Compliance Systems That Align to Fail Together (Part 1)
My whistleblowing adventures included more than 150
complaints and follow-ups with about 33 officials. Eleven of those offices never replied to my
communications, and another six stopped replying to my follow-up messages. Consistent with that governmental
indifference, half of the issues that I raised remain unresolved two or more
years later. Constrained by budgets,
government agencies cannot, it seems, be relied on to investigate possible
misdeeds on their own. Corporations also
have a responsibility to ferret out wrongdoers and make things right.
In its Sentencing
Guidelines Manual, the U.S. Sentencing Commission outlines elements of an
effective compliance program – including a code of conduct and related
policies, a compliance office and monitoring procedures, and a knowledgeable
Board – that can mitigate penalties in the event of a criminal conviction for
wrongdoing. Guided by its Board and the 2004
California Nonprofit Integrity Act, HomeFirst implemented many of these
elements, but problems still arose.
Each year the HomeFirst’s Board of Directors approved an
Employee Handbook which included an Ethics and Conduct Policy that required all
directors, officers and employees to observe high standards of business and
personal ethics. We must practice
honesty and integrity in fulfilling our responsibilities and comply with all
applicable laws and regulations, it urged.
In addition, estimable values were front of mind: We aspire to an excellence that is marked by
diligent effort; pursuing excellence means always bringing our highest quality
work forward and demonstrating integrity, accountability and transparency in
all aspects of our work. The code of
conduct was bolstered by policies on whistleblower protection, conflicts of
interest, document retention, and other matters to ensure that the code was
effective. While ethical codes like
these can be comforting, they seldom deter wrongdoing[1]. Enron,
Volkswagen,
and other corporations had admirable policies before committing their
well-publicized wrongs. More critical than written
policies is the way they are realized in the organization’s behavior.
Management Oversight
The primary responsibility for HomeFirst’s compliance
belonged to program management: the Chief Program Officer, her program
managers, and others who served clients according to the terms of government
contracts and private grants. Program
managers were positioned to readily correct common contract violations, such
as file documentation that did not support client eligibility or services that were
not provided as required by contracts.
They could not as easily identify violations in billings or compliance
with loan agreements and legal requirements; those were attended by
administrative management, like CEO Jenny and me.
Correcting some program violations could, however, be time
consuming, difficult, or costly. Correction
of the master lease violations, for example, required managers to negotiate new
leases with landlords who would not benefit from the change or to relocate
clients to new apartments. If the
violations were tolerated by senior management, they might be corrected slowly
or not at all. Operating management,
which had limited resources, might skirt inconvenient demands, so HomeFirst
employed additional layers of oversight.
Compliance Officer
HomeFirst designated me, in my CFO role, as Compliance Officer. I was charged with receiving internal
whistleblower complaints, reporting them to the chair of the Audit Committee,
and investigating them. A contract
compliance review program provided an annual monitoring of compliance with
contracts that accounted for about 75% of government revenue. I reported the detailed results of these
reviews to Jenny and program management, describing my findings and
recommendations for corrective action. I
also provided monthly reports of violations to the Finance Committee and the Board.
Compliance programs like HomeFirst’s are often initially well
accepted when they follow compliance crises.
Over time, though, the perceived legitimacy of compliance programs can
diminish[2]. Six years after HomeFirst’s disastrous 2006
audit, Jenny decided that she wanted to exert more control over the way reviews
were conducted. Program managers were afraid of the existing
process, she said. In particular, she
wanted staff to be told exactly what I would examine and to be given time to
prepare their files before I arrived. She
insisted that the reviews not investigate anything that I had not
pre-identified. In 2014 after I pointed
to an increased number of compliance violations, Jenny considered that it might
be time to shift responsibility for compliance to program staff.
Managers may justify weakening compliance programs for a
variety of reasons.[3] Benefits from the programs are difficult to
prove. Because staff may be basically ethical,
program is unnecessary. Compliance
requirements can crimp business practices that are considered legitimate enough. Because management pressures can impede the operations
of an ethics program, the Sentencing Commission hoped that Board oversight
would help ensure appropriate governance.
Board of Directors
The Finance Committee of the Board oversaw HomeFirst’s
financial performance and strategies, policies and procedures, and compensation
packages. The Committee met monthly
prior to Board meetings to discuss the financial statements and other topics
that fell within my area of responsibility, including preparation of the
budget, contract compliance, cash management and forecasting, banking,
insurance, IT, and property management.
The three Finance Committee members joined in the decision to fire me.
The California Nonprofit
Integrity Act aimed to improve corporate governance, accountability and
transparency in the nonprofit sector, by requiring companies with revenues of
more than $2 million to have an Audit Committee and an annual audit and to
comply with rules relating to commercial fundraising. In practice, the role of HomeFirst’s Audit
Committee depended on the background and interest of the Committee members,
which diminished in quality as the 2006 problems passed from memory. In any event, while HomeFirst’s auditors
welcomed input from the Audit Committee, established audit procedures, guidance
from the American Institute of CPAs and others determined how they conducted their
work. The chair of the Audit Committee supported
the decision to fire me.
The full Board of Directors, which
met about seven times a year, was the primary legal decision-making body of the
corporation. The Executive Committee of
the Board met monthly and officially comprised the Chair, Treasurer, and
Secretary, but in practice it also included the Vice-Chair, who would usually
become the next Chair, the chairs of the Audit and Development committees, the
past Board Chair, and occasionally others.
HomeFirst empowered the Executive Committee to make most decisions on behalf
of the Board although the Committee, like the Finance and Audit Committees,
deferred all decisions to the full Board.
The Executive Committee members also participated in firing me.
As the ultimate
decision-maker, the Board has responsibility for the actions of the
corporation, and its members must be good fiduciaries[4]. They must avoid self-dealing and conflicts of
interest. They must act as a “prudent
person” would. If the directors exercise
independent judgment in good faith, then they can avoid liability for the
ill-effects of their decisions unless they are grossly negligent. Since HomeFirst’s board was self-perpetuating,
they legally answered only to themselves, but they felt, and the community
might have expected, that they were responsive to the community.
The board is also responsive
to the CEO, and a healthy relationship between the CEO and the board is often
viewed as critical to the success of the CEO, the board, and the corporation[5]. Jenny’s participation in all Board and
committee meetings, her organization of board retreats, and her one-on-one
meetings with members went far to build that healthy relationship. In a 1990 survey, nonprofit board presidents felt
that their CEOs were more responsible for company results than were the boards[6]. Under those circumstances the CEO might naturally
lead, and perhaps should lead the board, they felt.
This the possibility of complicity between the board and the CEO led California’s Nonprofit Integrity Act to require independent audits of larger
nonprofits. Perhaps external auditors could keep a tilting company upright.
[1] Kaptein, Muel. “Toward
Effective Codes: Testing the Relationship with Unethical Behavior.” Journal of
Business Ethics 99 (2011): 233-251
[2] Trevino, Linda Klebe, Nike
A. den Nieuwenboerm, Glan E. Kreiner and Derron G. Bishop. “Legitimating the
Legitimate: A Grounded Theory Study of Legitimacy Work among Ethics and Compliance
Officers.” Organizational Behavior
and Human Decision Processes 123 (2014): 186-205
[3]
Ibid
[4] Brody, Evelyn. “The Legal
Framework for Nonprofit Organizations.” In The Non-Profit Sector: A
Research Handbook, 2nd edition,
Walter W. Powell and Richard Steinberg (eds.) New Haven: Yale University Press.
2006
[5]
For example: http://betterboards.net/relationships/the-board-and-the-ceo-relationship/;
http://www.nonprofitrisk.org/library/articles/Lets_Work_Together.shtml;
http://www.governance.com.au/board-matters/fx-view-article.cfm?loadref=2&article_id=42DE41E2-C01E-4CF6-9D648F68B0746CF7;
http://www.huffingtonpost.com/jeffrey-walker/the-most-important-relati_b_3748510.html
[6] Herman, Robert D. “The Effective Nonprofit
Executive: Leader of the Board.” In Nonprofit Management and Leadership 1.2 (1990):
167-180
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