Empowering the Chief Compliance Officer: A Recipe for Effective Compliances

Michael Volkov, CEO

Volkov Law Group LLC

The most significant corporate governance trend in the last five years has been the rise of the chief compliance officer. No longer shuffled off to the back benches of corporate governance, corporate executives are increasingly relying on chief compliance officers to promote corporate compliances and ethical conduct. A revision of corporate gestalt is at the heart of the surge in corporate compliance programs.

The evolution of the role of CCO has been the result of a variety of forces—increased government prosecutions, adoption of specific guidance in the United States Sentencing Guidelines, requirements imposed by Health and Human Services in corporate integrity agreements, and industry education efforts.

In this climate, many companies are focusing on elevating the CCO to design and implement proactive compliance programs. This trend is a welcome development and one that all policymakers should embrace and seek to promote.

As prosecution risks have increased, so has the role of the CCO. Companies are fast recognizing the value of elevating a CCO, and protecting the CCO’s independence through direct reporting authority to the board or a board committee.

Until the last few years, many companies added compliance oversight to the responsibility of their general counsels. A 2009 survey of companies found that nearly half of the responding companies followed this pattern.¹ More recently, companies have started to recognize that general counsels should not serve in this dual role of chief legal officer and chief compliance officer, given the different responsibilities and talents required by each position.² Many in the legal and governance communities have now endorsed the need for splitting the functions of chief legal officer and chief compliance officer.

Corporate compliance programs are continuing to evolve in response to emerging “best practices” and changes in the business environment. Back as far as 1998, the government encouraged companies to ensure the independence of chief compliance officers:

The OIG believes that there is some risk to establishing an independent compliance function if that function is subordina[te] to the hospital’s [G]eneral [C]ounsel, or comptroller or similar hospital financial officer. Freestanding compliance functions help to ensure independent and objective legal reviews and financial analyses of the institution’s compliance efforts and activities. By separating the compliance function from the key management positions of [G]eneral [C]ounsel or chief hospital financial officer (where the size and structure of the hospital make this a feasible option), a system of checks and balances is established to more effectively achieve the goals of the compliance program.³

In a similar vein, in a September 5, 2003, letter to Tenet Healthcare Corporation, United States Senator Charles Grassley (R-IA) observed:

“Apparently, neither Tenet nor (its General Counsel) saw any conflict in her wearing two hats as Tenet’s General Counsel and Chief Compliance Officer . . . It doesn’t take a pig farmer from Iowa to smell the stench of conflict in that arrangement.”⁴

The United States Sentencing Commission set in motion strong incentives for a company to earn credit for an “effective” corporate compliance program by implementing the organizational sentencing guidelines, and by adopting recent amendments to the guidelines in 2010 that specifically required companies to establish a senior level officer responsible for corporate compliance with direct-reporting authority to the board.

Specific individual(s) within the organization shall be delegated day-to-day operational responsibility for the compliance and ethics program. Individual(s) with operational responsibility shall report periodically to high-level personnel and, as appropriate, to the governing authority or an appropriate subgroup of the governing authority, on the effectiveness of the compliance and ethics program. To carry out such operational responsibility, such individual(s) shall be given adequate resources, appropriate authority, and direct access to the governing authority or an appropriate subgroup of the governing authority.⁵

In addition to the Sentencing Commission’s 2010 amendments to the guidelines, and in response to specific scandals and prosecutions in the healthcare industry, prosecutors demanded that companies separate the chief compliance functions from the chief legal officer.⁶

Companies now are embracing the idea of a C-Suite level chief compliance officer, and empowering that officer with adequate resources and real autonomy. Recent surveys of corporate compliance professionals show that companies are spending more money on their compliance programs.⁷

Among the many other reasons supporting the elevated CCO, is the likelihood that a C-Suite level officer can more effectively pursue a compliance agenda, and identify and communicate at the C-Suite level. For example, recently in response to governance failures and legal violations, HSBC and J.P Morgan reenergized their compliance programs by empowering independent CCOs with new reporting authorities and positioning.⁸ These innovative solutions to real governance problems reflect a growing trend across many industry sectors: namely, to empower a chief compliance officer as a check and balance against the potential for future corporate misconduct.

Separation of the legal and compliance functions ensures independent and objective legal reviews and promotes an internal system of checks and balances. What is critical is that the two roles have to coordinate and work well together. There is no question that the two roles are completely unique and two different people need to carry out their respective responsibilities.

Change in the compliance arena is having a ripple effect on corporate board governance and oversight of compliance programs. Change is occurring and companies are getting the message by creating compliance committees at the board level, and by empowering an independent chief compliance officer who reports directly to the CEO and/or the compliance committee.

The CCO’s daily reporting relationship is not as important so long as one prerequisite is met—the CCO has to sit in the C-Suite. This is an important requirement and demonstrates the company’s commitment to compliance and ethics. If you ask CCOs what they want (beyond adequate resources), the CCO will invariably reply—senior management support and visibility. Support and visibility give the CCO the credibility they need to carry out their job, to walk into a room and know that the CEO backs the CCO and that the CCO has influence within the organization, meaning that the CCO is viewed as a valuable member of the business team.

Michael Volkov is the CEO of The Volkov Law Group LLC and a recognized expert in the compliance and white collar defense field. He maintains a popular blog: Corruption, Crime & Compliance:  http://corruptioncrimecompliance.com

¹Association of Corporate Counsel and Corpedia, 2010 Compliance Program and Benchmarking Survey, available athttp://request.corpedia.com/WP2010ACCCorpediaCompliance.

²In the 2012 PWC State of Compliance Study, the number of CCOs reporting to GCs fell by 6 percent—to 35 percent from 41 percent—in the prior year.

³OIG, HHS, Compliance Program Guidance For Hospitals (1998), available at http://www.oig.hhs.gov/authorities/docs/cpghosp.pdf.

⁴See, Grassley Investigates Tenet Healthcare’s Use of Federal Tax Dollars, available at http://www.senate.gov/~grassley/releases/2003/p03r09-08.htm.

⁵Section 8B2.1 (b) (2) (C), United States Sentencing Guidelines.

⁶Association of Corporate Counsel and Corpedia, 2010 Compliance Program and Benchmarking Survey, available athttp://request.corpedia.com/WP2010ACCCorpediaCompliance.

⁷Dow Jones 2012 State of Anti-Corruption Compliance, available at  http://www.dowjones.com/pressroom/smprs/djrcsurvey2012.html.

⁸Donna Boehme and Michael Volkov, J.P. Morgan Chase Takes a Giant Step on CCO Independence, Corporate Counsel, January 29, 2013, available at http://www.law.com/corporatecounsel/PubArticleCC.jsp?id=1202586012597&JPMorgan_Chase_Takes_a_Giant_Step_on_CCO_Independence&slreturn=20130302204109; Donna Boehme, DOJ Tells HSBC and Corporate America: Reform Your Compliance Departments, Corporate Counsel, December 20, 2012, available at http://www.law.com/corporatecounsel/PubArticleCC.jsp?