Companies have finally come to realize that institutional justice and fairness are perhaps the most basic tenet of any successful workplace. If employees believe they will be treated fairly, it will engender a level of trust that can work to not simply motivate employees but lead to a more successful workplace and, at the end of the day, a more profitable company. This encompasses the entire lifecycle of the employment relationship, from hiring through separation. It works in areas as seeming disparate as compensation and incentives, discipline, promotion and internal reporting.
On this final point, Kyle Welch and Stephen Stubben, in their 2019 paper entitled “Evidence on the Use and Efficacy of Internal Whistleblowing Systems”, noted that a robust whistleblower reporting system speaks to a functioning and ethical corporate culture. Employees who can report issues, in a fair manner, without fear of retaliation are more empowered to make the company run more efficiently and more profitably. Yet an equally interesting finding was where there was robust internal reporting, employees were more likely to speak up to improve overall business processes, thereby making the company more profitable.
The issue of Institutional Justice is most clearly seen in the area of discipline. This can be in the overall application of a compliance program to all employees, Board members and senior managers.
As noted in the 2012 FCPA Guidance, Hallmark Six of the Ten Hallmarks of an Effective Compliance Program: “A compliance program should apply from the board room to the supply room—no one should be beyond its reach. DOJ and SEC will thus consider whether, when enforcing a compliance program, a company has appropriate and clear disciplinary procedures, whether those procedures are applied reliably and promptly, and whether they are commensurate with the violation.”
This mandate was brought forward in the 2017 FCPA Corporate Enforcement Policy which stated, “Appropriate discipline of employees, including those identified by the company as responsible for the misconduct, either through direct participation or failure in oversight, as well as those with supervisory authority over the area in which the criminal conduct occurred.” [emphasis supplied]
All of these concepts were continued in the 2019 Guidance, which stated, “Another hallmark of effective implementation of a compliance program is the establishment of incentives for compliance and disincentives for non-compliance. Prosecutors should assess whether the company has clear disciplinary procedures in place, enforces them consistently across the organization, and ensures that the procedures are commensurate with the violations.”
The 2019 Guidance then laid out the following mandates
Human Resources Process – Who participates in making disciplinary decisions, including for the type of misconduct at issue? Is the same process followed for each instance of misconduct, and if not, why? Are the actual reasons for discipline communicated to employees? If not, why not? Are there legal or investigation-related reasons for restricting information, or have pre-textual reasons been provided to protect the company from whistleblowing or outside scrutiny?
Consistent Application – Have disciplinary actions and incentives been fairly and consistently applied across the organization? Are there similar instances of misconduct that were treated disparately, and if so, why?
One of the areas which Human Resources (HR) can operationalize your compliance program is to ensure that discipline is handed out appropriately and consistently across an organization and to reward those employees who integrate such ethical and compliant behavior into their individual work practices. In addition to providing a financial incentive for ethical behavior, it also provides a sense of institutional justice. Institutional justice comes from procedural fairness and is one area that will bring credibility to your compliance program.
Today, that institutional justice is called the Fair Process Doctrine, which recognizes that there are fair procedures, not arbitrary ones, in processes involving rights. Considerable research has shown that people are more willing to accept negative, unfavorable, and non-preferred outcomes when they are arrived at by processes and procedures that are perceived as fair. As you incorporate the Fair Process Doctrine in your compliance program, there are three key areas to focus on.
Administration of discipline. One area where the Fair Process Doctrine is paramount is in the administration of discipline after any compliance related incident. Discipline must not only be administered fairly but it must be administered consistently across the company for the violation of any compliance policy. Failure to administer discipline uniformly will destroy any vestige of credibility that you may have developed.
Likewise, there must be real consequences for an employee who violates your compliance program. If the regulators come knocking and you have not disciplined employees for Code of Conduct or compliance program violations in multiple years, the DOJ and SEC will conclude quickly you are not serious about compliance. Fair process means that you must discipline those who engage in compliance violations no matter what their position is within the organization.
Employee promotions. In addition to the area of discipline which may be administered after the completion of any compliance investigation, you must also place compliance firmly as a part of ongoing employee evaluations and promotions. If your company is seen to advance and only reward employees who achieve their numbers by whatever means necessary, other employees will certainly take note and it will be understood what management evaluates and rewards employees on.
Internal investigations. The third area of the Fair Process Doctrine is around internal company investigations. If your employees do not believe that the investigation is fair and impartial, then it is not fair and impartial. Further, those involved must have confidence that any internal investigation is treated seriously and objectively. One of the key reasons that employees will go outside of a company’s internal hotline process is because they do not believe that the investigation process will be fair. (Another finding of the Welch/Stubben study).
An often-overlooked role of any CCO or compliance professional is to help provide employees with institutional justice. If your compliance function is seen to be fair in the way it treats employees, in areas as varied as financial incentives, to promotions, to appropriate and consistent discipline meted out across the globe; employees are more likely to inform the compliance department when something goes array. If employees believe they will be treated fairly, it will go a long way to more fully operationalizing your compliance program.
Three key takeaways:
- The DOJ and SEC have long called for appropriate and consistent application of both incentives and discipline.
- The Fair Process Doctrinewill help set institutional justice as the norm in your organization.
- Inconsistent application of discipline will destroy your compliance program credibility.