Corporate Compliance and Ethics Programs—
Not Just for Public Companies

Enron. WorldCom. Tyco. Recent corporate scandals at some of the largest public companies ushered in new legislation—namely Sarbanes-Oxley—that imposed compliance-related obligations on publicly traded companies and a renewed commitment to corporate compliance and ethics programs. Indeed, a recent survey of general counsel, as reported by law.com, revealed that compliance matters were their number one concern.

The sentiment that drove this historic legislative reform, accompanied by heightened public scrutiny of corporate ethics and more vigorous government enforcement, should provide a wake-up call for private companies, too. In fact, several provisions of Sarbanes-Oxley apply to private companies, many of which do business in highly regulated industries that mandate compliance activities. The bottom line is that private companies stand to benefit from effective compliance and ethics programs.

Mitigating Risk and Maximizing Goodwill

In our experience, there are four major advantages to effective corporate compliance and ethics programs for private companies.

1. Avoiding Loss by Early Detection. An effective program will uncover potential problems early on, such as improper accounting treatment or anti-competitive sales practices. Early detection can help avoid or reduce losses by containing and insulating the problem in order to narrow its scope. It will also minimize lost time, on the part of employees and management, in responding to the problem, as well as limit the legal expenses and potential losses or fines associated with investigating and resolving allegations of wrongdoing.
2. Enhancing Morale. In today’s highly competitive business environment, human capital is one of the most important assets that companies possess. Therefore, an internal commitment to ethics and integrity, supported by an effective compliance and ethics program, is a critical factor in your ability to attract and retain top talent.
3. Bolstering Goodwill. Customers and the public at large demand a commitment to ethical conduct, particularly in this era of heightened corporate responsibility and accountability. A robust compliance and ethics program, prominently displayed and available for download on your website, goes a long way toward bolstering goodwill and assuring the public that you operate in the marketplace fairly and ethically.
4. Reducing Potential Fines and Other Repercussions. Although the primary goal of an effective program is to deter wrongdoing, the United States Sentencing Guidelines—which apply to both public and private companies, as well as partnerships and other business entities—reward companies for maintaining an effective program, even when misconduct occurs. For example, potential fines are reduced if you maintain an effective compliance and ethics program, and further reduced if you self-report the problem.

Moreover, law enforcement and regulatory bodies are often persuaded to dispose of a potential criminal matter civilly, or narrow the scope of a criminal offense or regulatory violation, if you are viewed as a good corporate citizen that attempts to comply with the law. An effective compliance and ethics program will help convince governmental agencies that any problems were the result of isolated, aberrant conduct. This is particularly important because these governmental agencies will continue to regulate your activities in the future. Finally, an effective compliance and ethics program may yield additional benefits in defending civil litigation.

Building an Effective Compliance and Ethics Program

The United States Sentencing Guidelines have prescribed seven structural elements that are required for a successful compliance and ethics program. Fortunately, these common-sense principles align closely with how companies would otherwise design an effective policy:

1. Clear articulation and implementation of written policies and standards
2. Accountability
3. Proper selection of compliance personnel
4. Training
5. Audit effectiveness
6. Enforcement and discipline
7. Prevention  

In addition to these structural elements, you should assess several key functional areas, which are common to most companies and demand clearly written policies: corporate governance; finance and audit; intellectual property and information technology; workplace environment; and sales, marketing and advertising practices.

Much Shelist can help you design and implement an effective corporate compliance and ethics program in a cost-effective manner. It’s an investment that will pay dividends in the future, so don't wait.

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The Litigation & Counseling Alert contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under professional rules, this alert may be regarded as advertising material.