The Board's Changing Role in Ethics and Compliance

Kira Ciccarelli

The Board’s Changing Role in Ethics & Compliance

Listen to Episode 89 on Apple Podcasts

Guest: Michael Volkov, CEO and Founder of The Volkov Law Group LLC

Hosts: Dottie Schindlinger, Executive Director of the Diligent Institute, and Meghan Day, Vice President of Marketing for Diligent ESG & Data Intelligence

Summary:

In this episode of The Corporate Director Podcast, Michael Volkov, CEO and Founder of The Volkov Law Group LLC discusses the latest trends in ethics and compliance, regulation and litigation around these issues and how the board’s role in overseeing ethics and compliance issues is evolving.

In this episode:

  1. Trends in Ethics and Compliance: Volkov brings us up to date on recent developments in terms of court decisions and changing expectations in the Department of Justice when it comes to ethics and compliance.
  2. The Relationship Between the Board and E&C Leaders: Volkov gives advice to Chief E&C executives and the board on how to communicate more frequently and effectively.
  3. Connections to Audit and ESG: Volkov reflects on the expanding role of the audit committee and the rise of ESG in the audit and compliance space.

Trends in Ethics and Compliance

For Volkov, the rise of the compliance profession, “Has been the most significant transformation in corporate governance in the last 25 years. This changed the game for corporate officers and eventually for corporate boards.”

He adds, “Of course, the impact of Sarbanes-Oxley on internal audit/corporate controls was pivotal. But, what we see now is the culmination of trends from U.S. sentencing guidelines being translated into the Department of Justice (DOJ) pushing for corporate governance reform. Now, we are also seeing transformation in some of the decisions of the Delaware courts when it comes to expectations around board, performance and oversight and monitoring of ethics and compliance programs.”

Volkov continues, “At the same time, we had huge movement around businesses recognizing the importance of ethical cultures. Intuitively, everyone has wanted to say and believe that ethics are important. Now, we are reaching that accountability stage. The attitude has shifted to monitoring and improving on E&C because stakeholders are demanding it, and because it’s important to financial performance as well.”

He highlights the confluence of a few trends: “The DOJ wants to see dedication to a culture of compliance from the board down. At the same time in the Delaware courts, there is intense pressure on board performance. Then, we have stakeholders saying that they want to see companies as good actors. Senior management cannot handle all of this alone. The board is an invaluable resource.”

The Relationship Between the Board and E&C Leaders

When looking to improve the relationship between E&C executives and the board, Volkov advocates having a former compliance professional on the board because it is as vital as ensuring that some directors have a financial background.

From there, boards need to get specific: “Every board member and senior officer tells me they are committed to doing the right thing,” he says. “Okay, so what is your culture? What are your values? What do you expect of your employees? How do you communicate this, spread it, and hold people accountable? The true measure is that employees want to work at ethical companies and believe in the company mission. If the board doesn’t know or define the culture, or just relies on senior management, that’s a missed opportunity.”

He gives an example: “Some boards now are committed and ask for quarterly reports where they specify that they want to know something about the company culture from the Chief E&C Officer. Frankly, most board members telling the truth would say don’t know how to oversee E&C, even though they think it’s important. You need to go back to basics and look at controls and systems.”

Volkov recommends an audit committee which supervises E&C: “Some are also doing a compliance committee to address the G in ESG,” he adds. “This project has to start with senior management and the CCO.”

Connections to Audit and ESG

At the same time though, Volkov highlights the stress being put on the Audit Committee: “Audit committees are overworked. They have to have financial expertise for obvious reasons as it is the first line of defense on SOX, and there are many other expertise demands there as well. The day is coming now where some are moving compliance out of audit, since the committee is so loaded with other responsibilities.”

Instead, Volkov has seen companies move compliance to the Nominating and Governance Committees, with a few also moving it to a Risk Management Committee. He adds, “ESG is such a big trend right now. I can see compliance merging into that function, but I am not an advocate of it. The CCO has plenty of work already and doesn’t also need to be the head of ESG.”

Also in this episode…

Volkov provides tips to CCOs on how to develop that board relationship: “Make it positive and productive. The Audit Chair and CCO need constant, regular communication with the board, and many struggle with that. Board members are slower to embrace this area, too. Don’t just go to the board and complain; show the value of your work by building relationships with those who have good relationships with the board. Conduct training as least once a year to talk about how you implement an effective EC program that meets DOJ standards and Court standards. Be positive. Talk about the opportunities and benefits. Build credibility first.”

Resources from this episode:

Kira Ciccarelli
Kira Ciccarelli is the Lead Researcher at the Diligent Institute. Diligent Institute is the modern governance think tank and research arm of Diligent Corporation, the leading provider in board collaboration software. In her role, Kira works to conduct and provide high-level modern governance research to inform director decision-making and identify best practices.