Image courtesy of WalmartThe compliance profession has for years been beset by a debate with the outside world over the position of Chief Compliance and Ethics Officer (CECO). Should the CECO be part of the law department reporting to the general counsel? Or should the CECO be an independent, equal member of the C-Suite, reporting to the CEO with direct, regular access to the board? In my opinion and many others, this is the most consequential debate in the compliance field today.
To most compliance officers the answer has been obvious: without an independent CECO the compliance field is finished. Why? Because the compliance function is so often in conflict with the business function, with compliance officers telling business they cannot do this or that. Eventually, if we don’t roll over, we are retaliated against. Case in point: Maritza Munich, the compliance officer at Walmart allegedly forced out for doing her job.
Without a strong CECO connected directly to the board, compliance officers could not confront senior executives without fear of committing career suicide. Because an independent CECO function has meant that other areas (like legal, human resources, and marketing) would have to give up some power, and because an independent CECO is a new addition to a growing list of C-Suite functions, the resistance encountered by proponents like Donna Boehme, Joe Murphy and the compliance officer-member organization SCCE has been fierce.
But Walmart’s recent decisions regarding the compliance function within their company signals the debate is over; the CECO should report directly to the CEO and the board.
As discussed in recent posts, compliance is a system of checks and balances. The old way, where compliance and compliance officers were part of the law department, had serious flaws. Scandal followed scandal because there was a gap in the system exactly where coverage was critical: in the C-Suite. For complex reasons probed in the Rand Report, the C-Suite is all-too-often a primary source of headline-grabbing misconduct, a “Cauldron of Corruption.” To address this weakness, compliance had to become an equal in the C-Suite, where the CECO could have a powerful voice, fully informed about the company’s plans and fully empowered by the board to speak freely to the CEO and to the board.
Without this critical change, compliance cannot function in the big cases where it is needed most. While compliance officers might speak up about low-level, excessive gift giving (for example), they would not challenge the really bad conduct coming from powerful executives who could end their careers.
This shift of power within the company is perhaps among the biggest recent changes in the history of corporate organization. It is a shift business schools will want to study — once they understand what compliance is and what has happened.
One of the remarkable things about the new Walmart compliance structure is the company’s outspoken endorsement of this shift. Jay Jorgensen, the CECO of Walmart in an interview settled the debate. Asked about it he said:
The chief compliance officer can’t be buried in the organization. She can’t be wearing half a hat. (Compliance officers) need to be independent, senior executives, who all report back into Bentonville.
Compliance officers can now skip many arguments and cut to the chase: ‘Walmart is investing in compliance and so should you.’ Follow its lead or be left behind. Compliance officers have an icon of business success to make its arguments about the CECO position, including the basic decision to invest in compliance.
The compliance system of checks and balances changed Walmart and now Walmart can be a positive part of the system by showing other businesses why and how to go forward.
___________
Michael Scher is a contributing editor of the FCPA Blog. He has over three decades of experience as a senior compliance officer and attorney for international transactions. He is affiliated with ethiXbase, the owner of the FCPA Blog. He can be contacted here.
4 Comments
I think there is a middle ground that is not explored here. I am guessing that the vast majority of us work in companies whose C-suites are not "Cauldrons of Corruption." We still report into the general counsel's office and are able to carry out our jobs because our senior management teams want to do the right thing. We also meet with and report regularly (4-5 times per year) to the board of directors or committees of the board of directors, but we do not report directly to the board. Structures like these are working. Do I think eventually we will change it? Possibly. But I am comfortable with the way it works now.
When I taught Business Ethics in the School of Business at Georgetown back in the early 1990s, I advised the students that the CECO should report to the Board of Directors and the CEO directly, especially due to the Federal Sentencing Guidelines which were new then. I am heartened to discover that almost twenty-five years later a few companies are finally listening. Perhaps Credit Suisse wishes that it had listened.
To Susan Morris – Thank you for reading the post and taking the time to comment on it.I hope you may have an opportunity to study the links and the commentary on this issue over the past half decade (or longer per Mr Kennedy's comment) by many experts including Boehme, Joe Murphy, the Director of Public Policy for the SCCE, Michael Volkov and the leaders of the SCCE, the largest professional association of compliance professionals. They come down, as does the DOJ/SEC, Walmart, the SCCE's COs and many others in leadership positions on having the CECO as an independent member of the C Suite reporting to the CEO with direct, regular dialog with the Board. It's worth getting deeper into why that is the consensus. Note that good C Suite officers are still vulnerable to making ethically wrong decisions. Among the reasons is a body of new research that describes the C Suite's conflicts of interest ( per Jeff Kaplan's insightful blog) and behavioral decsionmaking pitfalls (per Scott Killingsworth's papers in the important Rand Center study linked in the blog.) Feel free to continue this discussion by email. Thanks again.
To Stephen Paul Kennedy: Thank you for contributing to the discussion your 20 years of experience with these issues. It's helpful to acknowledge how long this change has been under active consideration leading to its gradual, well considered reception as the norm. As you noted, there may be quite a few companies that wish they had empowered COs to inform the board of "lawful but awful" projects before full blown legal troubles arrived. GM might be a case in point. I appreciate your engagement with the post.
Comments are closed for this article!