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Compliance committees of boards of directors have existed at some corporations for at least 20 years. The Wall Street Journal reported last Jan. 9 on Page B4 that that an increasing number of corporate boards are forming such committees separate from their audit committees. A company may be spurred to create such a committee (or to expand the responsibilities of its audit committee to include compliance) by an agreement with law enforcement officials to resolve an investigation or by a perceived need to strengthen the board’s performance of its general duty of oversight of the conduct of the corporation’s business. The existence of such a committee has the potential to increase attention to compliance at all corporate levels and, in day-to-day decision-making, to help prevent subordination of compliance to other corporate goals. Under their charters, compliance committees commonly consist of at least three nonmanagement directors; the committees meet three or four times a year; and they are formally organized-with a chair, schedule of regular meetings (with provision for special meetings as needed), agendas and minutes. The committees’ principal functions are board oversight of corporate programs to maintain compliance with law and corporate policy, and reports to the full board with recommendations for action. At some corporations, the committees perform additional functions, e.g., monitoring of corporate integrity and similar agreements with law enforcement agencies, direct liaison with regulatory agencies, and receipt of reports of alleged misconduct. Differences between audit and compliance committees Although compliance committees are in some ways analogous to audit committees, their role and functioning are different in significant ways. Whereas audit committees generally focus on internal accounting, the audit process and outside auditors, financial controls and financial reporting-certainly large subjects-compliance committees must focus on the corporation’s compliance with the full range of laws applicable to the corporation’s activities (except those addressed by the audit committee)-criminal, regulatory, civil; federal and state-and corporate policies. Whereas audit committees can rely on outside auditors answerable to the board, compliance committees generally must rely principally on corporate employees answerable to management (in at least one corporation, however, the chief compliance officer is appointed by, and answerable to, the board’s compliance committee). Although a compliance committee can call on outside counsel and consultants, especially as to particular, specified concerns, outside counsel and consultants are very unlikely to have a degree of knowledge of a corporation’s total state of compliance that would be analogous to outside accountants’ knowledge of the corporation’s financial condition, personnel, practices and controls. Plainly, where a board has separate audit and compliance committees, coordination between them is necessary. It can be achieved through overlapping memberships or by communication. How might a board compliance committee discharge its responsibilities without interfering in management? Plainly, the committee needs to meet regularly not only with senior management, but also with corporate officials who are particularly involved in compliance-e.g., the chief compliance officer (if there is one), the general counsel, the head of regulatory affairs and the head of the internal compliance audit function. Depending on the nature of the corporation’s business, the committee might also meet from time to time with the corporate officials responsible for compliance with specific legal requirements: e.g., antitrust, laws relating to the environment, workplace safety, foreign corrupt practices, and equal employment opportunity, and regulatory requirements applicable to particular kinds of business in which the corporation is engaged. The committee might also focus on areas of corporate activity that present an elevated risk of wrongdoing. An example is areas in which corporate noncompliance has previously occurred. Such noncompliance may be reflected in, e.g., report of internal audits and of internal investigations in response to whistleblower complaints, reports of governmental inspections, civil lawsuits and administrative or criminal proceedings. Another example is areas in which competitors have been found noncompliant; the corporation’s employees may face the same incentives for noncompliance as do the employees of its competitors. Scenarios in which there may be an increased incentive to cheat include those in which the corporation faces especially intense competition, in which its market performance is declining, in which serious problems have been encountered (e.g., problems in producing closely regulated products), or in which the corporation has recently ratcheted up performance goals. If the corporation has recently acquired another business, heightened attention to the compliance status and culture of that business may be warranted. In addition, law enforcement officials may signal a heightened interest in particular areas through public statements or publicly reported enforcement actions. To monitor such areas, the committee may want to meet with middle managers and others who may be particularly subject to pressures that lead to noncompliance. Depending on the size of the corporation and the time available to the committee, it might plan to survey a range of corporate activities over a multiyear period. Of course, such a survey should leave the committee time to address pressing issues. In its meetings with company personnel, the committee might seek an understanding not only of official corporate policies and of particular corporate activities, but also of general corporate culture and of the cultures of individual business units. In day-to-day activities, are legal requirements taken seriously? Are company lawyers, regulatory affairs personnel, and others with particular expertise relevant to compliance consulted when they should be, and is their advice followed when it should be? Is there a perception among company employees that cutting corners simply is necessary to doing business, that noncompliance is acceptable because everyone in the industry engages in it? Are managers at different levels open to hearing bad news, or must such news be covered up? Are adequate resources provided for compliance? Committee members might conduct their conversations with employees so that answers to such questions would emerge even if the questions are not directly asked. If the committee’s interactions with senior management and other corporate personnel convey the message that the board takes compliance seriously, that message is likely to be received well beyond those particular interactions. When a manager has to submit a report (or part of a report) to the committee, or has to meet with the committee, some of the manager’s subordinates will be called on to help the manager with the report or with preparation for the meeting. As employees talk to one another, word of the committee’s interest is likely to spread. Understanding of the importance of compliance is thereby enhanced. In view of the wide scope of its responsibilities and its limited number of meetings, a committee needs to rely on written reports from the corporate officials with particular responsibility for compliance. Committee confidence that it is receiving full and accurate reports from those officials is indispensable. Among the matters that meetings with company personnel and written reports might address are budgets for compliance-sensitive activities, training and controls to prevent noncompliance (including relevant personnel policies and practices), and systems to detect it if it has occurred. Reports might also contain data and information on potential indicators of compliance issues, e.g., consumer complaints and correspondence with regulatory officials. Familiarity with other compliance methods a plus Among the distinctive contributions committee members can make to a corporation’s compliance program are familiarity with how other institutions approach compliance and a willingness to probe whether established ways of doing business carry undue legal risks. Because misconduct commonly is hidden from expected forms of detection, introduction to a corporation of forms of inquiry learned from other institutions may enable the corporation to detect and deal appropriately with misconduct before it grows into a major problem or is discovered by outsiders. Committee members can usefully transmit compliance techniques from one institution to another. In recent years, we have seen broad investigations and numerous enforcement actions in response to practices common to many firms in an industry-practices apparently accepted throughout the industry as a normal part of business. Members of compliance committees, whose principal experience is in other types of activity, may bring a fresh perspective to accepted but legally questionable practices. If committee members can unearth and actually raise questions about such practices, they may help reduce the occasions for such industrywide investigations, enforcement actions, and costly settlements in the future. Because a compliance committee typically meets only a few times a year, one key to its ultimate success is follow-up by management and compliance officials. The committee needs to establish procedures to ensure that it receives timely written or oral reports on the results of its interactions with management and other employees and its (or the full board’s) questions, recommendations and directives. Insistence on accountability for follow-up is likely to send a particularly strong message from the board that compliance counts. Richard M. Cooper is a partner at Williams & Connolly in Washington. He can be reached via e-mail at [email protected].

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