The framing effects of professionalism: is there a lawyer cast of mind? Lessons from compliance programs.

Author:Rosen, Robert Eli
Position:From 4. Testing Hypothesis 1: Compliance Behavior of Respondent's Company through Conclusion - Back to Julius Henry Cohen, with footnotes and tables, p. 327-367
  1. Testing Hypothesis 1: Compliance Behavior of Respondent's Company

    In order to test Hypothesis 1, we evaluate the extent of influence of the type of professional in charge of compliance on two measures of compliance management behaviors of the businesses--implementation of (formal) compliance management systems and the (substantive) way compliance is managed in practice. (114)

    (a) Implementation of formal compliance system elements (Table 2): The questionnaire asked respondents to provide yes or no answers to a series of twenty-one very specific questions about whether their organization had implemented various procedures and actions expected to be part of a good (formal) compliance system. (115) The questions were later grouped into four different indices measuring the implementation of system elements concerning a) complaints handling, b) communication and training from the top of the organization to employees, c) management accountability and whistle-blowing, and d) compliance performance measurement and discipline. We use these four measures to look at four different dimensions of compliance system implementation (rather than one index of all the items) because businesses will not necessarily implement all potential aspects of compliance systems equally. (116) On the other hand, using these four indices rather than looking at variation in each of the twenty-one elements individually gives a clearer picture that takes into account the fact that there are different ways of performing the different functions of a compliance system. (117)

    (b) Compliance management in practice (Table 3): Implementation of a compliance system is aimed at putting formal structures in place that managers and employees can use to identify, prevent and correct compliance. (118) This should be helpful in influencing the way activities are managed in practice to improve actual compliance. But it is not enough on its own. (119) It is possible for an organization to implement the various elements of compliance management programs in a formulaic, formalistic, or purely symbolic way. (120) But the key to a compliance management program's impact on compliance will be the impact it has on everyday routines and practices. (121) Effective compliance management in practice means that management and employees identify compliance problems, communicate them to those who can fix them, and rectify them as a part of their everyday routines and practices. (122) The aim of compliance management programs is to ensure compliance by improving compliance management in practice. Again we constructed a single measure by adding together fourteen questions containing specific statements about what business management actually does in order to make sure they comply with the TPA (shown in Table 3).

  2. Testing Hypothesis 2: Respondent Company's Risk Analyses

    Risk analysis requires determining both the magnitude of the loss and the probability that the loss will occur. (123) As there are multiple stakeholders who can sanction non-compliance, the salience of a stakeholder sanction must be determined in addition to the weight it is accorded. (124) As the regulator is reactive, (125) we add to the measure of legal detection of non-compliance, detection by stakeholders.

    (a) Respondents' Weighting of Losses from Different Stakeholders (Table 4): We measure the way the firm weighs the magnitude of loss for non-compliance resulting from sanctions from different stakeholders by a series of questions asking about how much they would worry about (i) economic losses in relation to various different stakeholders if their firm was accused of breaches of the TPA; and (ii) losses of respect and esteem in relation to various different stakeholders if their firm was accused of breaches of the TPA. These questions are all predicated on the hypothetical that the firm is "accused of breaches of the TPA one day in the future." In so doing, we attempt to segregate out the seriousness of the norm violation from the probability of it being detected.

    The businesses worry most by far about economic losses in relation to customers (46% worry "a lot" and 37% worry "very much") and then shareholders (42% worry "a lot" and 39% worry "very much"). (126) The next highest was only 39% worrying "a lot" or "very much" about economic losses from employees. (127) As with worries about economic losses, the businesses worry most about losing the respect or esteem of customers (33% worry "a lot" and 58% "very much") and shareholders (84% worry "a lot" or "very much"). (128) But the vast majority (83%) would also worry "a lot" or "very much" about losing the respect or esteem of employees, and 73% would worry "a lot" or "very much" about business partners. (129)

    In our tests of Hypothesis 1 (see Table 4 below) we test the extent to which these various worries explain variation in what businesses do with regards to compliance. It is not necessarily the case, however, that the more and more businesses worry about third party reactions to non-compliance, the more and more they will continue to try to improve their compliance behavior. It seems more reasonable to expect there to be some "tipping point" at which a certain degree of worry about third parties motivates change in compliance behavior. Inspection of the data, (130) however, could not identify any consistent "tipping point" at which a certain degree of worry about third parties was, on average, associated with a significant change in compliance behavior.

    Another way of modeling the relationship between worries about third parties and business behavior--especially in the light of the fact that most businesses worry quite a lot in relation to most third parties--is to hypothesize that it is only worries above the average that we can expect to have any effect on behavior. In the regression analyses reported in Table 10, therefore, we measure whether or not worrying about specific third parties more than average has an effect on compliance behavior or not. (131) We do this by transforming the measures of worries about third parties described above into dummy variables measuring whether or not each business rates their worries about third parties in the event of non-compliance as higher than the mean. (132)

    In the tests of Hypothesis 2 reported in Table 11, however, since we are interested in the extent to which the profession of the person responsible for compliance (and other variables) explains variation in the various worries about stakeholders, we do not use these dummy variables. Instead we use as dependent variables the original ratings of one to five given by the firm respondents about the extent to which they worried about each stakeholder.

    (b) Respondents' Assessment of Detection Risk (Tables 5 and 6). We measure respondents' assessment of the risk of detection for TPA violations, differentiating between informal and formal sanctioning processes.

    (i) "Risk from Third Parties": The respondents' perception as to the likelihood that third parties would notice whether they breached the TPA: a single measure that puts together responses to three separate questions asking respondents to consider whether their trade practices are being closely observed by consumers, suppliers and business partners, respectively (shown in Table 5).

    (ii) "Likelihood of A CCC Enforcement" and "Seriousness of Risk of A CCC Enforcement": respondents' perceptions of the likelihood and seriousness of A CCC enforcement action (shown in Table 6).

  3. Main Independent Variable

    Our survey was to be filled out on behalf of the organization by the most senior person in the organization with day-to-day responsibility for TPA compliance. We asked this person to write down their job description. These answers were then coded into business executives (including CEO of the business), legal counsel (including General Counsel), (133) finance officers (including CFOs), compliance officers, and Company Secretaries. In Australia, the Company Secretary is an executive managerial position, fundamentally different in responsibilities than in the United States. (134) The number and proportion in each category are shown in Table 1, supra. For the regression analyses reported in this Article, we created five dummy variables to represent each of these groups of respondents. (135) We coded as a lawyer any Australian respondent who so self-identified.

  4. Control Variables

    1. The Firm's History

      The firm's past compliance and non-compliance with the TPA are likely to influence how the firm manages compliance and how it assesses the costs and benefits of compliance and the risks of detection. Unfortunately, it is difficult to obtain reliable measures of the organization's past (and present) compliance and non-compliance. Instead, we examine the impact of complaints about non-compliance. We thus only examine the slice of the firm's history in which stakeholders have been acknowledged as attempting to sanction the company. The experience of these pressures may account for features of the formal compliance process as well as how compliance is managed in practice. The experience of these pressures also may account for how the firm now assesses the seriousness and risk of non-compliance.

      (i) "Stakeholder Criticism" (Table 7): a measure of how often each business had been criticized by various external parties in relation to their trade practices compliance (136) (divided into three groups--those who had experienced no criticism from any of the name groups; those who had experienced criticism from between one and seven of the various types of stakeholder; and those who had experienced criticism from between eight and fifteen of the various types of stakeholder). In an attempt to avoid self-serving denials, the question asked not only whether the firm but also whether comparable "others" had been criticized. When such criticism is known, even if it is indirect, it becomes part of the firm's...

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