The Compliance Function

Abstract

This Chapter identifies the features of the corporate compliance function and the steps countries should take to induce companies to implement effective compliance. The compliance function is comprised of the set of corporate inventions that deter corporate misconduct. Using empirical psychology, this Chapter shows that important aspects of corporate compliance reside outside a company’s compliance program as typically designed. For example, the compliance function includes the company’s compensation, promotion and retention policies and its approach to self-reporting misconduct to, and fully cooperating with, enforcement authorities. Countries cannot induce effective compliance through regulatory mandates alone because optimal compliance varies too widely across firms and is not readily assessable by either enforcement officials or courts. Thus countries must instead incentivize corporations to implement effective compliance functions holding them criminally liable for their employees’ misconduct. Corporate liability must be structured to remove their expected profit from corporate crime and induce them to detect and self-report misconduct and fully cooperate. In addition, directors and officers must be subject to explicit properly-tailored duties to promote effective compliance enforced through liability for bad faith breach and clawbacks.

Keywords: compliance, white collar, corporate crime, behavioral ethics, corporate liability, Caremark, claw backs