Ethics Resource Center

Published: March 25, 2010

Patricia J Harned, ERC President, testifies before the United States Sentencing Commission

• Read Testimony
• Read Comment Letter Submitted to USSC

The Ethics Resource Center has voiced support for a proposed change by the United States Sentencing Commission that could lighten a company’s sentence if its ethics and compliance officers have been granted direct access to the board of directors.

ERC President Patricia J. Harned, who testified before the seven-member Commission on March 17 in Washington, D.C., backed the proposed amendment to the sentencing guidelines, but suggested fine-tuning based on ERC’s research that would make the rules more effective and more far-reaching.

In her testimony, Harned addressed three specific points:

• The Sentencing Commission has proposed that as a "reasonable step" after criminal conduct has been detected, a company should assess its ethics and compliance program in an effort to prevent future misconduct.

"We would argue that this is an essential suggestion, but also that the proposed language does not go far enough," Harned said. "Following the detection of criminal misconduct, organizations should not only assess their programs, they should also be encouraged to assess their organizational cultures.  

"In situations where criminal conduct has taken place, it is often a finding after the fact that a culture existed where employees felt they were unable to report what they knew was going on.  In other cases, we find out later that employees felt pressured to engage in criminal activity in order to do their jobs.  Culture is always a factor in misconduct.  Understanding it is an important part of understanding how criminal activity took place. 

"The second reason for assessing culture is that it is the single largest determinant of the extent to which further criminal activity will occur.

"ERC has found in its research that when an organization implements the seven elements of an effective ethics and compliance program (per the guidelines) and establishes a strong ethical culture, misconduct is reduced by as much as 75 percent, reporting doubles and retaliation against whistleblowers is essentially eliminated. 

"However, this is because both a program and a strong culture are in place.  Our research has shown that compliance and ethics programs help to grow a strong culture in an organization, and it is the culture in turn that brings about these dramatic changes.   When an ethical culture is not strong, the likelihood for misconduct increases.

"That is why it is essential that an organization detecting criminal activity should not just assess its program to avoid future recurrence; it should also assess the culture itself."

• The Commission has proposed that companies placed under probation should be required to give the court a schedule for implementing an ethics and compliance program.

"ERC suggests that an organization placed under probation should not only provide the court a schedule for the implementation of a compliance and ethics program, it should also explain how it will measure the effectiveness of its program," said Harned. "In progress reports, organizations should indicate progress in program implementation based on these measures.

"Thanks to the 2004 amendments to the guidelines encouraging periodic measurement of program effectiveness, it is now common practice in the compliance and ethics industry to identify outcome measures for a program (e.g., observed misconduct, willingness of employees to report wrongdoing, retaliation against whistleblowers).  Program effectiveness is determined – in part – against positive change in these metrics.

"It is likely that organizations under probation will identify such measures of program success, as a part of its program implementation.  But unless explicitly stated, these organizations may not be compelled to share their metrics with the court.  Yet federal officials would be well served by the disclosure of these metrics and the ability to hold an organization accountable to them."

• The Commission asked for comment on whether a company should receive credit for having an effective ethics and compliance program even if high-level executives are involved in the criminal offense.

"First, if employees responsible for the compliance and ethics program are among the high-level personnel involved in the criminal offense, three-level mitigation should not be applied," Harned argued. "This will help ensure that companies appoint individuals to oversee the compliance and ethics function who have a high level of personal integrity, and who also have skills to do the job in situations that can sometimes be highly pressurized.

"ERC’s second suggestion is that the Commission should not identify the board or a board committee as the specific reporting relationship for "the individual(s) with operational responsibility for compliance."  Organizations vary widely. Some have boards; some do not.  Some boards have fiduciary responsibilities; others do not.

"In 2007, ERC invited four other leading nonprofit organizations in the compliance and ethics industry to help us essentially define the adequate role, responsibility and reporting relationship of a chief ethics and compliance officer.  Reporting relationship was the single biggest focus of our attention.  Because of the diversity of organizations and cultures, in the end we identified a set of principles that grant ethics and compliance personnel appropriate access to senior management or the board but retain flexibility for each organization’s circumstances.

"In our paper summarizing the discussion, Leading Corporate Integrity: Defining the Role of the Chief Ethics & Compliance Officer, ERC, ECOA, SCCE and others recommended four principles.  We encourage the Commission to lean on the good work of our nonprofits in trying to speak to the same issue. We recommend that individuals with operational responsibility for compliance in the organization should be:

Held accountable to the governing authority while carrying out the  fiduciary responsibilities it has delegated;

Independent to raise matters of concern (especially with regard to high level personnel) without fear of reprisal or a conflict of interest;

Sufficiently connected to company operations in order to build an ethical culture that advances the overall objectives of the business; and

Provided with authority to have decisions and recommendations taken seriously at all levels of the organization.

Commission Chair William K. Sessions III, a federal judge, said the panel hopes to reach its final decisions on the proposals in early April.

In This Issue

• The Importance of Leadership in Times of Crisis. Column By Patricia J. Harned, Ph.D. President, ERC
• Patricia J Harned, ERC President, testifies before the United States Sentencing Commission
  
• The Dark Side: Critical Cases on the Downside of Business. Book Review By Kyle Goetschius
  
• A Case for Cooperation: the Defense Industry Initiative
• ERC Honors the Late Carol Marshall with the 2009 Pace Award
• January Fellows Meeting Retrospective