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Chief Compliance Officer

The Effective CCO: Independence, Authority and Resources (Part III of IV)

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As Supreme Court Justice Potter Stewart eloquently opined in Jacobellis v. Ohio (1964), on the legal definition of obscenity, “I know it when I see it.”  This same test applies to other issues as well — when it comes to an effective ethics and compliance program, and an effective CCO, “[We] know it when [we] see it.”  Or conversely (and perhaps confusingly), “[We] know it when [we don’t] see it.”

To get out of this linguistic mess, let’s return to valuable ethics and compliance principles and CCO requirements.  While there has been lots of valuable guidance and discussions relating to CCOs and their roles and responsibilities, it all boils down to three important principles — independence, autonomy and resources.  When it comes to these requirements, there are no cutting corners, no hedging, and no compromises.

The Justice Department’s Evaluation of Corporate Compliance Programs recognizes the fact that corporate compliance programs can be designed properly, but that in practice well-designed programs may operate ineffectively because of lax implementation or lack of resources.  This is often described with the moniker of a “paper compliance program,” that is, a program that appears well-designed, but in practice suffers from ineffective implementation.  DOJ’s expectations for effective ethics and compliance programs extend to review, revision, analysis, audit, and documentation of the company’s compliance program. Further, DOJ has emphasized that effective compliance programs ensure that employees “are adequately informed about the compliance program and are convinced of the corporation’s commitment to it.”

In focusing on the role of the CCO, DOJ has specifically identified three important inquiries:

  • Whether the CCO has sufficient seniority in the organization?;
  • Whether the CCO [compliance function] has sufficient autonomy from management?; and
  • Whether the CCO [compliance function has sufficient resources, “namely, staff to effectively undertake the requisite auditing, documentation and analysis of the compliance program?”

These inquiries are often referred to in short hand as the requisite, independence, authority and resources to implement an effective ethics and compliance program.  As DOJ stated, the bottom line is whether compliance personnel are empowered within the company.

DOJ explains how these requirements should translate in the corporate operations and governance framework. While DOJ affords flexibility to companies to structure the compliance function in the context of the overall organization, companies have to adhere to these basic principles.

First, DOJ has noted that CCOs have to possess the authority and independence  to execute their responsibilities.  Further, CCOs have to maintain sufficient strategic importance in the organization equivalent to or no less than other comparable strategic functions. In making such a comparison, DOJ notes important factors such as “stature, compensation levels, rank/title, reporting line, resources and access to key decision-makers.”

Second, with respect to independence and autonomy, CCOs have to maintain direct access to the board to ensure that the board is adequately informed as to the company’s ethics and compliance program. The board itself has to establish an information and reporting system “reasonably designed” to provide management and directors with timely and adequate information to allow them to reach informed decisions relating to the company’s compliance with the law.”

DOJ identified important criteria under this issue for determining the existence of autonomy — direct reporting lines to the board or subcommittee thereof; frequency of meeting with directors; presence of senior management at these meetings; and steps taken by company to “ensure the independence of the compliance and control personnel.”

Third, on the issue of resources, DOJ notes that companies have to devote adequate resources to compliance, including sufficient personnel who have the requisite expertise and are compensated appropriately in order to “understand and identify transactions and activities that pose a potential risk.”

Most importantly, DOJ has emphasized that companies have to maintain sufficient staffing for compliance personnel to execute the required functions needed “to effectively audit, document, analyze and act on results” of compliance program performance.  DOJ warned that it intended to examine situations where CCOs requested additional resources and have been denied and the reasons for such a denial.


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The Importance of Independence to a CCO’s Role

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It is easy to be dogmatic in blog postings — to express an unvarnished opinion that sounds valid.  While it may not be supported by hard data or valid evidence, compliance officers are used to trusting their “gut feelings,” when it comes to compliance.  Compliance professionals with experience agree largely on big ticket issues, and this view often reflects lots of real-world experience.  Sometimes the experiential world provides more reliable indicators than the experimental world.

I hate to use the repeated Supreme Court Justice Potter Stewart quote with regard to the definition of obscenity, “I know it when I see it.”  This famous quote can be used by compliance professionals when turning a critical eye to their own compliance programs.  Deep in their hearts, CCOs know when their program has leadership support, operates effectively, and adjusts to changing events. It is this instinct that is invaluable.

The Justice Department has doubled down on the critical elements of an effective compliance program, including the role of the CCO and the compliance function.  DOJ often repeats the importance of Independence, Authority and Resources to an effective compliance function.  Some of these concepts, in practice, however, have been diluted in the real world.  When it comes to resolve and commitment, there is little question that companies have not translated these ideas into real practice.

Perhaps one of the most disturbing trends is the failure of companies to support and implement an “independence” compliance function.  As a best practice, a separate compliance office, headed by the Chief Ethics and Compliance Officer (“CECO”), who reports day-to-day to the CEO and directly to the Board (or Committee thereof).  Instead, many (but not all) CECOs find themselves embedded in other functions or even spread among various functions. 

The compliance profession had a long battle to extricate itself from Legal Departments.  Yet, in NAVEX’s 2022 Risk and Compliance Benchmark Report found that 29 percent of CECOs were located in the Legal Department and reported to the Chief Legal Officer.  That result is surprising.

Over the last twenty years, the compliance profession has transformed itself through effective advocacy.  At the same time, government prosecutors and regulators, along with investors, shareholders and marketplace stakeholders, have demanded that companies enhanced their ethics and compliance programs. 

At its core, compliance is a profession that requires different skillsets than lawyers.  Compliance professionals employ a blend of talents needed to build and operate an effective compliance program.  While being a lawyer may be helpful in circumstances, compliance professionals know that legal education and experience is not a requirement to serve as an effective compliance professional.

Compliance professionals have to redouble their approach to compliance programs to consistently demand independence, authority and resources.  In the absence of such an effort, the profession may drift back to prior practices where compliance professionals had to advocate for basic work requirements. 

A CECO has to operate with full independence — meaning that the CECO, in consultation with the Board and the CEO, has to execute on those responsibilities and projects free from undue influence or obstacles from internal countervailing forces.  When a CECO has the requisite independence, company leaders and employees are more likely to trust the compliance function as the guardian of the company’s culture and integrity.  With such acceptance, a compliance program can become truly effective.


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Chief Compliance Officer

Episode 240 – The CCO’s Role in an Effective Compliance Program

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I have been — and continue to be– hyper-focused on the proper role and responsibilities for Chief Compliance Officers. Not that I see any cause for alarm, but it is easy to lose focus in the sea of so-called hot issues — ESG, Diversity, Climate Change, Threats to Democracy, Cybersecurity and Data Privacy, each of which is an important component and focus for organizations. All of these issues intersect, are interdependent and should be addressed through organizational commitment.

But I want to take a step back and return to an issue of importance — the proper role of CCOs. To do so, we need to remind everyone about basic requirements, lessons learned and ways forward to meet the fast-changing times. CCOs have to maintain and then advance their positions. In my view, given the interdependence of all of the important issues mentioned above, the role of the CCO has become even more critical.

In this Episode, Michael Volkov reviews the standards applicable to the CCOs function in an effective compliance program. 


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Chief Compliance Officer

Where Does Your Compliance Program and CCO Fall Under DOJ’s Independence, Authority and Resources Test? (Part IV of IV)

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As we enjoy the remainder of the summer and get ready to launch into a new fall season (no, not football) but a time for renewal and recommitment, this may be a good opportunity to examine and analyze your own compliance program.  DOJ’s framework provides a valuable set of questions and issues needed to conduct this analysis.  It is important to note the critical ability to define standards that take into account the size, geographic scope and operational footprint of your company when it comes to ethics and compliance.  This is just a wordy way to state the obvious — compliance is not a one-size-fits-all inquiry.

DOJ’s broad definitional short-hand of Independence, Authority and Resources (or “IAR” for short) is a perfect framework within which to analyze the specific role and capabilities of your compliance office.  I would expect that many companies know and understand that their compliance program has failed to meet the compliance office IAR test.  

If an honest and objective test is applied, many companies will fail on the resources factor because most boards and senior managers have embraced compliance but not really carried through with the requirements.  All too often I hear the same mantra from board members and senior executives, “we are committed to compliance.  We know that it is important to “Do the Right Thing.” 

In my experience, this attitude reflects the exact opposite — a failure to understand the actual importance of ethics and compliance programs and how they should operate.  The presence of this attitude underscores the need for CCOs to “educate” their boards on how ethics and compliance programs really work and how board members should conduct oversight and monitoring of the ethics and compliance program.

As to resources, it is hard to overcome prior attitudes that compliance is a “cost-center” and drains from more important activities such as business development, marketing and sales.  Not to diminish the importance of such activities, but ethics and compliance contributes to the financial bottom line. 

Aside from the issue of lack of resources, many compliance programs continue to suffer from lack of access to the board for fulsome discussions of compliance program issues.  CCOs often appear at the end of a scheduled board/subcommittee meeting and are deprived of valuable discussions and interactions with board members.  Such curtailment often creates situations where CCOs are unable to operate with the authority and autonomy needed to operate an effective ethics and compliance program.

Finally, we return to one of our favorite issues — where in the corporate organization is the compliance function located?  Who does the CCO “report” to? 

While I have often stated that there is no one “right” way, it is easy to identify situations where the structure and stature of the compliance function falls into the “deficient” or “wrong way” category.  I have been writing about this issue in several blog posts in the past week or so.

When a CCO lacks the requisite title (and associated compensation level), is located outside the C-Suite, or reports to a functional leader without direct and structural access to the CEO and the board, any one of these situations alone or a combination thereof is by definition defective.  It is hard to imagine how a “director” of ethics and compliance (who is paid that salary level)  and who reports to the general counsel could satisfy the Independence, Autonomy and Resources test.  Frankly, they cannot and I am sure DOJ would agree with me.

In the end, and hopefully after reading this entire series, we can all agree on a basic proposition — an effective ethics and compliance program requires a level of dedication, commitment and resources from an entire organization that results in a collaborative program, directed from the C-Suite, with effective commitment and contributions from every part of the organization under a board and senior management defined program.  Together, a CCO can build an effective ethics and compliance program.  If operating alone or without the basic DOJ Independence, Autonomy and Resources, CCOs will suffer organizational and compliance frustration. 


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