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Senior Management Has Growing Role in Compliance Oversight

The importance of ensuring that an ethics and compliance program is overseen by an individual who qualifies as high level personnel ("HLP") under the Organizational Sentencing Guidelines cannot be overstated, according to Jeff Kaplan, a partner at Stier Anderson, LLC. Kaplan discussed the role of senior executives with defined responsibilities for ensuring the effectiveness of organizations' compliance and ethics ("C&E") programs at the Conference Board's 2006 Ethics and Compliance Conference held in New York City.

Kaplan explained that the original Guidelines mandated that an HLP be assigned overall responsibility to oversee a company's compliance standards. The Guidelines defined HLPs as individuals with substantial control over the organization or who have a substantial role in making policy within the organization. According to the Guidelines, the term HLP includes a director, an executive officer, an individual in charge of a major business unit of the organization, such as sales, administration or finance, and an individual with a substantial ownership interest.

Kaplan said that the 2004 amendments to the Guidelines do not change the definition of an HLP, but change the HLP's responsibilities because the HLP must ensure the effectiveness of the program. Because the definition of an effective C&E program is greatly enhanced in the amended Guidelines, Kaplan noted that there is now a lot more for an HLP to ensure.

In addition to the Guidelines, HLPs need to be aware of the implications of the Caremark decision, according to Kaplan. Caremark said that fiduciary duty of care includes compliance program oversight and the duty of care applies to officers as well as directors. Kaplan stated that Caremark and the Guidelines revisions could lead to greater individual liability for corporate officers in cases where shareholders suffer because a company has a deficient C&E program.

Kaplan observed that the Guidelines do not use the term "chief compliance officer" or "chief ethics officer." He said while it can be useful for various reasons for a company to have such a person, it is important not to let the title obscure what the Guidelines require. Kaplan warned that many executives with the title of chief compliance officer don't meet the Guidelines definition of an HLP. If a company has a chief compliance officer, that person must meet the requirements of an HLP, or some other executive who is an HLP must ensure the effectiveness of the program. He warned that, if a company's chief compliance officer who is not an HLP reports solely to the CEO, the CEO could be charged with overseeing the program's effectiveness. He also noted that, while there are many benefits to having a C&E Committee, companies should be aware that they still need an HLP to oversee the C&E program.

Kaplan stated that there are many benefits to be had from creating governance documentation articulating the role of the HLP and others. These benefits include making sure that nothing is missed, keeping those with program responsibility focused over time and avoiding "jurisdictional" issues. The documentation can also prove useful for encounters with the government.

With regard to board C&E documentation, Kaplan recommended documenting that program oversight is assigned to a committee. The documentation should articulate the role of the HLP and others in reporting to the Board and should include what is reported and the frequency of reporting.

Kaplan discussed program governance documentation and said it should include the HLP's job description. He recommended considering tying some aspect of compensation to defined criteria for success in this aspect of the HLP's job. Kaplan observed that this will also address another program element outlined in the Guidelines.

According to Kaplan, a company with a C&E committee should have a charter that spells out all the new Guidelines elements. He said that, generally, the C&E committee's role would be to assist the HLP in ensuring the efficacy of each program element. Kaplan observed that it is less desirable to have them in the role of ensuring themselves.

He said that, because there is strength in numbers, a company may want to give the C&E committee a decision making, as opposed to an advisory, role with regard to the imposition of discipline, the interpretation of program issues, the consideration of conflicts issues, and waivers, unless they are covered by the Sarbanes-Oxley Act or the NYSE or Nasdaq rules.

Although the Guidelines have not changed with regard to investigations and discipline, experience shows that this can be one of the most difficult aspects of C&E programs. Kaplan stressed the need to build into programs means to assure that there is enough information enterprise-wide and independence so that discipline can be meted out fairly. He said that this will often require involvement of HLPs because it crosses jurisdictional "boundaries" in many companies and will impact individuals who may have power in the organization.

Because it is a great challenge to ensure no favoritism for HLPs and other favored employees, Kaplan urged companies to consider a broad approach to notifying board committees of issues involving senior managers. He said sometimes the duty of the HLP is not to be involved.

Kaplan characterized independent investigations as another area that companies get wrong even though they are effectively required by the SOX and the NYSE listing requirements and the need for them is strongly supported by the self-reporting requirements of the SEC, the Department of Justice and other agencies, as well as the Guidelines. He recommended expanding a SOX protocol requirement that the audit committee be notified of any factor suggesting a need for an independent investigation to cover offenses not covered by SOX.