RAND Center for Corporate Ethics and Governance Symposium White Paper Series, Symposium on "Transforming Compliance: Emerging Paradigms for Boards, Management, Compliance Officers, and Government" (2014).
13 Pages Posted: 1 Jun 2014 Last revised: 13 Jan 2015
Date Written: May 29, 2014
Corporate Compliance is becoming privatized, and privatization is going viral. Achieving consistent legal compliance in today’s regulatory environment is a severe challenge and one at which even well-managed companies regularly fail. But besides coping with governmental oversight and legal enforcement, companies now face a growing array of both substantive and process-oriented compliance obligations imposed by trading partners and other private organizations, sometimes but not always instigated by the government. Embodied in contract clauses and codes of conduct for business partners, these obligations often go beyond mere compliance with law and address the methods by which compliance is assured. They create new compliance obligations and enforcement mechanisms and touch upon the structure, design, priorities, functions and administration of corporate ethics and compliance programs. And these obligations are contagious: increasingly accountable not only for their own compliance but also that of their supply chains, companies must seek corresponding contractual assurances upstream, causing a chain reaction of proliferating and sometimes inconsistent mandates.
This essay examines the origins and the accelerating growth of the privatization of compliance requirements and oversight; highlights critical differences between compliance obligations imposed between private parties and those imposed by governmental actors; and evaluates the trend's benefits, drawbacks and likely direction. Particular attention is given to the use of supplier codes of conduct and contractual compliance mandates, often in combination; to the issue of contractual remedies for social, process-oriented, or vague obligations that may have little direct bearing on the object of the associated business transaction; to the proliferating trend of requiring business partners to "flow down" required conduct and compliance mechanisms to additional tiers within the supply chain; and to this trend's challenging implications for the corporate compliance function's role and its interaction with operations, procurement, and sales groups. Recommendations are made for achieving efficiencies and reducing system dysfunction by seeking a broad consensus on generally accepted principles for business-partner codes of conduct, compliance-related contract clauses, and remedies appropriate to each.
Keywords: compliance, ethics, supply chain, privatization, code of conduct, sentencing guidelines, P2P, compliance programs, FCPA, money laundering, corruption, bribery, human rights, corporate social responsibility, OECD, CSR, sustainability, contracts, remedies, management, collective action
JEL Classification: L14, M14, A13, F02, K12, K22
Suggested Citation: Suggested Citation
Killingsworth, Scott, The Privatization of Compliance (May 29, 2014). RAND Center for Corporate Ethics and Governance Symposium White Paper Series, Symposium on "Transforming Compliance: Emerging Paradigms for Boards, Management, Compliance Officers, and Government" (2014). . Available at SSRN: https://ssrn.com/abstract=2443887
By D. Sokol