¶ … Corporate Compliance Plan: Riordan Manufacturing

Our company, Riordan Manufacturing is a global plastics manufacturer employing 550 people with projected annual earnings of $46 million. The company is wholly owned by Riordan Industries, a Fortune 1000 enterprise with revenues in excess of $1 billion. While the introduction of ethics into the curriculum is laudable, it really is not what corporate compliance is about. In a sense compliance is beyond ethics -- not because compliance is a higher form of ethical behavior, but because compliance is a different issue altogether. To be compliant is not necessarily to be ethical (Baxter & Evelyn, 1999). Nevertheless, there is an obvious interplay between ethics and compliance. In many cases government regulation is designed to prohibit or constrain unethical behavior. Even where the ethical dimension is absent, compliance with regulation shares the problem of ethical behavior in that it can rarely be expressed in terms that business students and faculty can readily appreciate: profits and losses.

When corporate compliance is considered in business education, it is treated as merely another variable to be added into the equation. Most frequently it is considered just another cost of doing business -- and then a cost that should be minimized or avoided, if possible. As one professor writes, while we do "try, to some degree, to teach interpersonal skills, teamwork skills, negotiating skills, and political skills . . . we don't do a very good job . . . because their mastery requires a lot of practice, and most business schools have been designed without practice fields" ( Leavitt 1989, 40). It is much easier to simply try to insert compliance with government regulation and its attendant costs into an analytical model as yet another constraint or, worse, to note its existence and then ignore it because it cannot be reduced to some number.

ADR

The practical benefits of managerial judging are considerable and likely to result in a net improvement in the efficiency of civil litigation, notwithstanding the increased costs attendant on the more active judicial role (Lipsky & Ronald, 1998). In this respect, it should be emphasized that the consequences of delay and inefficiency in the court system extend further than simply increasing the cost of proceedings in an immediate sense: they pose a threat to the continued existence of the civil trial system itself as a viable option for civil dispute resolution (Podgor, 2006). It is significant that, in general, the legal profession also appears to favor the idea.

At an early stage of the proceedings, the judge is able to explain to the parties the advantages of alternative dispute resolution, and, based on his or her assessment of the case, can refer the parties to mediation or case appraisal in accordance with the proposed rules governing alternative dispute resolution (Lipsky & Ronald, 1998). The judge's greater familiarity with the progress of a case under a system of individual case assignment reduces the opportunity for parties or their legal representatives to exploit the system by abusing pre-trial procedures. And if any such abuse does occur, that familiarity will enable the judge to impose timely and appropriate sanctions. The judge's constant involvement in the proceedings also increases the efficiency and accuracy with which issues are defined. This in turn provides a better basis for settlement negotiations and, should the case reach this stage, reduces the time and cost of the trial. Increased judicial supervision may also encourage clients to monitor more closely the conduct of their legal representatives (Huff & Note, 2006).

Enterprise and product liability

For it to have any meaningful impact, the concept of interactive compliance must be "sold" to business faculties, students, and graduates as a more effective and efficient way of living with and prospering under government regulation. In short, given the nature of the beast that is the business school, this selling must show how being compliant makes good business sense -- as measured in dollars and cents. Is it to a corporation's advantage to be compliant? On a fairly basic level, if compliance relieves the corporation of the fines and penalties of regulatory violations, sure. But this may not be enough of an incentive. The "stick" mentality has its limitations, for it is not the severity of the punishment that makes a sanction effective; it is the certainty that the punishment will be imposed. In the area of corporate compliance, detection and consequential sanction are anything but certain. So there must be a better way. This is where interactive compliance comes into play.

The Accounting Model

An exact parallel to the interactive corporate compliance...

Perhaps the quintessential example of the compliance situation is the requirement that a company's financial statements be prepared in conformity with generally accepted accounting principles (GAAP). The compliance investigation is conducted not by a government official, but by a highly trained, independent professional -- the certified public accountant (CPA). The CPA conducting the audit examines the corporate records in order to express his or her opinion on the "fairness" of the financial statements. These audits are expensive -- in terms of time, effort, aggravation, and, maybe most importantly, money. But the corporation can reduce the costs of the audit by engaging in interactive compliance.
In the financial reporting sphere, interactive compliance takes the form of an internal control structure. All companies have an internal control mechanism that is designed to safeguard the company's assets and give some assurance that the accounting numbers being spewed out of the accounting system are reasonably reliable. However, not all internal control systems are created equal. Some are well designed, manned by certified internal auditors (or CIAS, a fitting acronym) who report directly to an independent internal audit committee, which is outside the "line of fire" and influence of management (Lipsky & Ronald, 1998). Others are considerably weaker. Clearly, the stronger the internal control structure is, the more expensive it will be to create, implement, and maintain. So where is the payoff?

The first advantage of a strong system of internal control is found in the enhanced quality of the information being provided to executives, managers, investors, and other users. However, while this advantage is unquestionably important, it is blunted somewhat by the fact that it is difficult to put a price tag on the improvement of information quality. For those who like to "crunch numbers," as accountants do, the cost-benefit trade-off is uncertain at best. More "selling" is required before the corporation will "buy" into this. A second advantage is a bit more quantifiable (BusinessWeek, 2002). The stronger the internal control system, the less likely that defalcations and other employee misdeeds will go undetected. Still, the actual savings cannot be calculated with any precision, and even if they could, the total dollar amounts involved may not be that significant. As with the first advantage, it would be difficult to justify the additional costs of a stronger system of internal control in terms of dollars-and-cents benefits. To make matters worse in trying to draw an analogy, neither of these advantages carries over to the broader field of corporate compliance (Baxter & Evelyn, 1999). However, a third advantage of a strong system of internal control -- the reduced cost of compliance -- does.

Enterprise and product liability

Corporations should view codes of conduct and compliance programs as desirable goals, irrespective of the legal implications of those codes. A litany of good reasons supports the adoption of a corporate code. Internally, the code offers an unambiguous statement of normative standards for those employees who want to conform their behavior to corporate rules. Employees are less apt to violate such rules if they know the company is serious about enforcing its standards. Corporate codes also provide a meaningful message to the public; a corporate defendant is less likely to be viewed with the disdain reserved for lawbreakers when the company in question did all it could to prevent the violation. Moreover, prosecutors at least will consider -- even if they will not credit -- the existence of an effective compliance program before asserting liability against a company whose carefully formulated and enforced code of conduct has been violated by an errant employee (Huff & Note, 2006). Consequently, even if the law governing codes remains in its present ambiguous state, the development of corporate codes is likely to continue unabated.

The adoption of a code, however, is rarely a purely voluntary act and is less likely to be a voluntary act in the future. While the decision to develop a code may technically be "voluntary," the ambient circumstances surrounding the adoption of most codes create many subtle -- and not so subtle -- incentives to foster compliance programs. Moreover, some companies are under a statutory obligation to develop such programs. For example, ITSFEA represents one instance in which Congress required corporations to develop internal standards [15 U.S.C.A. sec. 780(f) (Supp. 1989)] (Lipsky & Ronald, 1998). Similarly, agencies with prosecutorial power are turning toward codes of conduct as part of the settlement process. These codes, and other examples of corporate…