February 12, 2010
The Organizational Sentencing Guidelines: Part II
Posted by Miriam Baer

A few days ago, I blogged about the proposed amendments to the Organizational Sentencing Guidelines, which provide guidelines for federal judges when sentencing business organizations that have been charged and found guilty of committing federal crimes.  One of the proposed amendments to the OSG concerns "document retention policies," which I found to be potentially overbroad and confusing.

Another portion of the Sentencing Commission's proposal requests comment on:

"whether to encourage direct reporting to the board by responsible compliance personnel by allowing an organization with such a structure to benefit from a three level mitigation of the culpability score, even if high-level personnel are involved in the criminal conduct."

In English: The OSG creates a "culpability score" for entities charged with wrongdoing.  The higher the score, the higher the recommended punishment.  A number of factors go into calculating that score; some increase it and some mitigate it.  Factors that increase the score include the size of the company and the level of personnel that committed or were "involved in" the criminal conduct.  Some years ago, Vik Khanna wrote a great article asking why the entity's culpability should hinge on the wrongdoer's position within the company.   

In any event, the Sentencing Commission is proposing that despite the presence of high-level misconduct, a company still might be eligible for a three-level mitigation of its culpability score if the person in charge of its compliance program reported directly to the company's board of directors.

This seems to be part of a larger debate as to whether compliance officers should report directly to the board, or report up to the company's CEO, CFO or General Counsel.  (In some companies, the General Counsel is also the company's chief compliance officer.)  According to this 2009 survey by Compliance Week, approximately 20% of respondents report directly to the Board's Audit Committee, and the rest have a mix of reporting structures.

Now, were I fashioning my own compliance program, I might well create exactly the structure that the Sentencing Commission has in mind.  But I could also see arguments for having the Compliance Officer report to the General Counsel (or someone else, depending on the circumstances), and I certainly would hate to see this be the data point that stands out for purposes of determining an entity's culpability score when high-level officers are "involved" in criminal conduct.  Remember, the OSG already requires a judge to consider whether a "compliance program" is effective and effectiveness already is judged by whether the compliance officer is a high-level officer and whether the Board is informed about the company's internal monitoring procedures.  (The Board has to do that anyway under Caremark, although one might conclude that the OSG is far more intrusive than Chancellor Allen's "you ought to make sure something exists" standard).  

In sum, it seems like another instance in which corporate criminal liability becomes a means to indirectly regulate corporate governance.  Moreover, it looks a little like the quackery that Roberta Romano identified in her critique of the Sarbanes-Oxley Act, which was another attempt at using federal law (and to some extent, federal criminal law) to influence internal governance arrangements. 

I'm sorry, but I just don't think that a specific reporting structure is going to make companies more "compliant" with the law.  The forces that cause people to violate laws and regulations are highly more nuanced and complex than the simple question of whether the top Compliance guy reports to the GC, the CEO or directly to the Board's Audit Committee.  The change may help the compliance industry, which is feeling pressure on its bottom line as companies find ways to streamline expenses.  It may also be embraced by those companies that already employ separate reporting structures (always nice to put pressure on the other guy).  But will it lead to less crime and/or create a more rational means of sorting less culpable companies from more culpable ones?  I doubt it.

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