Finance Chiefs Lack Solid Compliance Metrics

Most ethics and regulatory data reported to boards of directors are “lagging indicators,” a new study finds.
David KatzJuly 8, 2013

Despite being presented with soaring budget requests from compliance executives, CFOs largely have only “lagging indicators” available to gauge the return on investment in corporate regulatory and ethics programs, according to a new report.

Over the last three years, the cost of compliance programs has risen by more than a quarter, according to a recently released survey of senior ethics and compliance executives representing 180 largely multinational companies. LRN, a corporate-advisory services firm, found that on average, the responding companies spent about $55 per employee on such programs in 2012, a rise of 10 percent over 2011 ($50) and nearly 25 percent more than the 2010 average ($44).

Given the rising regulatory risks associated with Foreign Corrupt Practices Act investigations, the Securities and Exchange Commission whistleblower awards program, United Kingdom Bribery Act prosecutions and similar actions, the blossoming of compliance budgets may make a whole lot of sense. But the metrics being used to judge how well that money is being spent do not, according to the study’s authors.  

Citing a “paucity of forward-looking metrics applied by organizations,” they found that most ethics and compliance (E&C) metrics reported to boards of directors are “lagging indicators” —  historical data  for which the “meaning and utility remain murky.” At the top of the range of E&C metrics reported to boards are data and trends involving ethics helplines (80 percent), numbers of violations of codes of conduct (79 percent) and completion and certification rates for E&C educational programs (71 percent).

The problem with those numbers is that they measure E&C activities without linking them to desired results. Instead, CFOs should look at metrics that are more firmly grounded in corporate principles, such as ones that measure the ability of employees to “speak up” both to report misconduct and reveal innovative ideas, says Wayne Brody, a senior adviser at LRN and a former chief compliance officer for Arrow Electronics.  

For example, executives can be judged on the basis of how often they lead a discussion with employees on such subjects as ethics, integrity and leadership, Brody told CFO. These could form part of a management-by-objectives (MBO) program in which one of the hurdles for a bonus is to provide a certain number of employee training sessions in ethical conduct, he added.

One yardstick CFOs can use to measure the effectiveness of an ethics program is to ask compliance officers “to what extent is it built into [our] organization and to what extent is it a bolt-on,” Brody noted. A bolt-on E&C program is merely lip service, he suggested, while building an ethics program into the core of a company involves paying executives based on the program’s performance.

But less of that is happening, according to the survey. Asked if their companies weight integrity, service and other ethical qualities as equal to business results in performance evaluations, 57 percent of the respondents said they gave ethics a lesser weight than business in 2012 – a substantial drop-off from 52 percent in 2011. 

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