Project: Corporate Counsel Part I (Unintended Consequences) - Legal Service Providers An Effective Compliance Program Reduces A Company's Vulnerability

Friday, July 1, 2005 - 01:00
Integrity Interactive
Kirk S. Jordan

Editor: What are your general reactions to the hypothetical on page 3?

Jordan: I found it very interesting. The hypothetical raises a number of issues that general counsel and practitioners face all too often.

Editor: How can Integrity Interactive's services assist a company confronted by a similar situation?

Jordan: Integrity Interactive provides ethics and compliance solutions to corporations around the world. Integrity's core service is the delivery of web based ethics and compliance training for corporate employees - covering virtually all ethical and legal risk areas. To date, we have delivered over 2,000,000 courses to more than 1,000,000 employees from over 200 premier companies. We train employees at all levels of a Company - from the board of directors to senior management to sales employees to folks out in the field. We believe our completion rates of 80 to more than 90 percent are the highest in the industry. Any employee whose job responsibilities may create legal or ethical risk for the organization can be well served by our compliance training.

Founded in 1999, Integrity now has about 100 employees and more than 200 client companies around the world using our services.

Editor: What led to your founding of Integrity Interactive?

Jordan: We recognized a growing need for effective training and communication of employees in ethical and legal subject matter areas. This need was unmet despite the growing risks to companies - and the huge potential fines and other penalties. In addition, the Federal Organizational Sentencing Guidelines gave companies incentives to put compliance programs in place. With the arrival of web-based services in late 1990s, we felt we had the tools to address this unmet need efficiently and in a cost-effective manner.

Editor: How does the hypothetical reflect some of what you are seeing in the field?

Jordan: The hypothetical reflects the dilemmas that corporations face when they encounter this type of litigation. We do know that a good ethics and compliance training program increases employee awareness of issues and drives employees to ask questions and report problems early - so that a number of failures can be prevented.

The Thompson Memorandum issued by the Department of Justice on January 20, 2003, is intended to guide federal prosecutors in deciding whether to prosecute corporations. It states that a truly effective compliance system, when consistent with other federal law enforcement policies, is an important factor for prosecutors to take into account in deciding whether to charge a company with a crime.

Editor: Do you see the possibility of establishing standards for punitive damages so that juries can be properly instructed?

Jordan: I think this is worth contemplating. For example, there has been discussion in the field about establishing an affirmative defense to punitive damages in a case where a company's ethics and compliance program satisfies the standards enunciated in the Federal Organizational Sentencing Guidelines. The argument is that if a company has taken the appropriate steps in implementing and enforcing a compliance program, it has acted in good faith and thus should be immune from at least punitive damages.

Editor: Can compliance programs help reduce a company's vulnerability to criticism and mitigate at least some of the adverse consequences portrayed in the hypothetical?

Jordan: We see a growing number of cases where compliance programs have helped companies in their negotiations with prosecutors and regulatory authorities, and in civil litigation where the company's compliance efforts have helped to negotiate a settlement or to mitigate damages. A company that I'm familiar with was faced with a potential criminal indictment for alleged conduct around accounting irregularities. The company's compliance efforts - including training employees on financial integrity using one of Integrity Interactive courses - was critically important in the company reaching a positive resolution with the regulatory authorities.

Editor: Can industry associations play a useful role in maintaining a dialogue with and educating prosecutors and regulatory agencies and in influencing businesses within the industry to create and implement more effective compliance programs?

Jordan: Yes, they can and have. We have seen success in the defense industry on the part of the Defense Industry Initiative on Business Ethics and Conduct. Started in the mid 1980s, the DII has a track record of promoting self-regulation and working closely with the federal and state agencies that oversee the industry.

The Pharmaceutical Research and Manufacturers Association recently passed a voluntary code of conduct on sales folks' interaction with healthcare professionals. Integrity has developed a web-based ethics course that addresses those issues to make sure that pharmaceutical sales employees know what the new standards are.

We also know that the Department of Justice is increasingly interested in having their staff educated on what companies are doing with respect to compliance. Win Swenson, an Integrity Interactive senior advisor, was invited to a training session of U.S. attorneys about corporate compliance programs. He had the opportunity to demonstrate one of Integrity's web-based courses as an illustration of what companies are doing in this area.

The Association of Corporate Counsel and its local chapters have also been helpful in educating compliance officers.

Editor: How important is tone at the top in maintaining a compliance culture throughout a company?

Jordan: It is difficult to overstate the importance of tone at the top. Peter Drucker's observation that "what gets measured gets done" is true in the area of ethics and compliance. A commitment by the Board of Directors and senior management to measuring employees' compliance efforts and success will have a direct bearing on the overall effectiveness of the program. Although the ethics and compliance personnel within companies have been talking about compliance for a long time, there has been a sea change in that boards and senior management are now talking about ethics and compliance and are committing the resources necessary.

Editor: How actively involved in compliance matters should the independent directors be?

Jordan: After the Caremark case and the enactment of the Sarbanes-Oxley Act, along with the changes to the NYSE and NASDAQ listing standards, it is clear that directors play a critical role in the oversight of the company's ethics and compliance program. It does not mean that the directors should be managing the program day-to-day. That responsibility, like most matters in company operations, is left to the company's management.

The board's function with respect to compliance is one of oversight which in my experience means that the board must have sufficient information about the company's ethics and compliance program so that the board, as a body, can exercise an informed business judgment about the adequacy of the company's compliance efforts.

In other words, the board must ensure that it receives adequate information - by asking the tough questions and receiving a regular report from the compliance officer, at an executive session if necessary. This process should enable the board to exercise an informed judgment regarding the ethics and compliance program.

Editor: Is it important for a company to have both a code of conduct and a code of ethics?

Jordan: My view is that it does not matter that much what the policy is actually called. The name chosen should work for the organization, and it is often helpful to brand the ethics and compliance program.

The Federal Organizational Sentencing Guidelines refers to an "ethics and compliance program." The program should have a tone and substance that encourages ethical conduct at work as well as compliance with the law.

If employees violate the law, prosecutors will likely ask what training the employee received related to the relevant law. If you respond that you have only a code of ethics and teach employees how to make "ethical decisions," the prosecutors are not likely to be impressed unless you adequately train your employees about their legal, as well as their ethical, obligations.

Editor: What is the role of employee compliance training, a legal compliance system and a compliance hotline?

Jordan: Effective ethics and compliance training benefits a company - and its employees - in a number of important ways. It raises employee awareness of what the specific ethical and legal risks are in their day-to-day jobs. An employee simply may not realize that a certain behavior can quickly lead to serious legal problems - both for the employee and for the company.

So, effective ethics and compliance training raises employee awareness of these risks. We use a story-based format which models "good" and "bad" behavior and provides employees with the rules and guidance in plain English. Effective ethics and compliance training should also direct employees to the internal resources - for example, a code of business conduct, a compliance helpline - that are available for employees to ask ethical or legal questions or to report a violation. Effective ethics and compliance training has a positive impact on employee behavior.

It is our view that employee compliance training should not attempt to turn employees into legal experts. Rather, the training should raise awareness and direct the employees to the internal experts - for example, lawyers - who can provide them with advice. The hotline works in conjunction with the training so that employees have a confidential way to raise issues and report their concerns.

Questions about this interview can be directed to the interviewee at