Compliance monitors: necessity or nuisance?

October 5, 2015

Much has been made of the role that compliance monitors play when they are appointed to an organisation. They have been perceived as invasive supervisors, police officers, uncommercial, and even a major distraction to business operations and risk-management efforts. In whatever manner compliance monitors are viewed by the business, their intended purpose is clear: they are responsible for evaluating and reporting to an enforcement body on the effectiveness of compliance and ethics programmes following a substantial legal or regulatory breach. The true impact of a compliance monitor has been open to debate, with some commentators questioning the benefits of such a role, and figures indicate that the frequency of appointing monitors is on the decline. However, if the ultimate outcome is to ensure swift execution of court-ordered compliance-programme improvement, compliance monitors are a necessity to drive change.

Compliance monitors have garnered particular attention following the publication of a report in The Wall Street Journal in which sour relations between Apple and its court-appointed compliance monitor were exposed. Apple had been found culpable of price fixing alongside five other major book publishers, and had attempted to remove compliance monitor Michael Bromwich with claims that Bromwich was performing his role in a manner that surpassed his jurisdiction. The fractured relations between the two parties even got to the point where Apple lodged an official request for Bromwich’s removal. This instance certainly highlights the need for compliance monitors to work within boundaries, but is certainly not cause to question such appointments in the first place. (Relations between Bromwich and Apple did improve considerably after initial complaints.)

A compliance monitor’s primary role is to ensure compliance and ethics measures within an organisation are enhanced, as well as other settlement obligations being achieved. In SEC v WorldCom, Inc., Judge Jed Rakoff stated, ‘While the corporate monitor’s efforts were initially directed at preventing corporate looting and document destruction, his role and duties have steadily expanded, with the parties’ full consent, to the point where he now acts not only as financial watchdog (in which capacity he has saved the company tens of millions of dollars) but also as an overseer who has initiated vast improvements in the company’s internal controls and corporate governance.’

Are they effective?

In the event that a company has been through a protracted and damaging court case or investigation for illegal conduct, there can be no doubt that any rebuilding should be immediate and impactful. Considering the reputational damage that a company might have suffered following a prosecution, the presence of an external body is symbolic of an instantaneous need for cultural change and a revised approach to internal controls and ethical conduct. The presence of a compliance monitor ensures that finances and resources are directed to compliance efforts when they otherwise might not be.

With the introduction of a compliance monitor, there is a cyclical obligation to embed ethical practices and revised procedures into business operations. Their presence, at least for a short while, helps gear the priorities of employees towards conducting themselves with integrity. All such activities accelerate the embedding of ethical behaviour into the DNA of an organisation. There are not many more motivators to do the right thing than having a government regulator looking over your shoulder.

There is validity to the argument that such close oversight can impede business and disrupt operations. Any substantial change to a company’s existing processes will have a slowing-down effect in the short term as employees adjust; however, the changes being made at the direction of a monitor are for long-term, sustained improvement. With the benefit of constant independent assessment, compliance monitors provide the ideal foundation to prevent fraudulent behaviour and other violations.

In this sense, the appointment of a monitor is absolutely necessary to ensure court orders or settlement obligations are adhered to. Having a compliance monitor avoids the ‘all talk and no action’ scenario – business leaders are forced to follow through on sweeping statements they might make about implementing change in the wake of a scandal.

As Apple undoubtedly discovered, having an independent monitor onsite is a harsh reality check on the magnitude of the changes a company requires. So it is not surprising that there was backlash toward Bromwich (whether or not he was overstepping his mark). But in the end, the purpose of a compliance monitor is to ensure permanent – albeit radical – change. Left up to their own devices, it is questionable whether organisations would do this speedily on their own accord.

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