engaging your board · 2014. 9. 3. · three major training ^buckets _ ... engage third party...
TRANSCRIPT
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ENGAGING YOUR BOARD
Erica Salmon Byrne EVP, Compliance and Governance Solutions NYSE Governance Services Eric Morehead Managing Director and Senior Compliance Counsel NYSE Governance Services October 8, 2013
AGENDA
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Presenting to the Board
Training for the Board
Example Presentation to The Board
Current Program Assessment and Update
Business Case for Compliance
Common Questions
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PRESENTING TO THE BOARD
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•Guideline standards and best practices regarding
• Who delivers the report
• How often the report is given
• What is included in the report
•How is the relationship between the “day to day” operational compliance personnel and the board memorialized?
•Is the Audit Committee the right forum?
•Do you have a “unique” governing structure?
• JV or portfolio company
• Private company
• University or non-profit
THE BOARD’S ROLE
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BOARD OF DIRECTORS OVERSIGHT (USSG §8B2.1 (B)(2)(A))
The Guidelines recommend that an organization’s “governing authority” be knowledgeable about the content and operation of the ethics and compliance program, and that it exercise reasonable oversight of that program.
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BOARD INVOLVEMENT WITH COMPLIANCE “HAS THE BOARD DELEGATED RESPONSIBILITY FOR ETHICS AND COMPLIANCE TO A
COMMITTEE OF THE BOARD ?”
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Source: World’s Most Ethical Company Dataset, Ethisphere Institute 2012
BOARD INVOLVEMENT WITH COMPLIANCE “DOES YOUR BOARD HAVE A ‘RED FLAG’ OR ALERT PROCESS TO BRING ISSUES TO THE
BOARD?”
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Source: World’s Most Ethical Company Dataset, Ethisphere Institute 2012
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BOARD INVOLVEMENT WITH COMPLIANCE “HOW OFTEN DOES THE PERSON WITH OVERALL RESPONSIBILITY FOR COMPLIANCE
UPDATE THE BOARD?” [ALL ORGANIZATIONS]
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11%
50% 5%
19%
5% 10%
Annually
Quarterly
Monthly
Ad Hoc
Never
Other
Source: ACC/Corpedia Bi-Annual Survey 2011
BOARD INVOLVEMENT WITH COMPLIANCE FREQUENCY OF COMMUNICATION
Confidential 8
2011 2009 2007 2005
Quarterly 50% 48% 42% 39%
Ad Hoc 19% 21% 30% 28%
Annually 11% 48% 42% 39%
Other* 10% 10% - -
Monthly 5% 6% 8% 11%
Never 5% 5% 8% 6%
*Other was not an available choice for the 2007 and 2005 surveys
2011 ACC Benchmarking Survey on Compliance Programs and Risk Assessments
CONFIDENTIAL
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BOARD INVOLVEMENT WITH COMPLIANCE “HOW OFTEN DOES THE PERSON WITH OVERALL RESPONSIBILITY FOR COMPLIANCE
UPDATE THE BOARD?” [WME HONORED ORGANIZATIONS]
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41%
42%
4% 6% 6%
1%
> Than Quarterly
Quarterly
3 Times Annually
Bi-Annually
Annually
Ad Hoc Only
Source: World’s Most Ethical Company Dataset, Ethisphere Institute 2012
BOARD INVOLVEMENT WITH COMPLIANCE ROLE OF OPERATIONAL ETHICS/COMPLIANCE OFFICER WITH THE BOARD
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“Does the operational ethics/compliance officer participate in board presentations?”
Source: ACC/Corpedia Bi-Annual Survey 2011
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BOARD INVOLVEMENT WITH COMPLIANCE “WHAT ASPECTS OF THE ETHICS AND COMPLIANCE PROGRAM ARE REPORTED TO THE
BOARD?” [ALL ORGANIZATIONS]
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0%20%
40%60%
80%
Hotline Statistics
Investigation Reports
Training Information
Communication
Risk Assessment
Program Measurement
Culture Assessment Results
Source: ACC/Corpedia Bi-Annual Survey 2011
BOARD INVOLVEMENT WITH COMPLIANCE “WHAT ASPECTS OF THE ETHICS AND COMPLIANCE PROGRAM ARE REPORTED TO THE
BOARD?” [WME HONORED ORGANIZATIONS]
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20%40%
60%80%
Hotline Statistics
Investigation Reports
Training Information
Communication
Risk Assessment
Program Measurement
Culture Assessment Results
Source: ACC/Corpedia Bi-Annual Survey 2011
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ENGAGING THE BOARD ON RISK
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TIMELY AND RELEVANT INFORMATION ON RISK
Risk Assessment Process
How the company audits the implementation of the compliance program
Employee perception of compliance
ALIGNING YOUR PROGRAM EXPECTATIONS FOR THE BOARD AND THE ORGANIZATION
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What information should the board be receiving?
Ethics and compliance metrics
Benchmarking
Training and regulatory updates
Program initiatives
What is the board’s role in communicating “tone from the top” and ensuring engagement?
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TRENDS IN BOARD TRAINING
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Boards are increasingly asking for
guidance on what a good compliance
program looks like
Companies are increasingly
asking the Board to review – or to
complete – the same code training
provided to employees
Online training for directors is becoming more common
However, board training is still hovering around an hour at
a majority of organizations
ENGAGING YOUR BOARD
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TOTAL HOURS SPENT TRAINING THE BOARD
Less Than One Hour
1 -2 Hours
3 - 5 Hours
More Than Five Hours
2011 ACC Benchmarking Survey on Compliance Programs and Risk Assessments
47%
35%
12%
6%
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TRAINING FOR THE BOARD
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Three major training “buckets”
•Code of conduct
• Summary
• Access to training assets including the online program
•Role and responsibilities of board
•Relevant risk topics
• Insider trading
• Conflicts of interest
• Anti-corruption
• Antitrust
COMMON RISK TOPICS COVERED IN BOARD TRAINING
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25%
33%
53%
64%
36%
Other Anti-Corruption Conflicts ofInterest
Code of Conduct Board OversightResponisbilities
Source: ACC-Corpedia 2011 Compliance Program and Risk Assessment Benchmarking Survey
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ETHICS & COMPLIANCE PROGRAM UPDATE
Erica Salmon Byrne Eric O. Morehead
Chief Ethics and Compliance Officer Vice President, Client Services
OurCo, Inc. Training, Inc.
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ETHICS & COMPLIANCE PROGRAM UPDATE
•Program assessment data
•Reports
•Case status and disposition
•Culture survey results
•Updated initiatives
•Training and communication plan
•2014 Plan
•Outside expert presentation
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HELPLINE & REPORTING FOR Q1-Q3 2013
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39%
14%
6% 3%
2%
15%
21%
Type of Report
HR Matters
Misuse ofAssets
HSE
Fraud
Accounting
Other law
Contact Statistics Q1-Q3
2013
Total Helpline Contacts 233
Anonymous Contacts 17%
Open Door Reports 158
Total Reports 391
REPORT CONTACT TRENDS
Contact Statistics 2010 2011 2012 Q1-Q3
2013
Total Helpline Contacts 174 208 217 233
Anonymous Contacts 29% 33% 31% 17%
Open Door Reports n/a n/a 73 158
Total Reports 174 208 290 391
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REPORT CONTACT TRENDS
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0
50
100
150
200
250
300
350
400
450
2010 2011 2012 Q1-Q3 2013
Open Door
Helpline
REPORT CONTACT TRENDS BY TYPE
Contact Statistics 2010 2011 2012 Q1-Q3
2013
Human Resources Matters 61% 67% 56% 39%
Misuse of Assets (Theft, Disclosure of
Confidential Information 12% 14% 8% 14%
Environmental Health and Safety 2% 2% 4% 6%
Corruption, Fraud & Bribery 2% 3% 2% 3%
Accounting, Auditing or Internal Controls 2% 5% 2% 2%
Other Law, Code or Policy Violation 19% 7% 16% 15%
Request for Guidance or Approval 2% 2% 6% 21%
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REPORTING METHOD TRENDS
34%
25%
12%
26%
3%
2010
Webform
In Person
Phone
Fax
22%
17%
51%
9% 1%
Q1-Q3 2013
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CASE HANDLING
12%
22%
26%
16%
24%
19%
15%
34%
10%
22%
0%
5%
10%
15%
20%
25%
30%
35%
40%
ImmediateResponse w/
Guidance
No Investigationor Action
Warranted
Investigated,Corrective Action
Taken
Investigated, NoAction Warrented
Referred Contactto Resource
2011
2012
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CASE DISPOSITION
26%
14%
3% 1%
56%
17%
24%
8%
2%
49%
-10%
0%
10%
20%
30%
40%
50%
60%
No Action/Closed Counseling orDisciplinary Action
Termination Prosecution Other (Guidance,Approval,
Communication)
2011
2012
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EMPLOYEE ENGAGEMENT SURVEY - 2013
Survey included questions aimed at measuring commitment and adherence to the principles and values
in our Code of Business Conduct and Ethics, including:
I know where to seek advice if I have questions about the ethics of a specific action?
I believe that all employees (including senior management) are held to the same ethical standards?
I believe that senior management behaves in an ethical manner?
I have not felt pressure to compromise values, company policy, or the law to achieve financial goals?
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EMPLOYEE ENGAGEMENT SURVEY - 2013
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27
23
31
15
43
50
47
34
20
18
16
28
7
7
5
15
3
2
2
8
0% 20% 40% 60% 80% 100%
Know Where to Seek Advice
All Employees Treated Same
Senior Management is Ethical
Not Felt Pressure to Compromise
Srongly Agree Agree Neutral Disagree Strongly Disagree
EMPLOYEE ENGAGEMENT SURVEY TRENDS
18%
45%
20%
12% 5%
2010
StronglyAgree
Agree
Neutral
Disagree
StronglyDisagree
15%
34%
28%
15%
8%
Q1-Q3 2013
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EDUCATION
2010
2011
2012
2013
Code of Business Conduct and Ethics Training
Online course delivered to all employees worldwide: 20686
Completion rate: 62% (but recordkeeping not clear). Limited
follow-up to ensure completion.
Code of Business Conduct and Ethics Training
All employees worldwide: 20436
In person for senior management. Enrolled: 312. Completion Rate: 99%
Online course for remaining employees. Enrolled 20124. Completion Rate: 93%
Reasons for completion rates: Tone at top and significant follow-up
Virtually no Compliance or Ethics Education courses delivered.
Reasons: Reduction in Force/general economic conditions.
Insider Trading for Managers. Employees enrolled: 1896.
Completion percentage: 66%. Minimal follow-up to ensure
completion.
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PROGRAM COMMUNICATION 2013
1Q2013
2Q2013
3Q2013
4Q2013
22 Feb – Intranet Feature, Test your Ethics IQ, Protecting Confidential Information of competitors,
potential vendors
26 Feb – CECO emails to managers and all employees regarding policies and Code training
31 Mar – Intranet Banner re new Code training due 30 June
14 Apr – Intranet Feature, Ethics in Action, Credit card misuse
June – Intranet Corp News – Using File share correctly
23 May – Intranet Feature, Test your Ethics IQ, Foreign Corrupt Practices Act
30 May – Intranet Banner re new Code and completion of training
7 June - Annual Meeting – CEO and General Counsel remarks including ethics discussion
18 Jul – Intranet Feature, Test your Ethics IQ, Insider Information
22 Aug – Intranet Feature, Ethics in Action, Employee and Vendor conflicts of interest
3 Sep - Quarterly Sales Meeting – CEO Speech including ethics discussion
24 Oct – Intranet Feature, Ethics in Action, CWT System cost error identified in Russia
14 Nov – Intranet Feature, Test your Ethics IQ, gifts and conflicts of interest
2 Dec - Rollout of revised Code training including executive message and local manager discussion
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KEY INITIATIVES FOR FY13 Code of Business Conduct and Ethics Revision
Benchmark Codes of Other Companies
Engage Internal Partners – HR, Legal, Communications
Identify and Engage External Partners
Education and Communications Curriculum and Implementation Plan
Develop New Code Course to Coincide with Revised Code Rollout
Determine Subject Matter Curriculum for Specific Employee Groups
Deliver Education Course to Board
Engage Third Party Training Provider
Develop and Implement Communication Plan for Year
Compliance Policies
Review Current Policies and Identify Weakness and Gaps
Develop Plan for Updating Policies
Audit and Legal Committee and Full Board
Reserved Time at Every Meeting of the Committee
Full Board – Presentation at One Meeting Minimum
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THREE YEAR PLAN
* Annual Program Elements
2014
Code of Conduct Revision
And Rollout
Communications*
Education Curriculum*
Policies*
Board and Audit Committee*
2015
Risk Assessment
Incentives
Employee Engagement Survey
Regional CE Committees
2016
Employee Engagement Survey
Third Party Program Assessment
Regional/Business CE Officers
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THE BUSINESS CASE FOR ETHICS AND COMPLIANCE
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THE COST OF FAILURE IS HIGH
Fines keep skyrocketing
BP $4.5B ($34B claim from the states)
GlaxoSmithKline $3B
Pfizer $2.3B
Johnson & Johnson $2.2B
HSBC $1.9B
Abbott Labs $1.5B
Eli Lilly $1.4B
Intel $1.4B
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THE COST OF FAILURE IS HIGH
$0
$1
$1
$2
$2
$3
$3
$4
$4
$5
In Billions
$4.4
$1.4
Intel's $ Income (2009)
Fines
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THE COST OF FAILURE IS HIGH
The fines and penalties that make the headlines make up, on average, only 2-3% of the total costs to an organization
“Hidden Costs” include:
Attorney and other professional fees
Lost opportunity costs
Employee retention effects
Brand and reputation issues
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THE COST OF FAILURE IS HIGH
The New York Times reported recently that Wal-Mart had incurred “$157 million of professional fees and expenses related to the ongoing FCPA matter during its last fiscal year and that it expect to incur an additional $40 to $45 million for the first quarter of fiscal 2014.”
That’s approximately $604,000 in professional fees and expenses per working day.
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IT’S NOT JUST WALMART & BP
Small organizations (under 500 employees) make up over 80% of companies that end up being convicted of a felony in the USA each year
Small to medium organizations rarely, if ever, receive mitigation credit for an effective ethics and compliance program – but, since they are the most frequently charged, they could benefit the most with just reasonable efforts
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THE OTHER SIDE OF THE COIN
Known declinations are hard to pin down, but there are exceptional cases
Morgan Stanley -- April 2012:
“After considering all the available facts and circumstances, including that Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not bribing government officials, the Department of Justice declined to bring any enforcement action against Morgan Stanley”
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PROACTIVE ACTION
A targeted, well-resourced ethics and compliance program delivers results in lower misconduct instances and higher detection rates
Building a strong culture that includes everyone encourages reporting and discourages misconduct through transparency
Understanding compliance risks is key to marshalling resources effectively
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REAL RESULTS
Companies with a strong ethical culture are much less likely to experience misconduct. 2011 NBES Survey, Ethics Resource Center.
Companies with a weak ethical culture experience up to TEN TIMES more misconduct than companies with strong ethical cultures. Compliance and Ethics Leadership Council, Corporate Executive Board.
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STRENGTH OF CULTURE MATTERS
29% 46%
67%
90%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Strong Strong Leaning Weak Leaning Weak Leaning
% of Employees that Observed Misconduct in Previous 12 Months
Source: 2011 NBES Survey, Ethics Resource Center
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STRONG PROGRAMS DRIVE STRONG CULTURE
86%
57%
23%
Well-Implemented
Poorly Implemented
Little/No Program
% of Organizations w/ Strong or Strong-Leaning Culture
Source: 2011 NBES Survey, Ethics Resource Center
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GETTING AND KEEPING STAFF
• Journal of Business Ethics study: Employees look for companies that share their ethical and moral values
• Stanford and UC Santa Barbara Study: MBA grads willing to work for 12% less at companies with strong ethical culture (see figure)
• Self-propagating cycle: ethical companies attract best employees, which continue to improve ethical culture
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A FOCUS ON ETHICS DRIVES RETURNS
Source: Ethisphere Institute
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AVERAGE SHAREHOLDER RETURN OVER TEN YEARS
8.8%
-7.4%
Source: Corporate Executive Board, 2012
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KEY TAKEAWAYS
•Ethics and Compliance is a bottom-line business issue
•Program costs are minimal compared to fines and associated losses
•Ethics is a driver for recruitment, reputation, partnership and investment
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QUESTIONS TO ANTICIPATE FROM YOUR BOARD (IN ADDITION TO “HOW MUCH IS ALL OF THIS GOING TO COST?”)
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“We’re no GE, we’re a bit player, why do we care about investing in this? Will the government even care about us since we’re smaller/private?”
Small Fries get the bigger hammer
US Sentencing Commission data consistently shows small organizations taking convictions. In FY11, for example, 94% of the organizations convicted of a felony had less than 500 employees, 70% had less than 50 employees
Small orgs can’t weather the costs, reputational and otherwise, as well as large orgs
Issues like debarment from federal work can kill orgs
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“Why are you talking about Sentencing Guidelines?”
It’s not just us talking about it, it’s what your local US Atty looks at when making the call on charging, what the SEC and other agencies consider as a framework, and it’s echoed in standards from the Federal Acquisition Regulation (FAR) to international standards like the UKBA and OECD
The guidelines provide a flexible framework for organizations of all sizes and scopes – it’s a valuable roadmap
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“We’ve had a hotline for years now and we never get any calls, doesn’t that mean we’re doing fine?”
It might also mean that no one knows about the hotline or that they are either scared to report --or feel it won’t matter
Surveys consistently show that 90% or more of employees prefer to report to their managers, supervisors or HR – the hotline is consistently an option that gets less than 10%.
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“Everyone knows we are an ethical company and do the right thing. I talk about it all the time.”
While we are consistent in what we say from the top, getting the message to the grass roots is deceptively difficult and employee perception of the company culture and our commitment to it is actually as important as what we say and do at the top
The perception of company culture is local
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“Shouldn’t we focus all of the resources on [pick a topic], that seems to be the hot issue?”
What regulators are focused on today is important, but risks change and we need a robust program that focuses on reporting, asking questions and taking responsibility to create a culture that adapts to all possible compliance risks
Assessing individual risk topics, and the resources that should be brought to bear, is an integral part of any successful program – but you have to have the framework in place to do that
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“How do we know that the company’s money is going to be well spent?”
Ethics and compliance is not a black box, there are metrics that can be used to gauge performance and benchmarking with peers to ensure best practices (including internal surveys and external benchmarking)
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Thank You