National Center for Preventive Law

1 CORPORATE COMPLIANCE PRINCIPLESN ational Center for Preventive LawCopyright 1996 ToLouis M. Brown1909-1996"The Father of Preventive Law"With deep appreciation foryour having started it all."This publication is designed to provide accurate andauthoritative information in regard to the subject mattercovered. It is sold with the understanding that the publisheris not engaged in rendering legal, accounting or otherprofessional service. If legal advice or other expertassistance is required, the services of a competentprofessional person should be sought."--from Declaration of Principles jointly adoptedby Committee of American Bar Association andCommittee of Publishers and AssociationsSUMMARY TABLE OF 's the Introduction to the Corporate Sample Code of OF 's the Introduction to Corporate COMPLIANCE PROGRAMS1.

2 Manage Contain Respond to State Compliance Endorse at Top Create Compliance Ensure Program AND CONTROL 8. Maintain High-Level 9. Assign Individual Delegate Authority Enforce Reward AND TRAINING13. Communicate Match Training to Tailor Training to Define Communication TO VIOLATIONS17. Respond Gather Compliance Consider Offense Evaluate Program COMPLIANCE PROGRAMS1. Manage Contain Respond to State Compliance Endorse at Top Create Compliance Ensure Program AND CONTROL 8. Maintain High-Level 9. Assign Individual Delegate Authority Enforce Reward AND TRAINING13. Communicate Match Training to Tailor Training to Define Communication TO VIOLATIONS17.

3 Respond Gather Compliance Consider Offense Evaluate Program Code of 'S THE SITUATIONI nternal misconduct raises important threats to companies today. Jail sentences andlarge fines are increasingly common for corporate personnel involved in seriousoffenses. Even corporate managers who were not directly involved in criminal conductmay face jail or fines for offenses committed by persons under their control. Criminal orcivil offenses can produce enormous corporate fines that undercut corporate vitalityand competitiveness. Probation sentences and increased regulatory oversightfollowing an offense can restrict management control over future corporate activities. The disruption which accompanies a major investigation of a company by publicofficials can be very costly.

4 Civil damage recoveries in the aftermath of an offense canadd significant further liabilities. And, perhaps most importantly, the reputational losssuffered by a company due to an offense may be difficult or impossible to planned and implemented compliance programs can reduce these risks bypreventing illegal conduct and mitigating or eliminating punishments and liabilities forthose offenses which still occur. Achieving and maintaining compliance can alsoproduce other positive results. These include: increasing consumer and shareholderconfidence, reducing the costs of doing business, improving relationships withinvestment bankers, commercial lenders and the stock and bond brokerage community,boosting management and employee morale, increasing profits, and cutting legal andadministrative costs.

5 The problem confronting most businesses now is not whether toadopt a compliance program, but rather how to establish and maintain such a NCPL's Corporate Compliance Principles provide guidance for designing andimplementing compliance programs. The Principles describe the commondenominators of successful compliance programs -- , principles of legal riskreduction which compliance programs must follow to be effective. Beyond theseessential principles, this document offers considerations and examples to aidbusinesses -- large and small -- in constructing their own focus is on compliance results and not the particular procedures, tools ororganizational structures a given firm should use to achieve those results.

6 ThesePrinciples will guide managers in selecting the appropriate compliance programfeatures for their own firms. By applying the compliance principles described here andcarefully assessing the associated compliance considerations and examples, corporatemanagers can formulate and operate compliance programs that are both effective anddemonstrably Corporate Compliance Principles in this volume constitute design guidelines forcreating corporate compliance programs. A compliance program encompasses the setof operational methods that a company uses to ensure its activities adhere to legalrequirements and broader company values. Designing effective compliance programsis an important corporate concern for two reasons.

7 First, public harm and corporateinjuries potentially resulting from corporate offenses and deviations from companyvalues justify careful management of offense and misconduct risks. Second, under anumber of recently developed legal standards -- most notably the Federal SentencingGuidelines for Organizations -- firms with generally effective compliance programs canoften significantly reduce or eliminate penalties for offenses that occur despite serve these ends, firms must operate -- and be able to demonstrate that theyoperate -- effective compliance programs. What are the features of such programs? While some rudimentary tests are contained in the Sentencing Guidelines and otherlegal standards, these tests provide little concrete direction on how to create effectiveprograms.

8 The enclosed Compliance Principles seek to provide this Principles are the product of a two year study of compliance practices andprograms. Recognizing the gap in present compliance program standards, in 1994 theNational Center for Preventive Law assembled a Compliance Principles Commissioncomprised of legal and compliance professionals from corporations, law firms,consulting firms, and universities. The goal of the Commission was to create a set ofcompliance program guidelines that could be used to construct and evaluatecompliance programs in organizations of all types and resulting Principles include three content levels. The primary content is a set ofcompliance principles that describe essential features of effective complianceprograms.

9 These principles are clarified through a series of considerations to be usedby compliance program designers and evaluators in implementing the principles. Finally, the considerations are supplemented by numerous implementation examplesshowing how each consideration relates to a specific design problem and solution. Principles, considerations, and examples were developed for each of the four majortopics addressed by the Compliance Principles: Establishing Compliance Programs,Structure and Control of Compliance Programs, Communications and Training, andResponses to format reflects the Commission's understanding of the widely-differing complianceneeds, circumstances and capabilities of different organizations. In light of this, theCommission sought not to create minimum program requirements at the level ofprogram operating features, but rather concrete principles and suggestions for thedesign and operation of compliance programs.

10 These principles and suggestionsshould provide valuable guidance to parties concerned about compliance programs,including corporate managers, compliance program specialists, inside and outsidecounsel, and others such as trade organizations who advise companies aboutcompliance programs. Although our primary focus is on corporate complianceprograms, the compliance principles and suggestions described here will be relevant toother types of organizations, including partnerships, associations, joint-stockcompanies, unions, trusts, pension funds, unincorporated organizations, governmentsand political subdivisions thereof, and non-profit scope and detail of these Principles reflect the diverse backgrounds of theCommission members listed below.