“It is Time” – Rafiki, The Lion King
Corporate scandals continue to rack up – I am not just blowing smoke on this fact. Corporate boards are under greater scrutiny but the hardest place to bring reform is the corporate boardroom. Old institutions do not change quickly and there is an inherent resistance to change when it comes to a corporate boardroom.
The old dynamic may be ripe for change. This is where Compliance 2.0, and the rise of the compliance profession can play a critical role. In some respects, the seeds for change are being planted right now – enter the Chief Compliance Officer.
As CCOs rise, and the new model for compliance takes hold, the inescapable fact is that a new dynamic is about to take place. The requirement for the dynamic is the empowerment of the CCO in the corporate boardroom.
Let me outline the way this can – and will – occur.
First, assuming that the CCO has adequate access and opportunity to report to the board on a quarterly and annual basis, along with executive sessions, the amount of contacts between the CCO and the board will increase. Even informal contacts should increase between the Audit/Compliance Committee Chair and the CCO as they work together to ensure proper monitoring and supervision of the company’s compliance program.
Second, if the CCO has opportunities to train the board, the CCO has to use those multiple opportunities to educate the board on: (1) the board’s oversight and monitoring responsibilities; (2) a new exercise of responsibility over the ethics and compliance program as a profitable activity designed to protect and promote the company’s reputation; and (3) substantive issues.
Third, assuming that the CCO has a senior position in the C-Suite, and participates in appropriate senior management meetings, the CCOs relationship and influence among senior managers will also improve.
All of these factors place the CCO in a strong position of influence in the corporate boardroom.
But there is a significant counterweight that has to be overcome. For years (and possibly centuries), lawyers have played a key role in corporate governance by directing boards to play a largely defensive role. As a result, corporate boards are focused on worst-case scenarios as a guiding principle to escape potential liability. I am not advocating that lawyers be escorted out of the boardroom, only that the “defensive” approach be replaced with a more realistic balancing of governance principles and risks.
Corporate boards are given significant protections under the law including the business judgment rule that are designed to balance the fiduciary duty against the limitations on the board’s supervisory capabilities.
In this balancing act, however, the need for corporate attention to corporate culture, and its reputation has been diminished. Lawyers tend to resist change and in particular can become threatened when new influences start to generate importance in the boardroom. Lawyers are used to being the sole and most important adviser to a board. The old dynamic, however, is changing. Lawyers have to make room at the table for CCOs in order to promote and enhance the company’s culture of ethics and compliance.
CCOs have to step up and offer corporate boards a new dynamic in reporting and interactions. CCOs have to lead the board to a new standard of care that embraces the company’s culture, reputation and range of reporting and interactions keyed to ethics and compliance.