The rise of the compliance profession has had a number of positive impacts on the corporate governance landscape. One of the most important results has been increased focus on corporate culture.
Chief compliance officers recognize that they are the guardians of the company’s culture (assuming the company does not have a separate Chief Ethics Officer). Some companies have recognized the importance of ethical business decision-making and have appointed a separate Chief Ethics Officer. These changes in the corporate landscape are positive developments, reflecting increasing attention to proactive strategies designed to promote a culture of ethics and compliance.
Modern business leaders understand the importance of a culture of ethics, not as a preventive strategy to avoid legal violations and enforcement actions, but as a proactive financial driver in achieving positive results. At ethical companies: employees are more productive; employee turnover declines; employee reporting of misconduct increases; and overall misconduct rates decline. The bottom line for all of these results is that an ethical company is more profitable than it would otherwise be.
What has been and will be the role of lawyers in creating an ethical culture?
I am not one to take on government representatives but a recent speech by Michael Held, the general counsel of the Federal Reserve Bank of New York, caught my eye recently. A copy of the speech is here.
Interestingly, Held addressed the problem of culture in the financial services industry, a topic that the Federal Reserve of New York should be intimately familiar. In his speech, Held argued that in-house lawyers should “play important roles at financial firm as advisors not just on law – what is legal or illegal – but also on culture.”
As part of his thesis, Held argued that culture is distinct from both public law and private rules. As he explained, a group’s culture often informs and is informed by its rules, but culture “is a powerful force in its own right.”
These statements are welcome and reflect the growing influence of ethics and compliance. There is no question that lawyers, like any other professional executive, should apply and inform their work with understanding how a specific decision aligns with a company’s culture.
Held also made numerous observations about the challenges of culture in the financial industry, basically by referring to past enforcement actions. He notes that financial institutions do not tolerate failure, and that the emphasis on success and the limited definition of success naturally impacts a culture of compliance and ethics.
Held’s speech encourage in-house lawyers to play a more active role in considering corporate culture and how legal recommendations affect the company’s culture. These are welcome admonitions and suggestions.
But what struck me about Held’s speech, and his thesis, was his failure to recognize at all – the role of a Chief Ethics Officer and/or a Chief Compliance Officer in promoting the company’s culture as a natural ally and partner in corporate governance.
I am not sure where Held has been working for the last twenty years, or what tropical island he has been stranded on, but his speech fails to even acknowledge the existence of CCOs and the existing ethics function. Given his position at the NY Federal Reserve, either he has a blind spot or a tin ear, and appears to avoid such recognition for a reason.
Do not get me wrong – lawyers should be attending to corporate culture. After all, legal compliance is an important aspect of a company’s compliance program and is incorporated throughout the company’s code of conduct. Held should have acknowledged this important role of CCOs and urged lawyers to work together to coordinate and collaborate in embedding and promoting a culture of compliance.
However, ethics and legal compliance are not necessarily the same. We have a laundry list of criminal corporations where lawyers were often complicit, either directly or indirectly in corporate wrongdoing, either by promoting legal “analysis” that fostered illegal conduct or justified turning a blind eye to corporate misconduct.
Two examples come to mind – the GM ignition switch controversy occurred under the cloak of privilege administered by the in-house legal team, preventing GM senior leadership from addressing the ignition switch problem that resulted in the death of over 100 consumers.
Last year’s VimpelCom FCPA enforcement action involved the participation of in-house and outside counsel who bent over backwards and created an analysis framework for the board of directors to approve the acquisition of two shell companies without answering a basic legal question – who was the beneficial owner of the shell companies? If the lawyers had answered the question, the company would have rejected the acquisitions because the owner was the corrupt daughter of the Uzbekistan President.
While Held’s speech is an interesting digression and pep-talk for lawyers to become more aware of a company’s culture in their work, his failure to acknowledge or even demonstrate any awareness of the role and impact that CCOs and Corporate Ethics Officers have had in he corporate governance world is surprising to say the least. Furthermore, his failure to recognize and urge lawyers to reach out and collaborate with CCOs and Chief Ethics Officers reveals a glaring omission in his prescription for improving corporate culture at financial institutions.
