Creating A Proactive Compliance Strategy

For the past two-plus years, corporate legal departments have found themselves in a reactive mode - responding to wave upon wave of corporate governance reforms. From new exchange listing requirements to the Sarbanes-Oxley Act of 2002 to revisions in the federal sentencing guidelines, corporate legal departments have been bombarded with hurricanes of new rules, regulations and standards to understand and then implement as quickly as possible. While board governance committees and compliance systems are now fleshed out, much remains to be done in assuring that the systems will actually function to ensure compliance with laws by the corporation. Post Enron, the compliance function has moved from a low priority (except in the defense industry, where it has been at the fore) to an area of high expectation from a corporation's stakeholders.

This is new territory for most boards and senior management. Who in the organization should be the chief compliance officer? The general counsel? One who is not the general counsel? To whom should the chief compliance officer report? More complex questions arise regarding how to coordinate the many legal areas encompassed in a compliance system and the challenge of operational implementation. In the end, thoughtful boards will realize that the new compliance environment is all about a culture of honoring high ethics and living with the purposes of applicable laws. In short, they will look to their general counsels and law departments to assure a robust compliance system is in place. For this to happen right, the general counsel must become a proactive leader in the compliance field.

Corporate Governance And Compliance - Value Drivers

The need for a proactive compliance strategy is driven by a fundamental truth that has emerged in the wake of Enron, WorldCom and other corporate scandals: In today's world, corporate governance and compliance are value drivers. In a marketplace where public trust is a scarce and often depleting resource, one mishandled compliance issue can have a devastating impact on share price in a matter of days, if not hours. A compliance program that is able to respond quickly and effectively to allegations of wrongdoing or impropriety gives a corporation a competitive advantage in a marketplace where investors place a premium on public trust. While others may operate the compliance system, and indeed be the chief compliance officer, the law group must be providing leadership. In the post-Enron environment, a general counsel who fails to view compliance and corporate governance proactively neglects her or his duty to the corporation.

What then, should a forward-thinking general counsel be doing to thrive instead of survive in this new environment? At the most basic level, the general counsel must ensure that the corporation has a compliance system that filters and flows information up from company operations to key management and, ultimately, the board of directors. Each of "three pillars" of corporate governance - (i) Sarbanes-Oxley and other federal "corporate law,"(ii) In re Caremark and its progeny and (iii) the amendments to the organizational sentencing guidelines - make it clear that information and reporting systems are the critical infrastructure for good governance and management decision-making. Setting up systems to ensure the timely flow of relevant information is the key first step toward assuring a viable compliance system.

Compliance Not Solely A Legal Department Function

The proactive general counsel also must recognize that compliance is no longer solely a legal department function. The effect of the "three pillars" is to require an integrated approach to corporate governance that draws upon financial, audit, operational and legal skill sets. Integration is critical because each of the pillars creates a system of self-evaluation and compliance that has a slightly different impact on corporate governance, compliance and disclosure. Because ultimately it will be up to the legal department to determine if there are violations of law in every area of compliance, the general counsel is in a unique position to bridge these separate, yet interrelated spheres of compliance responsibility within a corporation. And even in corporations that have created separate chief compliance officers outside of the legal department, it is the general counsel who must give comfort to the board that the integrated system satisfies the "three pillars" legal requirements and allows her or him to carry out the responsibility of investigating all potential violations of law.

Governance And Compliance Best Practices Still Being Developed

Formalized compliance systems are a relatively recent phenomenon, spawned by the defense industry in the mid-1980s, formally endorsed by In re Caremark in 1996, and only recently viewed as a value driver on any widespread basis. Add to that the recent wave of governance reforms, and it is clear that post-Enron governance and compliance best practices still are being developed. No single integrated compliance framework has emerged as the "gold standard." Indeed, what is necessary for a large, multinational corporation may be too unwieldy for a smaller company. There is, however, a universal truth: The ultimate accountability for assuring a legally compliant compliance system rests with the general counsel and her or his lawyers. It is time for compliance to gain the level of respect and support that will be required by the expectations of a corporation's "publics." The general counsel who recognizes this new expectation and responds in a proactive way will be providing leadership in the finest traditions of our profession.

Get A Better Handle On Best Practices - Attend The October 14 Program

In considering a best practices approach for your company, it is most important that you take time to learn more about what is expected of you and what your colleagues are doing. On October 14, I am participating in the program described in the adjoining column. This program explores the compliance challenges faced by corporate counsel and most importantly provides an opportunity for corporate counsel to learn how other departments are responding to these challenges. I urge you to attend.

Published October 1, 2004.