Many compliance professionals currently report to the head of the corporate legal department or general counsel’s office.
The current Foreign Corrupt Practices Act investigation involving Wal-Mart de Mexico raises questions about the level of effectiveness compliance officers can have when they report to a member of a company’s management team versus reporting to members of the board.
Many compliance professionals currently report to the head of the corporate legal department or general counsel’s office. Roy Snell, CEO of the Society of Corporate Compliance and Ethics, is advocating having compliance officers report to a subcommittee of the board as a means of increasing their level of independence as they conduct investigations.
Based on news reports from the New York Times and others, Wal-Mart’s compliance officers were consistently prevented from doing their jobs by the Mexican subsidiary’s top managers, including Wal-Mart de Mexico CEO Eduardo Castro-Wright, who is currently vice chairman of the mega-retailer. When in 2005 a former executive revealed that more than $24 million in bribes had been paid for the purpose of quickly expanding the company’s market share over a number of years, the information was suppressed.
Even efforts to hire independent investigators to deal with the allegations of bribery were thwarted by company officials, who chose instead to launch ‘internal investigations’ so that they could control the outcomes. Wal-Mart’s management team in Mexico was committed to keeping corruption hidden from the majority of the company’s US officers and board members at Wal-Mart headquarters in Bentonville, Arkansas.
Hints of ethical misconduct at Wal-Mart de Mexico date back as far as 2003 when Kroll submitted the findings of an investigation it conducted. This situation proves once again that corruption can be hidden for extended periods of time when high-level executives are at the root of the corruption and those who are tasked with uncovering fraud report to them.
Snell predicts that in order to guard against such problems in the future, ‘What effective companies are going to do is create independence for the compliance officer like they have for the auditor by having them report to a subcommittee of the board. ’ He reasons that having compliance officers report directly to board members will make it less likely they will be suppressed by other company officers before their findings come to light. ‘This will allow the company to have an alternative perspective on resolving a regulatory or ethical issue,’ he says.
Linking compliance officers with the board is also in line with the increased responsibility that has been delegated to board members over the last two years. Since regulatory changes have made it more likely that board members will be sued by angry investors and be held liable for losses a company might incur, it is in the board members’ best interests – and in the best interests of shareholders – that they have direct access to compliance officers whose job it is to provide information that could prevent corporate fraud.
Having the compliance officer report to a subcommittee of the board is a move that will improve corporate governance and enhance the ethical culture of the company by making the compliance department more effective. As Snell says, ‘Independence for the compliance professional is probably the single most important issue on the table.’
