compliance and ethics training programs for the board of directors

COMPLIANCE AND ETHICS LEADERSHIP COUNCIL FEBRUARY 2005www.celc.executiveboard.comPrimary BriefCOMPLIANCE AND ETHICS TRAINING PROGRAMSFOR THE BOARD OF DIRECTORSOccasion for DiscussionTable of ContentsExecutive Summary 1Introduction 2Participants 3Assessing Board TrainingNeeds3-4Training Deployment andFrequency4-6Training Attendance 6Research Methodologyand Agenda7The November 1, 2004 amendments to the Federal Sentencing Guidelines (FSG) raisenumerous questions about their breadth and applicability. Those questions includequeries into the meaning of Sections 8B2.1(b)(2)(A) and 8B2.1(b)(4)(A) which addressa Board of Directors’ responsibility for oversight of the organization’s compliance andethics program, as well as the organization’s responsibility for communicating thestandards and procedures of its compliance and ethics program by “conducting effectivetraining programs and otherwise disseminating information appropriate to the [Board ofDirectors’] roles and responsibilities.”Companies take different approaches to fulfill this training requirement. While the vastmajority periodically report to the board on compliance and ethics matters, somecompanies are implementing formal compliance and ethics training programs. TheCouncil profiles a number of these formal training programs in this report.The Council selected the research participants from a group that previously participatedin related research with the Council, indicating that they either implemented a formaltraining program or were planning to in the near future. As a result, this brief does notpresent a representative sample of companies.Key Findings The Majority of Firms Do Not Have Formal Compliance and Ethics Training For DirectorsWhen asked what process their company has in place to ensure the board exercises reasonable oversight of thecompliance and ethics program, 95% of firms reported a periodic reporting relationship to the board. Only 24% offirms have formal compliance training programs either in place or under development. 1 This may be because boardsdo not call for formal compliance and ethics training, preferring instead to spend their time learning about thespecifics of the program during regular meetings with the Compliance and Ethics Officer. Established Compliance Programs Are Less Likely To Use a Formal Training ProgramIt is less likely that established compliance and ethics programs will incorporate a formal training program into theperiodic reporting process because they typically maintain deep, two-way communication with the board. Inversely, anewer program, which has had less regular interaction with the board, is more likely to implement a formal trainingprogram to “jumpstart” discussion around compliance and ethics issues. The Revised Federal Sentencing Guidelines Can Serve as a Lever to Increase Interaction with the BoardOf the 65% of Compliance and Ethics Officers who have a reporting relationship with the Board of Directors, twothirdsreport to the Audit Committee and 18% report to the full board. 2 This direct and independent access to theboard enables Compliance and Ethics Officers to build honest and robust dialog about the program and helps directorsto ask and receive the right questions and answers.12General Counsel Roundtable, Mapping Compliance Programs to the Federal Sentencing Guidelines Amendments, Washington, D.C.: Corporate Executive Board(2004).Compliance and Ethics Leadership Council, Size and Reporting Relationships for the Compliance and Ethics Function, Washington, D.C.:Corporate Executive Board (2004).©2005 Corporate Executive BoardCatalog No.:CELC130M8AD

COMPLIANCE AND ETHICS LEADERSHIP COUNCILCompliance and Ethics Training Programs for the Board of DirectorsPAGE 2IntroductionThe Guidelines impose ultimate responsibility for the compliance and ethics program on an organization's governingauthority, typically the Board of Directors. Thus, the amendments require that the board stay informed of the content andoperations of the compliance and ethics program and exercise reasonable oversight of the program.Council research identifies two key practices, board of director training and board reporting, which may improve boardoversight of the compliance and ethics program. Of 41 members surveyed regarding their method of ensuring boardoversight, 24% of companies provide compliance and ethics training for the board and 95% of companies present periodicreports to the board concerning compliance and ethics. The following graph presents the methods companies engage tokeep directors apprised of compliance and ethics activities:Board Oversight Method*100%95%50%24%15%0%PeriodicReporting tothe BoardComplianceTrainingOther*Companies may select more than one response. n = 41Source: General Counsel Roundtable, Mapping Compliance Programs to the Federal Sentencing Guidelines AmendmentsThe Council defines training as any activity used to inform the board on compliance and ethics matters beyond traditionalreporting. This typically involves formal presentations by internal experts (e.g., Compliance and Ethics Officer) orexternal consultants or counsel.Council staff contacted participants from the pool of companies that indicated they provide compliance training. Thisbrief contains information on the assessment of board training needs and the development of compliance and ethicstraining programs for the Board of Directors.©2005 Corporate Executive Board

COMPLIANCE AND ETHICS LEADERSHIP COUNCILCompliance and Ethics Training Programs for the Board of DirectorsPAGE 3ParticipantsCOMPANY BACKGROUND INFORMATIONCOMPANY INDUSTRY REVENUE EMPLOYEESCompany A* Electronics Less than $5 billion 10,000 – 20,000Company B* Health Care Products Less than $5 billion 10,000 – 20,000Company C* Non-Banking Financial Less than $5 billion 5,000 – 10,000Company D* Energy & Utilities $20 billion - $50 billion 20,000 – 60,000Company E* $10 billion - $20 billion 60,000 – 100,000RetailCompany F*Less than $5 billion 20,000 – 60,000Company G* Chemicals $5 billion - $10 billion 10,000 – 20,000Company H* Health Care Products Less than $5 billion 10,000 – 20,000*PseudonymAssessing Board Compliance and Ethics Training NeedsTo be both engaging and successful, a training program requires a preliminary assessment of needs. Generally, theCompliance and Ethics Officer is responsible for assessing training needs, through either personal knowledge of theboard, or by gauging director reaction to issues that external experts introduce. The board exercises significant influenceover the material presented to them, though the Compliance and Ethics Officer or General Counsel temper this advice.Council research explores several methods to perform this director assessment in the area of compliance and ethics.Descriptions of participating companies’ assessment practices follow:• Company A does not have a formalized education program; information concerning ethics and compliance isdelivered via the General Counsel, Compliance Officer, Secretary of the Board; he has a longstanding relationshipwith the board and it is his responsibility to decide which information concerning compliance and ethics toinformally present. This decision is also influenced by how the board is self-assessing; directors conduct annualself-assessments, which primarily consist of questions about corporate governance.Several questions explore the compliance and ethics terrain and the General Counsel, Compliance Officer,Secretary of the Board reviews the answers to these questions to determine whether targeted training may beneeded in a particular area. The board conducted its second self-assessment last year, and, though the GeneralCounsel, Compliance Officer, Secretary of the Board would like to include compliance and ethics-specificquestions this year, he will likely be forced to wait for 2006. He may suggest that an interim assessment,specifically focused on compliance and ethics, be completed by the board later this year.• At Company B, the Vice President of Global Compliance trains the board in compliance and ethics matters. Sheworks with the CEO and several directors to determine board training needs. The backdrop to these conversationsis the joint understanding that the directors should be familiar with the Code of Business Conduct, especially forareas (e.g., product complaints, advertising and marketing) that pose significant compliance risk to theorganization.• Company C uses an external agent to annually assess its board's information and training needs. Also, thedirectors complete a bi-annual assessment of their peers, which can reveal compliance and ethics knowledge gaps.• Company F directors partly set the agenda by asking for information they deem necessary to more effectivelyoversee the compliance and ethics program. The General Counsel, who is well-informed on the legal andregulatory issues impacting the company, determines the remaining items.©2005 Corporate Executive Board

COMPLIANCE AND ETHICS LEADERSHIP COUNCILCompliance and Ethics Training Programs for the Board of DirectorsPAGE 64Assessing Board Compliance and Ethics Training Needs (Continued)Training fatigue and information overload are concerns. Involving the board in the selection of training topics partiallyalleviates this risk. Also, the board is most effectively engaged through “real life” examples of issues being addressed bythe compliance and ethics program; this information (e.g., roll out new training modules to business practice officers inAustralia, completion of audits with respect to antitrust compliance, initiation of a round of risk assessments) should beincluded in the training program.• The Vice President of Global Compliance at Company B discusses the appropriateness of a topic with the CEO,and cuts out general information on ethics to focus on issues particular to the medical devices industry, dealingwith variations in global regulations and the specifics of advertising and promotion as well as complaint-handling.• Company E focuses on training content that covers recent regulatory and legal developments as well as issuesspecific to the retail industry. The company understands that compelling education cannot be a regurgitation ofgeneral compliance and ethics topics that could be covered in other forums.Training Deployment and FrequencyMany of the companies interviewed are currently in the process of implementing formal training programs. Descriptionsof these companies implementation plans follow below.Company B’s Vice President of Global Compliance trains the boardCompany B’s first compliance and ethics training presentation took place July 2004; the company plans to make this anannual event. The Vice President of Global Compliance worked with the CEO and the Compliance Committee of theBoard of Directors to devise the program and presented the information. The PowerPoint presentation includes slidesexcerpted from internally-designed employee training modules.Company C uses internal subject matter experts to train the boardCompany C began conducting training sessions for the board in 2001. There are three of these sessions per year, with oneor two of them focusing on corporate governance, with an emphasis on ethics and compliance. Each session runsapproximately 45 minutes, but the company asks speakers to keep presentations to less than 25 minutes to allow sufficienttime for questions and discussion. Speakers are typically internal, those considered closest to the topic by management.The board, which drives the training agenda, evaluates all education sessions.Practice Spotlight: Web site Created for DirectorsCompany C developed a Web site specifically for its Board of Directors that contains all trainingpresentation materials, board meeting minutes and documents pertaining to company policy. Boththe Compliance and Legal functions post relevant articles.©2005 Corporate Executive Board

COMPLIANCE AND ETHICS LEADERSHIP COUNCILCompliance and Ethics Training Programs for the Board of DirectorsPAGE 5Training Deployment and Frequency (Continued)Company D asks its outside counsel to present at a board dinnerIn the process of formalizing its compliance andethics training program, Company D will hold aninitial training event in late February to sharpenthe directors’ focus on their responsibility tosupport an ethical culture; Company D anticipatesthat this will encourage discussion around thetopic and enable an assessment of areas to pursuefor further ethics training in August (and regularlythereafter). The ethics training will involve theboard getting first hand knowledge of the traininggiven to employees, as well as discussion around anumber of “what if…?” scenarios specific toCompany D’s business.Practice Spotlight: Food for ThoughtThe February training will be given by anexternal attorney who will decide the contentof the presentation with the help of CompanyD’s legal team. This attorney worksextensively with Company D and is veryfamiliar with its business. The presentationitself will be given over dinner the nightbefore the Board meeting to provide aninformal venue for in-depth discussion.Compliance and ethics will not be on the board meeting agenda, but the previous evening’s presentation is expected tofoster discussion on the topic. Company D hopes to incorporate ethics training into all aspects of board education ratherthan having specific sessions devoted to it. For instance, if an investment analyst presents to the board, the GeneralCounsel could then speak about insider trading.Company E pairs an external consultant with a member of the boardIn June 2005, Company E will formalize its compliance and ethics Board of Director education by hosting two speakers atits board meeting. A compliance and governance expert from Harvard Business School will be the principle speaker. Hewill seek to foster discussion around general compliance and ethics issues. The second speaker, a current Company Edirector, will provide company specific context around the consultant’s session to the rest of the board.Company E will gauge director interest and knowledge of issues that speakers introduce and will assess future trainingneeds based on how this first event unfolds. Board feedback will be incorporated into Company E’s ongoing trainingprocess.Company G tailors employee training modules for the boardCompany G developed a highly tailored board training program which occurs every other year. The spotlight practicebelow provides additional information on Company G’s training program.Practice Spotlight: Tailoring Compliance TrainingCompany G presents the board a tailored compliance training program every two years. Legaldepartment attorneys in specialized areas (e.g., antitrust, regulatory, employment, intellectualproperty) present training modules on the code of conduct and company policies (e.g., fraud,employment, intellectual property, antitrust, document management). Company G believes theboard gains insight into the company-wide compliance training program through the tailoredcompliance training program.©2005 Corporate Executive Board

COMPLIANCE AND ETHICS LEADERSHIP COUNCILCompliance and Ethics Training Programs for the Board of DirectorsTraining Deployment and Frequency (Continued)Company H delivers employee training to the boardCompany H is the only profiled company that deploys the same training program to both the general employee populationand the Board of Directors. Directors are required to participate. The spotlight practice below provides additionalinformation on Company H’s training program.Practice Spotlight: Mandatory Director TrainingDirectors at Company H receive the same mandatory compliance and ethics training that allemployees and on-site vendors receive. This general overview training reinforces CompanyH’s commitment to corporate and individual integrity and is revised and redeployed every twoto three years.Training AttendanceOnly Company H requires director attendance at training sessions. Several companies cite near-perfect board meetingattendance rates, while others believe it presumptuous to require participation. Most participating companies agree that ifa director were unavailable for a training session, both the personnel and materials would be made available should s/heask for a repeat of the session.Company A has conceived of, but not yet put in place, a company guideline that requires a certain amount of directortraining, whether completed in-house or at accredited seminars. Embedding questions about training into the selfassessmentprocess would enable Company A to determine which directors follow the guidelines.©2005 Corporate Executive Board

COMPLIANCE AND ETHICS LEADERSHIP COUNCILCompliance and Ethics Training Programs for the Board of DirectorsPAGE 7Research MethodologyIn an effort to gather information regarding compliance and ethics training programs for the Board of Directors, Councilresearch staff examined multiple research databases and contacted member institutions to conduct primary research. It isour hope that this brief will provide Council members with a focused summary of popular wisdom on this issue.Research AgendaBusiness Purpose:The purpose of this research is to determine:a. The training needs of directors in the area of ethics and complianceb. How such training occursResearch Questions:1) How do companies assess board (compliance & ethics) training needs?a. Is training targeted to specific directors or committees (e.g., audit committee vs. executive compensation andmanagement resources committee)?2) What are the different types of training provided?3) How often are directors trained?4) What is the method of deployment (e.g., expert speaker, online, video)?5) Is the training mandatory?a. If it is mandatory and a director refuses, what are the repercussions? Are these made explicit?6) To what extent is outside training (e.g., training that a director might have received as part of a different company’sboard or executive team) considered when developing your company’s strategy?7) Was the training organizationally driven or did the directors call for it themselves?Professional Services NoteThe Compliance and Ethics Leadership Council has worked to ensure the accuracy of the information it provides to its members.This project relies upon data obtained from many sources, however, and the Compliance and Ethics Leadership Council cannotguarantee the accuracy of the information or its analysis in all cases. Furthermore, the Compliance and Ethics Leadership Councilis not engaged in rendering legal, accounting, or other professional services. Its projects should not be construed as professionaladvice on any particular set of facts or circumstances. Members requiring such services are advised to consult an appropriateprofessional. Neither Corporate Executive Board nor its programs are responsible for any claims or losses that may arise from anyerrors or omissions in their reports, whether caused by Corporate Executive Board or its sources.©2005 Corporate Executive Board