Leaders in Global Risk Management
Freeh Group International Solutions graphic

Watching the Executives

Financial Times June 6, 2011

Companies caught lying, cheating or bribing are increasingly turning to new a solution to signal they have recovered their moral compass – an integrity tsar. One reason is that hiring a guardian of ethics is an easy way to broadcast to the outside world that the business has renounced its former ways.

In February, Daimler, for example, appointed Christine Hohmann-Dennhardt, a former German Federal Constitutional Court judge, to a new “integrity and legal affairs” seat on its management board, almost a year after reaching a costly financial settlement with the US Securities and Exchange Commission and Department of Justice over allegations that it had paid bribes to foreign government officials.

Other big companies, such as Siemens – still recovering from a bribery scandal than first surfaced in 2006 – and Renault, which is in the process of appointing an ethics manager as it tackles the fallout from a botched internal espionage probe, are also engaged in heavy duty corporate clean-ups. “The financial crisis showed that trusting people to do the right thing does not work, so activist shareholders are putting much more pressure on companies to be compliant and act ethically,” says Arturo Bris, professor of finance at IMD business school.

Fears that the UK Bribery Act, which will come into force on July 1, could trigger a series of test-case criminal prosecutions, also favour the trend, while presenting recruiters with a challenge. Simon Hankey, Europe, Middle East and Africa head of legal, risk and compliance practice at headhunters Korn/Ferry Whitehead Mann, says: “What we are witnessing is a role in transition, with some companies appointing compliance and ethics chiefs for the first time and others upskilling.”

In the past, compliance jobs appealed mainly to technically skilled auditors and legal specialists. Now, he says, the job demands professionals who also possess the business credibility and persuasion skills to change corporate culture.

One unanswered question, however, is whether the role is to be an enforcer, to keep employees legal or an ethics champion to push for what is right on top of what regulations require. The divergences in outlook are apparent in the variations in job titles for the function, which range across “chief compliance and ethics officer”, “compliance and integrity” and simple “compliance.”

At McDonald’s, Haydee Olinger is the global compliance and ethics officer, combining regulatory oversight with a wider responsibility for “instilling ethical thinking throughout the organisation.” But this does not mean she has a say in how the company promotes its Happy Meals, which have been attacked by consumer activists. That function falls to someone else whose reports to the head of communications.

How much independence the compliance role commands makes a big difference to the holder’s ability to be effective. At the time of the corruption scandal, Siemens employed part-time compliance managers who reported to local business heads. “Frankly, [compliance] just wasn’t taken seriously,” says Peter Solmssen, who joined the company in 2007 as general counsel. Today, all compliance staff report to the headquarters team. Mr Solmssen says this makes clear that their overriding responsibility is “to the company.”

How to encourage ethical behaviour

But what if senior management transgresses? Once again, reporting lines matter. At Microsoft, compliance director Odell Guyton reports to general counsel, as does Ms Olinger at McDonald’s. However, both are also independently accountable to their company’s audit committees. Such arrangements give compliance officers greater authority to bring potential malpractice to the attention of the company’s supervisory directors. As Mr Guyton puts it: “I have the ability to go outside the chain of command.”

As the compliance role has become more demanding, companies have adapted their hiring strategies. In 2007, as the new general counsel at Siemens, Mr Solmssen faced the un­usual challenge of rebuilding a compliance function that the bribery scandal had exposed as not only impotent but, sometimes, corrupt. “The investigators uncovered one or two cases where the person paying the bribes was actually [a] compliance officer,” he says. His solution was to persuade up-and-coming talent from commercial functions, such as sales and procurement, to do a stint in compliance as part of their career development.

Last year, Siemens appointed Josef Winter, previously head of German sales, as the head of compliance operations. Mr Solmssen says his deputy’s commercial background gives him “credibility” and means he can talk in language that managers understand.

A more commercially engaged compliance function might also lay to rest an outcome that many businesses fear: creating an army of bureaucrats who are detached from the profit imperative. In 2004, Robert Roeder set up a compliance and ethics function at his former employer, the metal packing company Impress (now part of Ardagh Group). To win over sceptics, he says he “became a foot-soldier” and accompanied colleagues to meetings to demonstrate how he could help them comply with regulations and still make their targets. On one occasion, he advised a key supplier who was pressing for “unorthodox commercial conditions” to check the matter out with his own legal department. The next week, the supplier told him: “You were absolutely right” – it was illegal.

Another outcome might be that eagerness to help their businesses might put pressure on ethics and compliance managers to become corporate stooges. Roy Snell, chief executive of the US-based Society of Corporate Compliance and Ethics, says that after educating and exhorting, compliance must “find and fix” malpractice.

But the skills required to isolate rotten apples are not necessarily those used in corporate audits. According to Louis Freeh, a former director of the FBI and founder of Freeh Group International Solutions, a compliance consultancy, many businesses follow scripts too rigidly rather than probing and picking up on unguarded remarks as investigators do. “A lot of companies are so process-driven that they forget the basic questions,” he says.

Since its public shaming, Siemens has made a point of disclosing malpractice. Not only does it collect statistics on dismissals following compliance investigations, it publishes them in its annual report – 108 in 2010. “We will train our employees and give them all the backing they need,” says Mr Solmssen. “But if they cross the line, they know there will be consequences, which, if [the transgression] is serious, includes being fired.”

It seems that compliance heads walk a tightrope – by turns trusted adviser, business partner and chief corporate cop.

© The Financial Times Limited, 2011.
Print a single copy of this article for personal use.
Contact us if you wish to print more to distribute to others.