The Challenge Underestimating the problem Boards & Management don t know:

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1 Society of Corporate Compliance & Ethics Utilities & Energy Compliance & Ethics Conference Houston, TX The Board & Management Role in Compliance March 3, 2009 P R E S E N T E D B Y: Daniel R. Roach, JD VP Compliance & Audit Catholic Healthcare West The Challenge Underestimating the problem Boards & Management don t know: What they need to do How to do it Incentives are skewed 1 1

2 Underestimating the Problem Ethics: Perception: Most of us are ethical Reality: Cheating high school college MBA Resumes Workplace 2 Underestimating the Problem We frequently fail to adequately understand: Ourselves Impact of authority/situational power Impact of our systems, processes, incentives See: The Lucifer Effect: Understanding How Good People Turn Evil. Philip Zimbardo, Random House

3 Underestimating the Problem Brocade CEO first convicted in stock option backdating scandal 4 Underestimating the Problem What's one man's kickback is another man's marketing approach. It s tough to deal with someone who has their hand held out. Title firm settles over kickbacks, Neil Roland, Bloomberg News, appearing in Aug. 29, 2007 San Ramon Valley Times. 5 3

4 Minimum Requirements 2004 Federal Sentencing Guidelines Chapter 8B2.1. Effective Compliance and Ethics programs (See Attachment 1) (a) To have an effective compliance and ethics program, an organization shall 1) Exercise due diligence ; and 2) Otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law. 6 Minimum Requirements [S]ubsection (a) minimally require[s] the following: 1. Standards & Procedures 2. High-level oversight 3. Screening 4. Training & Education 5. Monitoring, Auditing & Reporting 6. Promotion & Enforcement 7. Response & Correction These are commonly referred to as the 7 Elements 7 4

5 Minimum Requirements Section (2)(A). Governing authority must be: Knowledgeable about content & operation of program Exercise reasonable oversight with respect to the implementation and effectiveness of program. 8 Minimum Requirements Section (2)(C). Specific individuals 1. Delegated operational responsibility for the compliance and ethics program 2. Report directly to high-level personnel and the governing authority 3. Direct access to governing authority 4. Be given adequate resources, appropriate authority and direct access to governing authority (emphasis added) 9 5

6 Understanding Roles Role of the Board Define scope of the program Approve key policies and procedures Balanced incentives Require relevant, periodic, substantive reporting by management Ask questions Tip: Add compliance expertise to board or appropriate committee. 10 Understanding Roles Role of Management Actively promote/support program Ensure implementation of program Create culture of compliance Hold subordinates accountable Tip: It s management s job to ensure compliance. The role of the ethics and compliance officer is to ensure management has the tools & resources. 11 6

7 Understanding Roles Role of Ethics & Compliance Officer Design (and redesign) program with input from management (operations), employees, peers and experts Develop policies and procedures Structural (OSGs) Substantive (high risk areas) Develop/acquire education applicable to targeted functions, including the board & management 12 Understanding Roles Role of Ethics & Compliance Officer Simplify complex, clarify ambiguous Respond to environmental changes Monitor and report on execution Have the difficult conversations Tip: It s not usually ECOs job to tell management no it is ECOs job to provide appropriate alternatives. 13 7

8 Understanding Roles Courage Practice difficult/crucial conversations Think before you speak Attack the problem, not the person Listen carefully Admit mistakes the two most disarming words in the English language are. 14 Incentives Skewed Incentives Management climate Cognitive dissonance Ambiguity paralysis Incentives Financial Operational Customer satisfaction 15 8

9 Incentives Are ethical and compliant business practices fundamental to who we are? Align Incentives! Specific, measurable objectives Climate monitoring Aligned incentives Internal transparency Tip: Metrics easier to sell if management understands the benefits. See Attachment 2 for metric ideas. 16 Aligning Incentives: Culture of Compliance & Ethics Evaluate, Report, Enforce Insist on regular, transparent reporting Conduct audits to validate reporting/ performance Report key metric results to management & board Tip: Tie to compensation. Treat compliance as a threshold element in the performance and/or incentive evaluation process, particularly for key management employees. 17 9

10 Management & Board Reporting Written Reports purpose is to inform, report and educate Issues Investigations (internal & external) Annual work plan Key metrics Recent developments 18 Management & Board Reporting Oral Reports Highlight new investigations/issues new reports/tools key messages Respond to management/board questions Ask management/board if they have questions 19 10

11 Management & Board Reporting Minutes Purpose: To reflect topics, deliberations and actions in meeting and demonstrate that participants are effectively fulfilling their role Outline General topic area Issues Questions/deliberations Action See Corporate Minute-Taking: A General Counsel s Guide by Michael Peregrine & Russ Hayman Analysis0106.pdf 20 Management & Board Reporting Follow-up Progress in addressing key issues Progress in correcting adverse audit findings Answers to board/management questions 21 11

12 Questions? 22 12