employ it.

For more information, check out The Compliance Handbook, 4th edition, available on LexisNexis.com.

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31 Days to More Effective Compliance Programs

One Month to a More Effective Compliance Program: Day 7 – Designing Compensation to Operationalize Compliance

In this podcast episode, Tom Fox highlights the importance of incorporating compensation systems into a company’s compliance program. He discusses how the DOJ and SEC view monetary structures as a way to reinforce compliance and reward employees who adhere to compliance programs. Fox advises compliance practitioners to revise incentive systems to align with the goals of the compliance program, ensuring simplicity, alignment with company values, and immediate behavior change. He also emphasizes the need to align compensation programs with compliance goals and shares examples of how this can be done effectively. These episodes provide valuable insights into the role of compensation in promoting compliance and integrating compliance into HR practices, emphasizing the importance of transparency and immediate action in implementing effective compensation structures for compliance.

When it comes to compliance programs, many companies focus primarily on policies, procedures, and training. However, designing a compensation system that reinforces compliance is equally crucial. According to the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC), rewarding employees who conduct business in compliance with their employers’ programs is an effective way to promote compliance.

  1. Incorporating Compliance Incentives:

To align your compensation system with your compliance program, consider revising your incentive structure. Fox advises compliance practitioners to ask themselves three key questions: Is it simple? Is it aligned with company values? Does it affect behavior immediately?

Keeping the compensation plan simple is essential to prevent employees from reverting to old, non-compliant behaviors. By aligning the goals of compliance practitioners with the entity’s compliance goals, you can ensure that the compensation program effectively drives desired behaviors.

2. The Impact of Sales Compensation:

Salespeople often generate the majority of a company’s revenue, making their alignment with compliance goals crucial. Immediate implementation of incentive structures is important, but it should also incentivize employees to support compliance initiatives. Transparent communication with employees or third-party sales bases is necessary for effective implementation.

3. Transparency and Accountability:

Transparency plays a vital role in gaining acceptance for compliance initiatives. While designing the incentive system may not be a democratic process, openness is essential. Employees should appreciate the transparency in the compensation structure, leading to accountability and their acceptance of compliance goals.

4. Integrating Compliance Incentives:

The podcast suggests incorporating compliance incentives into the compensation program. Even a small percentage of a discretionary bonus can be significant to employees. For example, a discretionary bonus program based on overall sales can be a starting point for incorporating compliance incentives. Fox recommends allocating 5-10-20% of the discretionary bonus program towards compliance incentives.

5. The Role of HR in a Fully Operationalized Compliance Program:

To fully operationalize compliance, it is essential to integrate compliance into HR practices. HR can play a crucial role in ensuring transparency, simplicity, and alignment of the compensation structure with company values. By making compliance part of the incentive structure, employees will understand and support the evolving business model and strategy of the organization.

As compliance practitioners, it is our responsibility to prioritize integrity, ethics, and compliance within our organizations. Incorporating compensation systems into our compliance programs is a powerful tool in driving desired behaviors. By aligning our incentive structures with compliance goals, keeping them simple, and fostering transparency, we can create a culture of accountability and acceptance.

Three key takeaways:

  1. The DOJ and SEC have long advocated compensation to motivate employees into ethical and compliant behaviors.
  2. Keep the compliance aspects of your compensation structure simple and easy for your employees to understand.
  3. Have full transparency in the frame of your compensation structure.

For more information, check out The Compliance Handbook, 4th edition, available on LexisNexis.com.

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31 Days to More Effective Compliance Programs

One Month to a More Effective Compliance Program: Day 6-Six Core Principles for Compliance Incentives

In these podcast episodes, Tom Fox discusses the importance of incorporating incentives and support systems into a company’s compliance program. He presents six core principles for effective compliance incentives, emphasizing the need for simplicity, visibility, and institutional mechanisms to ensure their longevity. Fox also highlights the role of human resources in implementing compliance programs and the positive impact it can have on organizations. By understanding and implementing these principles, companies can create a culture of compliance, reduce the risk of unethical behavior, and enhance their credibility.

I have developed six core principles for incentives, adapted from a MIT Sloan Management Review article, entitled “Combining Purpose with Profits”, and formulated them for the compliance function in an anti-corruption compliance program.

1.     Compliance incentives don’t have to be elaborate or novel.

2.     Compliance incentives need supporting systems if they are to stick.

3.     Support systems are needed to reinforce compliance incentives.

4.     Compliance incentives need a “counterweight” to endure.

5.     Compliance incentive alignment works in an oblique, not linear, way.

6.     Compliance incentive initiatives can be implemented at all levels.

Obviously, this list is not exhaustive. Yet it is now more important than ever that you demonstrate tangible incentives for your employees to gain benefits, both financial and hierarchical, through doing business ethically, in compliance with your own Code of Conduct and most certainly in compliance with relevant anti-bribery laws. It is also a requirement that such actions be documented so they can be demonstrated to the regulators, if they come knocking.

Three key takeaways:

  1. Compliance incentives do not have to be elaborate or novel.
  2. You must create support systems for your compliance incentives.
  3. Compliance incentives should be implemented at all levels.
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HR’s Key to Unveiling the True Ethical Fabric of Organizations

Compliance professionals understand the importance of fully operationalizing compliance and embedding it into the fabric of a business. How can your Human Resources (HR) function help to both create and maintain an ethical culture at your organization? It turns out in a variety of ways. Obviously significance of incentives in driving ethical behavior cannot be forsaken but there are other areas to consider such as the impact of cross-cultural differences on ethical behavior. HR can play a role in the importance of creating a speak-up culture where employees feel comfortable reporting ethical concerns without fear of retaliation.

In a world where ethics are paramount, HR professionals hold the key to creating an ethical culture within organizations. But what happens when change is pushed too quickly, compensation drives behavior, and cross-cultural differences come into play? Discover the challenges and secrets to success in this thrilling journey of HR’s quest for an ethical culture…

In the pursuit of understanding the vital role of HR in establishing an ethical culture, I stumbled upon an unexpected revelation that shook the very foundation of my beliefs. It was a twist that challenged my assumptions and left me with a burning question: Can change truly be achieved without sacrificing ethical values? As I ventured deeper into this journey, I uncovered unsettling truths about the underlying ethos of corporations and the detrimental impact of short-term targets. But what I discovered next was even more astonishing, a revelation that would forever alter my perspective on the role of HR in creating an ethical culture…

If you are feeling frustrated and overwhelmed because your efforts to create an ethical culture are being undermined by inconsistent enforcement and lack of accountability, then you are not alone! Despite implementing compliance programs and promoting ethical values, you may find that employees still engage in unethical behavior due to a lack of consequences or clear guidelines. This can lead to a sense of disillusionment and hinder the progress towards an ethical work environment.

HR significantly contributes to embedding ethical behavior within the organizational culture. By creating a conducive environment that promotes honesty and integrity, HR can foster a culture that this significantly resistant to unethical practices. It’s primarily up to HR to ensure that employees feel comfortable voicing concerns without fear of retaliation, helping to enhance the ethical culture within organizations.

The path to cultivating an ethical culture is often met with significant roadblocks such as too much rapid change, reward-driven behaviors, and cross-cultural conflicts. These elements can create an environment where unethical behavior thrives, impacting organizational growth and success. For a moral culture to strive, these challenges should be identified and effectively addressed, paving the way for a workplace that values ethical conduct.

Understanding the underlying organizational dynamics is crucial in establishing and maintaining an ethical culture. It’s not enough just to have a written code of conduct; the actual behaviors within the organization need to be assessed and aligned with these ethical guidelines. HR plays a crucial role in comprehending these dynamics, ensuring that metrics used to reward employees promote ethical conduct rather than encouraging unethical short-term success.

Have you ever heard these myths about the role of HR in creating an ethical culture? First myth: HR is solely responsible for ethical behavior. Second myth: Creating an ethical culture is too time-consuming and costly. Third myth: HR can’t effectively enforce ethical standards. But what if I told you that these myths are far from the truth? Some key points are:

  • How HR can be the key instigator in shaping an ethically driven business culture.
  • Recognizing the potential roadblocks that could obstruct the path to ethical behavior in organizations and how to overcome them.
  • Appreciate the crucial interplay between organizational dynamics and ethics.
  • Perceive the nuanced impact of incentives on ethics and how it can steer the moral compass in corporate environments.
  • Master the art of endorsing.

My journey into understanding the vital role of human resources in establishing an ethical culture within an organization started with a deep dive into the role of HR and how those roles could that shed light on a fundamental dilemma for compliance. This dilemma was not about right and wrong, but about navigating clashing interests, misaligned incentives, and conflicting cultures. I learned that pushing too much change from the top, too quickly and too frequently can warp a company’s ethical climate. This realization led me to critically analyze the compensation plans in various organizations. The stark reality that people do what they are rewarded to do underlyes ethos of many corporations. This means that short-term targets often overshadowed long-term success, leading to a detrimental impact on the ethical culture. As I delved deeper into the concept of ethical culture, I realized that the essence of this term is far more profound and complex than it seems on the surface. This is not just about formal corporate governance documents or written codes of conduct. It is about understanding and adopting your organization’s underlying culture. It is also about self-awareness, organizational awareness, and the courage to speak up. One problem is that too many leaders tended to seek advice from their like-minded peers rather than embracing diverse opinions. This convinced me about the importance of fostering a speak up culture, and most crucially, a culture devoid of retaliation. This exploration underscored the pivotal role of HR in championing ethical norms, thereby establishing a robust and effective compliance program.

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31 Days to More Effective Compliance Programs

One Month to More Effective HR in Compliance: Day 5 – Role of HR in Incentivizing Compliance

Welcome to the August edition of One Month to a More Effective Compliance Program. In the month of August, 2023 we will consider the role of Human Resources in a best practices compliance program.

In this episode, Tom Fox explores the role of HR in implementing effective compliance programs within companies. The episode focuses on the importance of incentivizing compliance and ethical behavior through both financial and non-financial incentives. The Department of Justice’s guidance emphasizes the need for positive incentives, such as personal evaluations, promotions, and rewards for ethics and compliance leadership. The podcast discusses various avenues for implementing incentives, including cash bonuses and non-compensation rewards like t-shirts or ethical awards. It emphasizes the role of HR in driving the right behavior through incentive structures and warns against solely promoting based on financial targets. Overall, the podcast highlights the significance of HR in creating a fully operationalized compliance program that fosters an ethical work environment.

 Three key takeaways:

  1. The DOJ 2023 ECCP specifically calls out incentives for doing business ethically and in compliance.
  2. HR can lead the efforts around incentives.
  3. Incentives go beyond financial rewards.

For more information, check out The Compliance Handbook, 4th edition, available on LexisNexis.com.

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31 Days to More Effective Compliance Programs

One Month to More Effective HR in Compliance: Day 4 – The Reference Check

Hiring the right people for your team is critical to the success of any organization. Unfortunately, it can also be a costly endeavor if the wrong hire is made. According to a survey of 2500 companies, one bad hire can cost an organization more than $25,000 in lost productivity, low morale, and other associated costs. In some cases, the cost can be even higher, with one energy service company estimating the cost of a bad hire at $400,000.

With these staggering costs in mind, it’s clear that companies need to invest in the hiring process to ensure they get the right people. Reference checks are an important part of this process, yet they are often overlooked. This was discussed in a recent episode of One Month More Effective Compliance Program. The episode featured Kevin Ryan, who believes that reference checks are an underutilized part of the hiring process and a key internal control for human resources.

Reference checks are the only way to learn things about prospective employees that can’t be found on a resume. Unfortunately, companies often can’t or won’t give out much more information than confirming dates of employment. To get a more robust appraisal, one should dig up people who will speak candidly about the candidate. Search firms are particularly good at this, and companies should emulate this practice. Asking direct questions to acquaintances can provide direct responses 75% of the time.

The Department of Justice has recognized hiring as a best practice for compliance programs since 2004. According to Kevin Ryan, companies should take the time to get to know the candidate and ask questions that will reveal their values, beliefs, and motivations, as well as their ability to work with others, take direction, and think critically. He recommends that companies take three steps in the hiring process: resume review, in person interview, and reference checks. While the resume is good for establishing the basic qualifications for the job, it doesn’t provide much else.

The hiring process is the first step in operationalizing a compliance program. Reference checks are an important part of this process, as they can help to ensure that the candidate is a good fit for the company. Investing in the hiring process is essential to ensure that the right people are brought on board and to avoid costly mistakes. The Department of Justice has recognized hiring as a best practice for compliance programs since 2004, and reference checks are an underutilized part of the hiring process and a key internal control for human resources.

Three key takeaways:

  1. The hiring process is the first step in operationalizing your compliance program.
  2. The DOJ spoke to hiring as part of a best practices compliance program as far back as 2004.
  3. Reference checks are an underutilized part of the hiring process and a key internal HR control.

For more information, check out The Compliance Handbook, 4th edition, available on LexisNexis.com.

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31 Days to More Effective Compliance Programs

One Month to More Effective HR in Compliance: Day 3 – The Hiring Process

When it comes to hiring, it’s important to consider compliance, especially when it comes to family members of foreign government officials or employees of state-owned enterprises. In this podcast episode, Tom Fox discussed the importance of using the skill, will and fit approach to interviewing to try to weed out those persons who might not fit with the organization on an ethical and cultural basis.

The skill, will and fit approach to interviewing involves asking open-ended questions to determine whether the employee takes ownership of their work and has the hunger and creativity to succeed. For example, questions like “What’s the biggest impact you had at your past organization?” and “What do you want to do in five years?” can help to assess whether an employee might have a propensity to engage in bribery and corruption.

Tom also discussed the importance of having a frank discussion with prospective hires about what is expected of them in terms of engaging with the community. He used the example of the Houston Dash, a professional women’s soccer team, who are active in the local community and encourage their players to adopt local charities and become involved. This puts the importance of interacting with the public into their interview process.

There are three questions to analyze the hiring of a family member of a foreign government official or employee of a state-owned enterprise:

1. Does the candidate meet your hiring requirements?

2. Does the foreign official whose family member you are considering for hire demand or suggest that the company hire this prospective candidate?

3. Has the foreign official made or will make a decision which will benefit your company?

He also emphasized the importance of documenting any decisions made in order to avoid violating the Foreign Corrupt Practices Act (FCPA). Additionally, he encouraged organizations to operationalize their compliance programs and to have a second set of eyes in the hiring process to provide another level of oversight.

When it comes to hiring, HR has a dual role with both a traditional hiring and a compliance function. Introducing the topic of compliance at the pre-employment stage may encourage potential employees with a propensity to engage in bribery and corruption to take their skills elsewhere. By using the skill, will and fit approach to interviewing, organizations can assess whether an employee might have a propensity to engage in bribery and corruption, and operationalize their compliance programs to ensure that all hiring decisions are documented and have a second set of eyes for oversight.

Three key takeaways:

  1. Use the interview process to determine who will be an ethical and compliance fit for your organization.
  2. Consider the skill, will and fit approach.
  3. Ask open-ended questions.

For more information, check out The Compliance Handbook, 4th edition, available on LexisNexis.com.