Adding value by designing effective compliance programs

Alan S. Gutterman, Founder & Executive Director, Business Counselor Institute

In today’s business world, all companies, regardless of their size, business model and scope of activities, must understand and comply with a plethora of laws and regulations, including common law legal relationships (e.g., with employees); governmental licensing and permit requirements; intellectual property rights; employment laws; federal and state tax laws and regulations; laws regulating commercial and consumer transactions; federal and state antitrust and unfair competition laws; securities laws and governance rules and regulations; and federal and state laws relating to privacy and data security. These requirements apply regardless of whether the business is operated as a proprietorship, a partnership, a limited liability company or a corporation and also apply to nonprofit organizations. Moreover, each form of legal entity has its own set of rules regarding formation and internal operations that must be followed in order to gain the expected benefits from the use of the entity. For example, in order for the shareholders of a corporation to take advantage of the limited liability offered through the use of the corporate form, they must observe certain governance procedures and operational formalities.

Companies need to respond to their legal environment by proactively implementing policies and procedures to comply with those laws and regulations that are most relevant to their specific activities. In other words, companies need “compliance programs” almost from the moment they are formed. While establishing and maintaining a compliance program is a time-consuming and often expensive project, there are clearly significant legal and business advantages to the company:

• Compliance programs can be used to educate employees and set standards for acceptable conduct in all the company’s operations around the world;
• Studies have found a direct link between companies that score high on integrity factors and those that perform well financially;
• Studies have also found that companies with the best governance practices tend to be relatively more profitable, more valuable, and offer their shareholders a higher return on their investment;
• Companies that have created and followed compliance programs are better able to defend against enforcement actions by federal prosecutors and take advantage of programs that mitigate penalties for violators that have adopted a compliance program; and
• Emphasis on compliance and ethics is consistent with the continuing trend of best practices among companies around the world.

There has been a wide array of judicial and regulatory guidance on the elements of an effective compliance program:

• Under the ALI Principles of Corporate Governance, directors and officers have duties to establish effective legal compliance systems to ensure that activities of the corporation are generally conducted lawfully, must act responsibly in delegating monitoring duties concerning legal compliance, and must react affirmatively once they receive evidence that compliance programs are not operating properly.
• Court decisions, such as the well-known Caremark case, have imposed liability on directors for what amounted to a breach of their fiduciary duty of care by failing to properly supervise employees of the corporation and implement legal compliance programs which, if present, would have prevented activities that resulted in liability to the corporation.
• Government agency guidelines and policies relating to the factors that will be taken into account in enforcement and prosecution decisions, such as those promulgated by the Department of Justice, regularly mention the existence and effectiveness of the corporation’s compliance programs and provide specific guidance on the elements of reasonably acceptable compliance plans.
• “Public companies” are required, under the provisions of the Sarbanes-Oxley Act and the listing requirements of the major securities exchanges, to adopt and publish written codes of ethics and detailed statements of conduct standards for their executives, managers, employees, and agents.
• The Federal Sentencing Guidelines provide substantial incentives for companies to implement an effective compliance program and specific guidelines on the elements of such a program.

The scope and complexity of a particular company’s compliance programs depends on a variety of factors, such as the size of the company, available resources, and the activities in which the company is engaged. Designing a compliance program begins with an assessment of the existing compliance environment to identify those areas within the company that require the greatest amount of attention from a “compliance perspective.” The highest priority should be given to areas that carry the most significant levels of potential legal risk and financial exposure. A menu of the areas that might eventually be covered in a comprehensive compliance program include:

• Accounting and finance
• Human resources
• Health and safety
• Environmental laws
• Tax
• Exports and imports
• Antitrust
• Government contracts
• Intellectual property
• Insider trading
• Political activities
• Licenses and permits
• Privacy and data security
• Securities laws

In-house lawyers must put compliance high on their agendas and embrace it as an area in which they can and should contribute significant value to their companies.

In my next contribution to Corporate Counsel Connect, I’ll discuss the key questions regarding the role of the board of directors in developing and overseeing an effective compliance program.

Chapter 223 of Business Transactions Solution provides in-house lawyers with the guidance and tools needed to provide value during the process of designing, implementing, and maintaining effective compliance programs. New tools that have been added recently include a checklist of legal areas and business activities to be covered by compliance programs (§223:108); a checklist of the elements of an effective compliance program (§223:109); a questionnaire for analyzing and assessing compliance procedures and attitudes (§223:110); an executive summary for clients regarding compliance programs (§223:111), and a slide deck presentation on compliance programs that can be used for law department training purposes (§223:112).

About the author

Alan Gutterman is a regular contributor to Corporate Counsel Connect. He is the founding director of the Business Counselor Institute and the International Center for Growth-Oriented Sustainable Entrepreneurship. His publications on governance counseling and other matters are available on Westlaw at the “Business Counselor” page.

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