In last week's column I posed the question of whether a company can require employees to report misconduct when they see it. My contention was—and still is—that compliance officers are in a predicament: impose a duty to report misconduct, and you could expose your company to retaliation complaints if someone ignores you; don't impose one, and you could expose yourself to more scrutiny from regulators who claim your company has an insufficiently rigorous culture of compliance.
That debate stirred a fair bit of attention, and I have fresh insight to report. Last week Compliance Week hosted another of our editorial roundtables, this time in Houston and on the subject of conducting internal investigations. So I posed the question to the 12 compliance officers there: Does your company impose a duty to report misconduct?
Hands went up all around the table. Paul Mitchell, head of the corporate practice at law firm Andrews Kurth and my co-host at the event, answered with a concise, “Sure you can.”
The consensus among roundtable attendees was that while disciplining an employee for not reporting misconduct might be construed as retaliation, employees all have a moral obligation to each other and to the company to do the right thing, and that has to start somewhere.
For example, if two employees tell their manager about a fraud, and that manager decides not to bother reporting that to the compliance department or some other appropriate senior leader—well, nobody would think twice about disciplining that manager. Likewise, if you draw up any scenario that says, “Should an employee be obligated to report a violation of the Code of Conduct when…” and then replace “Code of Conduct” with the words “safety code,” pretty much everyone would say it's common sense that an employee must raise the alarm about possible safety threats.
Indeed, one attendee phrased it this way: “So if you're an employee over here, and you see two employees over there conspiring to do something, and you don't report that to me because you don't really care? No way. That's not going to fly.”
And as soon as the attendee described the situation that way, I recalled my mother's attitude when my brother and I were boys: If either one of us knew of some impending misconduct on the part of the other, failure to report was deemed just as serious as committing the misconduct itself. I suspect most parents with multiple children would wholly agree. Makes sense to me.
On Ethics at the SEC
Our other flashback this week happens thanks to the Securities and Exchange Commission, which has announced that it is elevating its Office of Ethics Counsel to answer directly to SEC Chairman Mary Schapiro, rather than the SEC general counsel.
This was a headache waiting to strike the agency. The SEC has been dogged for years by complaints that it paid insufficient attention to employees' own ethical conduct and possible conflicts of interest. In 2009 Schapiro announced that she would consolidate various oversight offices into the Ethics Office, and hire its first-ever chief compliance officer. In 2010 Schapiro announced the hiring of that CCO, Kathleen Griffin, and promptly got grief because Griffin answered to the agency's chief ethics counsel rather than Schapiro herself. I was one of those who agreed with the compliance purists that tone and appearance matter, and that Griffin should have more independence—clearly stated on the SEC's organizational chart.
Sigh. Another year, another scandal more about appearance than actual misconduct. This time around the focus was on the SEC's former general counsel, David Becker, who advised the Commission on how to compensate victims of Bernard Madoff when Becker himself inherited $2 million from a Madoff account back in 2004. SEC Inspector General David Kotz dug into that rather unseemly coincidence, and published a report last week faulting Becker, Schapiro, and anyone else within a country mile of this mess. Kotz specifically recommended that Becker face criminal investigation.
How does any of this affect the average investor or the average corporate issuer? Not all that much. The SEC is, as usual, primarily the victim of Republicans in Congress looking to deconstruct the agency by any means possible. Kotz in particular is a man on a mission, eager to take the rope Republicans in Congress are giving him and range as far and wide as that leash will allow.
All that said, the SEC is primarily a victim of Republicans playing politics—it is still also a victim of its own woefully bad optics. The SEC imposes a high standard of ethical conduct and strong tone at the top on the businesses it oversees, but didn't clearly show that holds itself to those same standards. Was there actual malfeasance by Becker? I doubt it. Should he and others have seen the appearance of conflict anyway? Should the SEC have had an independent ethics function long before this scandal exploded, just like it tells issuers to have? Absolutely.
As one Compliance Week subscriber fired off to me over the weekend: “I'm astounded at how industry is held to the highest ethical standard, as it should be, while in government there appears to be a different expectation. This one is particularly shocking with the SEC playing the role of the ultimate watchdog over corporate America, yet allowing internal practices that would be completely unacceptable in the companies over which they watch.”
Once again: makes sense to me.