Corporate Compliance Plan for Riordan Manufacturing

Introduction

Riordan Manufacturing is a global plastics manufacturer employing 550 people with projected annual earnings of $46 million. The company is wholly owned by Riordan Industries, a Fortune 1000 enterprise with revenues in excess of $1 billion. While the introduction of ethics into the curriculum is laudable, it is not, strictly speaking, what corporate compliance is about. In a sense, compliance goes beyond ethics—not because compliance represents a higher form of ethical behavior, but because it is a different issue altogether. To be compliant is not necessarily to be ethical (Baxter & Hunt, 1999). Nevertheless, there is an obvious interplay between ethics and compliance. In many cases, government regulation is designed to prohibit or constrain unethical behavior. Even where the ethical dimension is absent, regulatory compliance shares a problem with ethical behavior: it can rarely be expressed in terms that business students and faculty readily appreciate—namely, profits and losses.

When corporate compliance is considered in business education, it is treated as merely another variable to be added into the equation. Most frequently it is regarded as just another cost of doing business—and then a cost that should be minimized or avoided if possible. As one professor writes, while we do "try, to some degree, to teach interpersonal skills, teamwork skills, negotiating skills, and political skills . . . we don't do a very good job . . . because their mastery requires a lot of practice, and most business schools have been designed without practice fields" (Leavitt, 1989, p. 40). It is much easier to simply insert compliance with government regulation and its attendant costs into an analytical model as yet another constraint—or, worse, to note its existence and then ignore it because it cannot be reduced to a single number.

The practical benefits of managerial judging are considerable and likely to result in a net improvement in the efficiency of civil litigation, notwithstanding the increased costs attendant on a more active judicial role (Lipsky & Seeber, 1998). In this respect, it should be emphasized that the consequences of delay and inefficiency in the court system extend further than simply increasing the immediate cost of proceedings: they pose a threat to the continued existence of the civil trial system itself as a viable option for civil dispute resolution (Podgor, 2006). It is significant that the legal profession, in general, also appears to favor the idea.

Alternative Dispute Resolution (ADR)

At an early stage of proceedings, the judge is able to explain to the parties the advantages of alternative dispute resolution (ADR), and, based on his or her assessment of the case, can refer the parties to mediation or case appraisal in accordance with proposed governing rules. The judge's greater familiarity with the progress of a case under a system of individual case assignment reduces the opportunity for parties or their legal representatives to exploit the system by abusing pre-trial procedures. Should any such abuse occur, that familiarity will enable the judge to impose timely and appropriate sanctions. The judge's constant involvement in proceedings also increases the efficiency and accuracy with which issues are defined, providing a better basis for settlement negotiations and, should the case reach trial, reducing both time and cost. Increased judicial supervision may also encourage clients to monitor more closely the conduct of their legal representatives (Huff, 2006).

For it to have any meaningful impact, the concept of interactive compliance must be "sold" to business faculties, students, and graduates as a more effective and efficient way of living with—and prospering under—government regulation. In short, given the nature of the business school environment, this selling must demonstrate how being compliant makes good business sense, as measured in dollars and cents. Is it to a corporation's advantage to be compliant? On a basic level, if compliance relieves the corporation of the fines and penalties associated with regulatory violations, the answer is yes. But this may not be sufficient incentive. The "stick" mentality has its limitations: it is not the severity of the punishment that makes a sanction effective, but the certainty that it will be imposed. In the area of corporate compliance, detection and consequential sanction are anything but certain. This is where interactive compliance comes into play.

Enterprise and Product Liability

Corporations should view codes of conduct and compliance programs as desirable goals, irrespective of their legal implications. A litany of good reasons supports the adoption of a corporate code. Internally, the code offers an unambiguous statement of normative standards for employees who wish to conform their behavior to corporate rules. Employees are less apt to violate such rules when they know the company is serious about enforcing its standards. Corporate codes also send a meaningful message to the public; a corporate defendant is less likely to be viewed with the disdain reserved for lawbreakers when the company in question did all it could to prevent the violation. Moreover, prosecutors will at least consider—even if they will not credit—the existence of an effective compliance program before asserting liability against a company whose carefully formulated and enforced code of conduct has been violated by an errant employee (Huff, 2006). Consequently, even if the law governing codes remains in its present ambiguous state, the development of corporate codes is likely to continue unabated.

The adoption of a code, however, is rarely a purely voluntary act, and is even less likely to be so in the future. While the decision to develop a code may technically be "voluntary," the ambient circumstances surrounding the adoption of most codes create many subtle—and not so subtle—incentives to foster compliance programs. Moreover, some companies are under a statutory obligation to develop such programs. For example, ITSFEA represents one instance in which Congress required corporations to develop internal standards [15 U.S.C.A. sec. 780(f) (Supp. 1989)] (Lipsky & Seeber, 1998). Similarly, agencies with prosecutorial power are increasingly turning to codes of conduct as part of the settlement process. Such codes, along with other examples of corporate self-governance such as internal corporate investigations, are becoming a regular condition for favorable settlements in negotiations with government agencies. Corporate codes of conduct are, in essence, a product of pressures created by the current regulatory environment.

The current state of the law deprives society of the benefits that would accrue from widespread, state-of-the-art compliance programs. Despite cynicism that is sometimes well grounded, corporate self-regulation provides a valuable check against antisocial behavior. The corporation is in the best position to predict sources of potential misconduct and to develop the most appropriate controls. Controls developed internally are likely to be more efficient than those imposed by the government. While no system of self-regulation can—or should—exist completely unchecked, corporate self-regulation gives society an additional measure of protection that is worth promoting and facilitating.

Corporate self-regulation also provides a superior alternative to tort or criminal liability as a means of meeting society's expectations of business. Criminal penalties and burgeoning punitive damages awards exist primarily to shape employer behavior. Unbridled tort liability imposes a hidden tax on the American economy; the criminalization of administrative offenses usurps limited prosecutorial resources and adds a harrowing dimension to often murky areas of the law. Corporate self-regulation provides a controlled, efficient, and rational alternative (Podgor, 2006). Common law rules governing the effect of employers' instructions evolved in another era—before the age of corporate codes, compliance departments, employee hotlines, and other procedures adopted by modern corporations (Baxter & Hunt, 1999). The legal standard should be adapted to this new reality.

The Accounting Model

An exact parallel to the interactive corporate compliance model already exists in the area of corporate financial reporting. Perhaps the quintessential example of the compliance situation is the requirement that a company's financial statements be prepared in conformity with generally accepted accounting principles (GAAP). The compliance investigation in this context is conducted not by a government official, but by a highly trained, independent professional—the certified public accountant (CPA). The CPA conducting the audit examines corporate records in order to express an opinion on the "fairness" of the financial statements. These audits are expensive in terms of time, effort, and money. However, the corporation can reduce the costs of the audit by engaging in interactive compliance.

In the financial reporting sphere, interactive compliance takes the form of an internal control structure. All companies have an internal control mechanism designed to safeguard the company's assets and provide reasonable assurance that the figures generated by the accounting system are reliable. However, not all internal control systems are created equal. Some are well designed, staffed by certified internal auditors who report directly to an independent internal audit committee that operates outside the influence of management (Lipsky & Seeber, 1998). Others are considerably weaker. Clearly, the stronger the internal control structure, the more expensive it will be to create, implement, and maintain. So where is the payoff?

The first advantage of a strong internal control system lies in the enhanced quality of information provided to executives, managers, investors, and other users. While unquestionably important, this advantage is blunted by the difficulty of assigning a price tag to improved information quality. The cost-benefit trade-off is uncertain at best. A second advantage is somewhat more quantifiable (BusinessWeek, 2002): the stronger the internal control system, the less likely that defalcations and other employee misdeeds will go undetected. Still, actual savings cannot be calculated with precision, and even if they could, the total dollar amounts involved may not be significant enough to justify the added costs. Neither of these first two advantages carries over to the broader field of corporate compliance (Baxter & Hunt, 1999). A third advantage, however—the reduced cost of compliance itself—does, and it is here that the accounting model offers its most compelling lesson for corporate compliance planning.

Conclusion

Huff, Kevin B. (2006). The role of corporate compliance programs in determining corporate criminal liability: A suggested approach. Columbia Law Review, 96, 1252–1284.

Lipsky, David B., and Ronald L. Seeber. (1998). The appropriate resolution of corporate disputes: A report on the growing use of ADR by U.S. corporations. Ithaca, NY: The School of Industrial and Labor Relations, Cornell University, and the Foundation for Prevention and Early Resolution of Conflict.

McCabe, Douglas M. (2008). Corporate nonunion complaint procedures and systems. New York: Praeger.

Podgor, Ellen S. (2006). A new dimension to the prosecution of white collar crime: Enforcing extraterritorial social harms. McGeorge Law Review, 37, 83–89.

Q & A with Manhattan DA Robert Morgenthau. (2002, December 2). BusinessWeek.