Ethics & Compliance: Is Your Ethics and Compliance Program Working? How Can You Tell?

All larger and many smaller mining companies, like corporate America generally, have in place internal controls designed to prevent and detect criminal and regulatory misconduct. Given the high risk of allegations of noncompliance with intensely regulated safety, health and environmental requirements, many mining companies have had strong internal controls in place for many years. The key elements of these compliance programs include the following:

• Promotion of an organizational culture that encourages ethical conduct and compliance
  
• Due diligence to prevent and detect criminal and regulatory misconduct
  
• Assignment of responsibility to a high-level person for compliance procedures, with oversight by the board or other governing authority
  
• Denial of substantial authority to persons who have engaged in illegal or ethically marginal activities
  
• Ethics and compliance training
  
• Periodic evaluation of the program
  
• Establishment of a reporting mechanism (such as a “hot-line”) for employees to report suspected wrongdoing to management, without fear of retaliation
  
• Enforcement with both discipline and incentives to comply
  
• Adjustments to the program as appropriate, should misconduct occur notwithstanding the compliance program

Even with all of this, many CEOs remain skeptical that the program actually is working and is worth the investment. Is a crisis brewing beneath the surface of the internal controls? Are there any signs to give comfort or concern? Proving that the program is effective is proving a negative, i.e., no recent federal investigation does not prove the program is okay. There is no binary test. Realistic metrics are hard to establish.

How then can the top management gauge the compliance program’s effectiveness? Here are some thoughts from one who has helped many companies establish a compliance program, or to fortify an existing one.

“Bring me the Bad News.” A positive sign that the compliance program is working is that supervisors and managers bring the “bad news” to the boss, and are comfortable doing that. The top leadership wants to know promptly when things are not going right, so that the matter may be corrected. Most of those in the organization readily tell of accomplishments and achievements, which is fine. But to properly steer the organization through or around emerging trouble, the boss must have the bad news, and sooner rather than later. As the philosopher and baseball great Yogi Berra is to have said, “bad news does not improve with age.”

Flow of Honest Information. Related to assuring that management is receiving the bad news, a good compliance program will assure that honest information, without shading, is rising. The compliance program must be structured in a way that creates transparency and not deniability. The company must encourage managers and supervisors to admit mistakes. The lessons of Enron and the other corporate debacles of recent months reveal that there were people within the organization who knew that what was going on was wrong. If that information had gotten to the right ears, things would have turned out differently. The flow of honest information must include the full sweep of managerial concerns, whether the information is of wasted resources or unsafe conditions or practices which may be damaging to the company’s reputation. Having this flow of honest information is a good sign people are serious about compliance.

Employee Awareness. Are personnel aware that the company has a code of ethics, is serious about it, and do employees know where to go for guidance on a puzzling course of conduct or to report suspected wrongdoing? This is key, and it is a condition the manager can readily evaluate by occasional random checking directly with employees and their supervisors. Anecdotal information is to the effect that many whistleblowers took their concerns outside the company because they did not know where to turn within the company, were afraid of criticism, or were dissatisfied with the company response to their internal report. The company culture, driven from the top, must be one that encourages questions and concerns, and does not shoot the messenger.

Pressure to Cheat. Inadvertent or deliberate pressure to cheat is a strong indicator of a company already in trouble. To remain competitive, the mining business must meet production and profit goals, while adhering to costly regulatory requirements for safety, health and environment. Many regulatory violations and even criminal misconduct occur because the employee perceives that the boss regards production and profit goals as so important that short cuts in regulatory requirements are acceptable. This condition is a real time bomb that sooner or later will erupt into a serious noncompliance. Employees will do that which they understand the boss “really’ wants. A working compliance program is one that both encourages production efficiency and demands regulatory compliance. This requires continuous training, coaching, vigilance, and a sincere and believable message from the top that compromise of regulatory requirements is never an acceptable trade off for production.

Fairness. Finally, high morale usually equates to willing compliance in an ethical atmosphere. When they hear the word “ethics”, employees translate that to mean “fairness.” Employees who perceive management to be fair are likely to have high morale and act ethically on the job. Employees enjoy working for organizations they perceive to be ethical and shun the opposite. Good managers are keenly aware of this reality and continually work to assure a perception of fairness throughout the organization.

New Guidance. On November 1, 2004 important changes to the federal organizational sentencing guidelines went into effect. See www.ussc.gov (Federal Sentencing Guidelines Manual, 2004). These guidelines should be used to measure your own compliance program. Chapter 8 of these new guidelines lays out the expected elements of a good compliance program, and those elements are reflected above in this paper. The significance of these new guidelines is not that the are used to determine the level of the fine to be imposed on a convicted company. They are significant in that they establish the criteria by which federal prosecutors, federal debarring officials, and other decision makers will evaluate corporate culpability in the event of criminal misconduct by a company official or employee. Application of these guidelines can be determinative in deciding whether the company itself should be held accountable for the criminal conduct of company personnel, and if so, to what extent. Companies that have sincerely tried to do the right thing will be richly credited with that sincere endeavor, and may even escape sanctions and penalties.

[Editors’ note: In the previous issue of the C&M Mining Law Monitor, Mr. Bednar described steps a mining company can take to establish a regulatory compliance program or evaluate an existing one. This follow-up article discusses how to tell whether your regulatory compliance program is working properly.]