Considering the Case for Compliance on the Board?

Historically, members of financial services firms’ boards of directors haven’t had much direct compliance experience. Instead, directors were chosen based on their broad business acumen. That approach may be changing as boards face mounting pressure to protect the companies they serve from ever-changing regulatory and compliance demands in a world with rising expectations for corporate behaviour relating to a wider range of stakeholders. As compliance and regulatory outcomes become increasingly intertwined with business, having one or more compliance subject matter experts on the board may help firms protect their reputations and protect shareholder value as well.  Expectations vary greatly by country and some jurisdictions have more demanding requirements than others.  An increasingly common view is to take a “best practice” approach to these matters so that common benefits accrue across a firm and shareholders can be confident that the right principles of governance are being pursued.  In Europe, regulatory demands have made board knowledge an area of growing concern.

Boards Must Address Issues While Taking a Forward-Looking Approach

All board members of a company have a legal duty of care and fiduciary responsibilities on behalf of shareholders.   Indeed, in some jurisdictions, these duties include not only shareholders but broader stakeholder concerns as well.  Among these many responsibilities, boards are responsible for setting a firm’s strategy, its culture, its appetite for risk and its management of that risk appetite.  Boards have a very real and direct responsibility for their company’s regulatory obligations, how they are assessed, managed and controlled.  None of this is new but the business and reputational risks in this area have risen dramatically.  It was not long ago that some company directors took a very distant approach to compliance and risk management. Over the last ten years however, firms have increasingly recognized the risk of getting things wrong as a result of massive fines and even more debilitating reputational damage.   Today, there are indications that a growing number of firm’s have decided to embrace these challenges by appointing new board members with regulatory/compliance expertise.  With the new demands of the UK Senior Managers Regime and the EU MAR and MiFID regulations, we expect this trend to accelerate.

Understanding compliance programs and requirements can help ensure that decisions about the company’s direction and approach will not run afoul of the rules or introduce unnecessary risks. Rather than being an afterthought on the periphery, organisations are increasingly realizing that compliance should be built into every decision the board makes.  That is simply much more likely to happen if the required expertise is right there on the board.

Recent Board Appointments and Actions Demonstrate a Commitment to Compliance

Several recent board appointments and corporate actions paint a picture of this growing emphasis on compliance at the board level.

Denmark’s largest bank, Danske Bank A/S, recently hired a new CCO and appointed him to the company’s board of directors at the same time. That appointment followed a June 2018 CCO board appointment at Siemens.  In the case of Siemans, it underscored that regulation was a core concern even outside the financial services sector, something now increasingly common in the phama sector, technology and defense.

In addition, the need for board-level regulatory knowledge has been brought home to a number of companies of late as they have had to grapple with tough decisions about CEO’s and other senior managers possible violations of codes of conduct. Board members of several large companies including Intel, Uber, Papa John’s, and Texas Instruments have had to make difficult decisions in recent months about removing their companies’ CEOs for code of conduct violations. Other companies, including CBS, are currently investigating allegations of misconduct against executives.

These actions demonstrate that boards are increasingly attuned to compliance and ethics. Firing the CEO also sends a powerful message to everyone else in the organization that illegal or inappropriate conduct simply will not be tolerated. In contrast, boards that simply gloss over compliance reports or that give passes to CEOs or other powerful executives when conduct violations occur are not actually minding the store; they’re leaving the organization open to potentially catastrophic risks.

Tone from the Top: Board Support for the Compliance Department Underscores the CCO’s Efforts

Most analyses of corporate culture have consistently concluded that firms with a strong and positive culture are led by those who project these priorities.  That is why board level codes of governance such as the UK Corporate Code all cite board responsibility as key for setting the right attitude and approach to regulatory issues. For compliance departments, the tone from the top that shows clear support to compliance provides a key signal to the entire organisation. It helps reinforce everything the compliance department does on a daily basis. Having a board that takes compliance seriously can also send a powerful message to regulators, showing them that your company doesn’t look the other way when violations occur.

Of course, no organization has an unlimited budget for compliance efforts. The board should play a key role in forming compliance programs by seeking to understand what the risks are and asking questions designed to make sure the policies the board approves are designed to address those risks. Having a CCO or other former compliance professional sitting on the board can be invaluable in shaping how a firm understands and manages its compliance and regulatory risks.

Board members need to have a solid, working knowledge of the company’s regulatory obligations and the compliance and ethics program in place to meet those obligations. They also need to interact regularly with the company’s CCO so they can understand the potential risks the organization faces. Finally, directors must be willing and able to fully support the compliance decisions that protect the firm.  How better to achieve this than by a compliance appointment to the board.