In search of effective ethics & compliance programs.

Author:Stucke, Maurice E.
  1. INTRODUCTION II. THE PROBLEM OF CORPORATE CRIME AND INEFFECTIVE CORPORATE COMPLIANCE DESPITE THE GUIDELINES' INCENTIVE A. Independent Demand for an Ethical Organizational Culture B. Extrinsic Incentives to Increase Compliance Efforts C. Despite the Guidelines' Incentive, Corporate Crime and Ineffective Compliance Persist III. WHETHER THE PROBLEM ARISES FROM THE GUIDELINES' THREE FUNDAMENTAL ASSUMPTIONS A. Can Ethics Programs Effectively Deter and Prevent Criminal Conduct? B. Are Effective Ethics Programs Attainable? C. Can Courts and Agencies Assess an Ethics Program's Effectiveness? IV. PROBLEMS WITH AN EXTRINSIC, INCENTIVE-BASED APPROACH TO COMPLIANCE A. Under an Extrinsic, Incentive-Based Approach to Compliance, Firms Will Demand Specific Guidance on What Exactly They Must Do to Obtain the Incentive B. Under an Extrinsic, Incentive-Based Approach, Firms Will Demand Uniform Standards that Accurately, Predictably, Objectively, Quickly & Inexpensively Assess an Ethics Program's Effectiveness 1. Failure to Follow Others 2. Assessing the Tone at the Top 3. Evaluating the Company's Risk Assessment 4. Surveillance Versus Trust C. Problem of Copycat Compliance Under an Extrinsic, Incentive-Based Approach D. Problem of Market Norms Crowding Out Ethical and Social Norms That Effectively Deter Unethical and Illegal Conduct V. AN INTRINSIC, ETHICS-BASED APPROACH A. How an Intrinsic, Ethics-Based Approach to Compliance Differs from an Extrinsic, Incentive-Based Approach B. Benefits of an Intrinsic, Ethics-Based Approach to Compliance C. Concerns of an Intrinsic, Ethics-Based Approach VI. CONCLUSION I. INTRODUCTION

    In 1991, the U.S. Sentencing Commission's Organizational Guidelines (1) provided firms strong financial incentives to have effective ethics and compliance programs ("ethics programs"). (2) Since then, compliance has become big business. (3) To incentivize compliance, some statutes require public firms to disclose their compliance efforts. (4)

    Directors of Delaware corporations owe a duty "to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists." (5) Companies listed on the New York Stock Exchange (6) and NASDAQ (7) must have an ethics code.

    But unethical and illegal corporate conduct is still pervasive. The economic crisis heightened concerns of widespread unethical and illegal conduct among financial institutions, ineffectual compliance, and corporate crime. (8) Thus, the current debate is over what the government can and should do to promote corporate compliance.

    One issue is whether a firm should be liable when its employees violate the firm's express compliance instructions and ethics code. A firm can argue that if it is ultimately responsible for any damages its agent causes, then the agent's conduct is not intended for the firm's benefit. (9) This argument proves too much. An ethics program would shelter firms from criminal liability, thereby lessening their incentive to comply with the law. Moreover, many corporate crimes, such as price-fixing and bribery, can benefit the firm--at least initially--and violate its compliance code. Consequently, an ethics program cannot automatically immunize firms from criminal liability. (10)

    A second issue is the extent to which courts and agencies should consider a firm's ethics program (or its absence) in determining the appropriate fine and other penalties. (11) A third issue is whether the agencies and courts should require firms in any settlement or sentence to implement an ethics program. If so, can the agencies and courts accurately assess whether the firm is indeed implementing an effective ethics program? (12)

    No consensus exists on these issues. Some argue that firms should be criminally liable only if the prosecutor proves beyond a reasonable doubt that the firm "failed to have reasonably effective policies and procedures to prevent the conduct." (13) A second approach is to provide firms an affirmative defense for their compliance efforts. (14) A third approach is that an ethics program is legally relevant, but not determinative, in determining corporate liability and sentencing. (15) A fourth approach is to leave ethics programs as a discretionary factor that prosecutors may consider.

    Nor is there consensus within the U.S. Department of Justice (DOJ) on these issues. For many corporate crimes, such as the Foreign Corrupt Practices Act (FCPA) violations, the DOJ treats a compliance program as a potential exonerating or mitigating factor:

    An assessment of a company's compliance program, including its design and good faith implementation and enforcement, is an important part of the government's assessment of whether a violation occurred, and if so, what action should be taken. In appropriate circumstances, DOJ and SEC may decline to pursue charges against a company based on the company's effective compliance program, or may otherwise seek to reward a company for its program, even when that program did not prevent the particular underlying FCPA violation that gave rise to the investigation. (16) One notable exception is antitrust, which often involves corporate liability and significant criminal fines. (17) The DOJ does not factor the firm's compliance efforts in determining the antitrust liability (18) or fine. (19) For the DOJ's Antitrust Division, "the true benefit of compliance programs is to prevent the commission of antitrust crimes, not to enable organizations that commit such violations to avoid prosecution for them." (20) Thus, ethics programs play a "very limited role" when the DOJ exercises its prosecutorial discretion for antitrust crimes. (21) To increase compliance, some argue that the Antitrust Division should adopt and promote the Guidelines' incentive, (22) but others disagree. (23)

    Nor is there any consensus on when, and for which crimes, firms should be required to implement an ethics program. Some organizations condition leniency on the firm's adoption of an ethics program. (24) Some want the Antitrust Division to do the same. (25) But the Division does not require, as part of its leniency program, that applicants (even recidivists) implement an effective antitrust compliance program. (26) One plea agreement reflects the "apparent 'split personality' within the DOJ on the role of compliance programs." (27) Bridgestone Corporation (Bridgestone) violated both the Sherman Act and FCPA by conspiring to fix prices for over eight years and bribing foreign officials who worked in state-owned entities. (28) Bridgestone's antitrust and anti-bribery compliance efforts were clearly deficient. Yet the DOJ required Bridgestone to remedy the deficiencies only in its FCPA compliance policies. (29)

    Nor is there a global consensus on the legal significance of corporate ethics programs in assessing liability and the appropriate fine. (30) Some jurisdictions, including the United Kingdom, France, Israel, Canada, and India, may reduce an antitrust offender's fine on account of its compliance efforts. (31) Other jurisdictions, notably the European Union, do not. (32)

    Every jurisdiction encourages firms to promote compliance. But jurisdictions diverge over whether, when, and to what extent an ethics program should be an exonerating or mitigating factor. To help address this issue, this Article examines the underlying problem: why, despite the Guidelines' financial incentive, do ineffective compliance and corporate crime persist?

    Part II outlines the problem. Firms have independent reasons to exercise due diligence to prevent and detect criminal conduct and promote an organizational culture that encourages ethical conduct and a commitment to comply with the law. Moreover, for over 20 years, the Guidelines promoted a financial incentive to induce firms to develop an ethical organizational culture. Nonetheless, many firms' compliance efforts remain ineffective, and corporate crime persists.

    Part III explores whether the problem of ineffective compliance is attributable to three assumptions underlying the Guidelines, namely: (i) an ethics program can effectively deter and prevent unethical and illegal conduct; (ii) an effective ethics program is attainable; and (iii) courts and agencies can distinguish between effective and otherwise ineffective or sham ethics programs. The empirical research, while developing, suggests that compliance efforts can be effective, and that effective compliance is attainable. Although several criteria that the courts and DOJ use to assess ethics programs raise concerns, the problem does not stem from these three assumptions.

    Part IV then identifies one important, yet unexplored, reason why corporate compliance, despite the Guidelines' incentive, remains ineffective. To promote compliance, the courts and the DOJ take an extrinsic, incentive-based approach, which assumes that compliance is primarily undertaken for the Guidelines' financial incentive. Compliance is perceived as a "cheap insurance policy" against later liability. (33) Parts IV.A and B discuss the inherent difficulties in telling firms exactly what they must do to earn the Guidelines' incentive, and in articulating objective, easy-to-administer standards to assess compliance efforts. Parts IV.C and D examine how an extrinsic, incentive-based approach can encumber an ethical organizational culture.

    Rather than mix two approaches, the government, as Part V proposes, should consistently promote an intrinsic, ethics-based approach. Here, the expectation is that a firm seeks an ethical organizational culture for its own end, for a strategic competitive advantage, or to prevent being competitively disadvantaged.

    The available information--economic logic, sentencing data, behavioral insights, survey results, and (most importantly) the persistence of significant corporate crime--indicates that the current extrinsic, incentive-based approach to compliance is ineffective. The alternative--an...

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