LRN – Compliance Building

LRN’s 2014 Ethics and Compliance Program Effectiveness Report

For the past seven years, LRN has conducted its annual survey of Ethics and Compliance programs in search of benchmarking data, suggestions of leading practices, and trends. In 2012 LRN adopted the Program Effectiveness Index as a tool to determine the impact of compliance programs.

The challenge with index is figuring out the difference between correlation and causation. The report is quick to point out the difference. For example, the public celebration of ethical leadership is a characteristic of programs with extremely high Program Effectiveness Indexes. But having a public celebration will not necessarily make your compliance program more effective.

I found the spending and staffing section useful. The average spend on compliance was $100 per employee, with highly regulated industries such as financial services averaging $130 per employee. As for headcount the average was 2.3 FTE per one thousand in highly regulated industries, above the 1.4 FTE overall average. You should note that the survey did not find a correlation between spending/staffing and effectiveness.

Annual assessments were highly correlated with effective programs. Of course if you are registered as an investment adviser, you are compelled conduct an annual assessment under the Compliance Rule 206(4)-7.

Sources:

LRN 2014 ethics and compliance program effectiveness survey

LRN’s 2013 Ethics & Compliance Leadership Survey Report

LRN’s has published its 2013 Ethics & Compliance Leadership Survey Report. This sixth annual Ethics & Compliance Leadership Survey Report provides guidance and specific recommendations on critical risks and challenges. The report is based on a survey of more than 180 ethics and compliance leaders from across industries and geographies.

This year’s report has a new metric: the Program Effectiveness Index (PEI). The US Sentencing Guidelines, the UK Bribery Act, regulators, and law enforcement all talk about having an effective compliance program. LRN looks at three major roles to address the Program Effectiveness Index:

a network of corporate controls
facilitator of business operations in regulated contexts
promotion of ethical conduct and culture

At first I was startled to see the Program Effectiveness Index measured on a scale from 0-1. I forgot about decimal points for a moment. In its survey, LRN reports an average PEI score of 0.71, with the scores distributed across a typical bell curve. The highest score was a 0.98 and the lowest was a 0.23.

The report highlights five attributes that distinguish the most effective ethics and compliance programs from the least:

Celebration of acts of ethical leadership
Adapting program to changing business needs
Focus on employees as a key element of risk assessment
Access to and support of senior management
Management’s use of risk data in decision-making

The survey respondents consisted of 11% financial services and 10% insurance, with the rest covering a broad spectrum of industries. The report does not dovetail neatly with the needs of a private fund manager. Of course it is always useful to see what others are doing with their programs, not just your peers.

The 2008 LRN Ethics and Compliance Risk Management Practices Report

LRN published their 2008 LRN Ethics and Compliance Risk Management Practices Report (.pdf) (free registration required) The report is based on a survey of senior ethics, legal, risk and audit professionals, with 461 completed surveys.

The key findings of the report:

Ethics and compliance programs are maturing
Companies identify their top two ethics and compliance risks as electronic data protection and data privacy
A majority of companies perform formal risk assessments involving multiple functions
Companies cite engaging employees and making education more relevant as their top challenges in prevention
Detecting violations still presents a significant challenge
Multinational companies face bigger challenges at their international regions than at headquarters
Few larger companies actively manage ethics and compliance risks within their supplier and partners’ network
Lack of resources – budget and staff – continues to be the leading challenge in conducting risk assessments and in implementing prevention programs

LRN conducted a similar survey in 2007, so this report is able to identify trends (to the extent two data points make a trend). I hope that they conduct a survey this year to see if these trends stay true.

“More and more companies are recognizing that ethics and compliance is the new frontier of business strategy. Increasing research demonstrates that forward-looking companies that put in place comprehensive and holistic ethics and compliance programs – i.e., programs that do not simply ensure the organization meet all regulatory requirements but that embed values-based business conduct into their culture – enhance their capabilities to compete in the marketplace. Without the distractions that accompany conflicting ethical viewpoints and goals or concerns over potential and actual rules infractions. Companies should concentrate on the workforce or the management of compliance infractions, companies can thrive through inspiration, motivating employees to be their best. An ethical work environment leads to more productive and profitable organizations.”

The report also pitches the LRN Ethics and Compliance Risk Management Process:

An integral component of enterprise risk management is to holistically build a strong
control environment with a culture of corporate ethics, by defining, preventing, detecting,
responding and evaluating as part of five key steps for building a sustainable compliance risk
management process:

Define business ethics and corporate compliance risks to create a comprehensive risk profile.

Prevent ethics and compliance lapses/failures with hard and soft controls, including business ethics and corporate compliance training.

Detect noncompliance with the law, regulations, company code of ethics and corporate governance practice via multiple reporting methods.

Respond swiftly and publicly to allegations and potential violations.

Evaluate results and make continuous improvements.

An LRN illustration of their process:

lrn-process

Managing Ethics and Compliance During a Recession

LRN hosted a webinar on Managing Ethics and Compliance During a Recession.

The panel consisted of:

Marjorie Doyle, Practice Leader, Solutions Management at LRN
David Greenberg, Executive Vice President of Knowledge at LRN
Debra Hennelly, President and Senior Adviser at Compliance & Ethics Solutions LLC
Adam Turteltaub, VP of Membership Development at The Society of Corporate Compliance and Ethics.

An ERC survey found that 60% of employees who feel pressured to do misconduct said “keeping their job” was a reason. As the economy sours, there seems more pressure to perform and to take shortcuts to achieve that performance. In times of economic stress, it is better to over-inform rather than under-inform.

How do you enlist support in your ethics and compliance program?

Make management aware that bad things happen more often when there is economic stress on the company.
First question a prosecutor will ask is: “What steps have you taken?” You do not want the answer to be: “We cut programs.”
Government is increasing pursuit of corporate wrong-doing. They just hired two new deputy chiefs.
People feel pressure to cut corners and make the numbers.

It is important to let people know the consequences of bad behavior. There are concrete remedies for badness. Also celebrate good behavior.

Highlight the non-retaliation policy. People are not going to make the call if they think they may lose their jobs. Silence is not good.

Obviously, compliance is not a profit center, so you need to be concerned when there are declining profits.

The Power of How presentation by Dov Seidman

LRN published the transcript of a presentation by Dov Seidman at the Center for Business Ethics at Bentley University: The Power of How: Achieving Enduring Success Through Ethics.

Basically, in a world in which nothing stays hidden, you have to act as if you have nothing to hide. But before you can act as though you have nothing to hide, in fact, you must have nothing to hide. There is an opportunity to literally out-behave your competition. You might not be able to answer a phone faster. You might not be able to create an anti-tampering device and market your bottled water on the basis of that device, because all the manufacturers of bottled water have that nailed down. But you can out-behave someone.