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Corporate Compliance’s Achilles Heel

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Miriam Baer discusses how corporate compliance, established as a crucial aspect of corporate governance after the Sarbanes-Oxley Act, faces challenges due to political polarization.

Image courtesy of interviewee. March 6, 2024

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This video video discusses the current state of corporate compliance, particularly in the context of the Sarbanes-Oxley Act (SOX) as it approaches its 20th anniversary. The speaker argues that while compliance as an industry is thriving and is generally viewed as important for corporate governance, there are underlying issues that make it precarious. These issues primarily stem from increasing political polarization in the United States, which can undermine trust within corporations and between corporations and the government.

The speaker highlights that SOX, enacted in response to accounting scandals like Enron, established significant corporate governance regulations, promoting the responsibility of companies to self-monitor and report financial health. The Act brought about lasting changes in the expectation of compliance and internal checks within organizations, with federal standards becoming more pronounced.

However, the speaker notes that polarization complicates compliance efforts. It affects interpersonal trust among employees and can discourage open communication about compliance issues. Furthermore, the politicization of regulatory agencies like the Department of Justice can shift how corporations perceive their relationship with the government and impact their willingness to report compliance failures proactively.

This video video outlines three trends exacerbated by polarization: a shift toward automation, increased remote work replacing in-person interactions, and the potential de-federalization of enforcement. The speaker expresses concern that these trends may lead to a compliance culture that relies more on mechanistic solutions rather than fostering genuine trust and cooperation among employees.

Despite these challenges, the speaker remains optimistic about the potential to improve compliance mechanisms by recognizing and addressing the effects of polarization, suggesting that skills developed in compliance may help organizations navigate these sociopolitical challenges.

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I don't mean to say that compliance is in a perilous

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position in the sense that, my gosh, the sky is falling

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and we're gonna end up with no compliance.

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In fact, I think the paper that I wrote really starts out

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with the opposite contention, right?

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That if you were to look at all of the metrics, and,

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and this paper by the way, was written

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for a symposium called Sarbanes Oxley at 20.

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So the idea was 20 years had elapsed,

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since the enactment in the United States

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of the Sarbanes Oxley Act, which had been in response

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to the string of accounting scandals sort

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of blowing up with Enron.

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So the idea was to look back at Sarbanes Oxley

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and say, you know, how has the world changed?

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How has corporate governance changed?

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Um, and, and what did this law, do in terms of

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what kinds of permanent changes did it make?

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And so I was asked to address compliance

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because I write about corporate compliance.

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And my point was, if you look at all of, sort

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of the basic metrics out there, you'd actually,

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the likelihood is you'd say compliance is doing

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great, right?

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And the idea that, it's a bill billion dollar industry

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that everyone agrees it's a important governments governance

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function that, in other words, the firm,

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everyone accepts the idea that a company is responsible

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for monitoring itself, for wrongdoing, for, both,

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you know, acting as an internal policing, branch,

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but also for attempting to remedy wrongdoing, looking

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for red flags, citing those red flags and alleviating them.

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So in that sense, you could say, no, compliance is fine.

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But my point was 20 years ago, and certainly

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before that, we weren't nearly

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as polarized in the United States, at least as a nation,

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and that this is the Achilles heel, right?

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That, and so that's what I mean by perilous,

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that there's this sort of,

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it's like you're looking at someone

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that looks really healthy

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and you'd, you'd say, wow, they just ran a marathon.

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They're doing great, but they've got this little insidious

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virus that's gonna hurt them.

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And that's the point of the paper. Okay?

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So in the wake of all of these major accounting schedule,

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scandals at publicly held companies, you know, Congress,

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and this was kind of remarkable, rushed

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to enact bipartisan legislation to improve how companies,

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both, their internal reporting,

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and then their external reporting of,

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of their financial, health, right?

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So there were all sorts of rules that were enacted.

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It was a massive statute.

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Um, and it was a bipartisan statute.

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Congress went, in fact, if anything, it was criticized,

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by certain academics prominently as you know,

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Roberta Romano, who was at Yale,

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called it Quack Corporate Governance.

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Her view was you rushed too quickly to,

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'cause you wanted to do something.

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And this was actually during the Bush administration.

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Um, so we often think of Republicans as pro-business,

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but this was, again, a bipartisan effort to say, here's

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how we're gonna respond to accounting fraud.

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And it included lots of different, components,

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Some of which are talked about

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by corporate governance experts about, for example,

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the reporting obligations.

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And even, for example, the obligation of the CEO

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and CFO to certify, you know, the financial reporting.

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In other words, you couldn't just pretend

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that you didn't know what your underlings were doing when it

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came to financial reporting.

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If you were a CEO

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or CFO, I was interested with regard

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to Sarbanes Oxley in a number of its, provisions

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that one would call criminal provisions.

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In other words, it was under Sarbanes Oxley.

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And again, this doesn't, wasn't just directed at companies.

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The Senate ended up becoming the law for everybody.

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Uh, the sentence for, crimes like mail

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and wire fraud, the maximum sentence in the federal,

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code, criminal code went from five years to 20 years.

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So those were important changes,

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that actually ended up having lasting effects for lots

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of folks, and not simply corporations.

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But one of my points in, in the paper is

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that Sarbanes Oxley turned our attention both

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to corporate crime.

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'cause there were a bunch of, provisions

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that talked about either underlying crimes

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that happened within, within corporations, like mail

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or wire fraud, or things like anti,

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there were provisions that made it illegal

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to retaliate against whistleblowers.

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So that's another example of, you know, sort

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of criminalizing behavior

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that you thought was inappropriate.

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Um, so they turned our attention to

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ways in which corporations could be guilty of crime.

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They also, Sarbanes Oxley directed our attention

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to the federal government, meaning they were saying,

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this is a federal issue, right?

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How we think about corporate compliance is, is partially

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determined by, for example, how does the Department

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of Justice think about corporate compliance?

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What is it expecting of corporations?

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And Sarbanes Oxley, at least rhetorically

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federalized compliance, made us think of compliance

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as something the federal government cares about.

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And so we as a corporation,

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better think about this in those terms.

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What is, you know, it wasn't surprising that in the wake

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of Sarbanes Oxley, and this was true for myself

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'cause I was at the US Attorney's Office at the time

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as a federal prosecutor,

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you saw corporations hiring former federal prosecutors

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to work in their compliance departments.

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And another way in which we think of it was a federal story,

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very centralized story.

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So there were a number within those elapsed, two decades,

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you see a lot of energy, especially in

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that first decade post Sarbanes about, you know, a lot

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of scholarship about what does the Department

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of Justice want in a compliance program, right?

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Uh, if we, employ the right people

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and do the right things,

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will this make the Department of Justice happy?

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And again, why were you so worried about that?

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Because if the corporation should later on be accused

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of a crime, the Department of Justice makes a bunch

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of decisions about whether

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or not to charge that corporation.

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And one of the factors it considers is whether

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or not the corporation maintains an

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effective compliance program.

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So that is why,

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compliance often has had both a federal patina,

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but also this kind of criminal overlay,

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because it's often the Department of Justice,

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Uh, that is determining whether the corporation has a,

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effective compliance program.

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One of my points was that, look, if you were to spend a lot

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of time with the compliance literature,

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especially in those early days, you'd think

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that it's really just a story of structural problems

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and incentives, right?

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Um, that the idea is, look, for example, I'm A CEO.

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Do I have the right incentives to monitor my people?

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Well, maybe I don't because if I get paid, for example,

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based on how well the company does in terms of revenues

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and its stock price, maybe when the information

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that comes up through my direct reports is a little bit too

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good to be true, maybe I won't investigate that,

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because why would I wanna investigate that?

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That's bad news, right? I wanna, I want good news.

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That would be an example. The story I'm just telling you is

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an example of incentive problems, right?

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The incentives are making me, you know, leave some

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bad news under the rug and not sufficiently investigate

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and monitor my people.

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Maybe the incentives are such that I'm also, if I,

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for example, tell everyone in the company, the look,

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I will fire everyone who's in the bottom 10%

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based on sales, guess what?

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You know, granted, some people want

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to legitimately not be in the 10%,

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but some people are gonna cheat their way outta being in the

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10, bottom 10%.

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So that's examples of bad incentives either being set

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by the company or set externally.

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And so a lot of that early literature

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said, how do we deal with incentives?

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How do we change incentives?

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You know, what, what, what do we do?

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There was additional literature, that focused on,

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for example, behavioral blind spots and cognitive biases

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and heuristics, meaning sort

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of the universal mistakes we make in how we make decisions.

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And again, a lot of that literature was, was sort

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of pointing out how we're all quite alike, right?

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That in the right situation we could make really

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bad decisions.

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Um, and so then the question was how to get us out

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of those situations, how

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to make sure we don't create those

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situations in the first place.

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So that's what, you see sort of this,

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and even norms, right?

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The idea of how do we have pro-social norms?

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How do we encourage people to behave?

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Well, and you could imagine these sort

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of nice virtual circles,

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or the opposite sort of these death cycles where people sort

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of end up behaving badly

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and the bad behavior spurs even more beha bad behavior.

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All of these are kind of universal stories

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and narratives that have almost a soothing feel to them,

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because if it's universal, none of us is a monster.

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Everyone has the pote potential to do something bad.

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But that means we all have the potential

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to make the right changes and fixes.

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And if we just make these nice architectural decision making

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changes, somehow we're gonna fix this all and,

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and improve our compliance.

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And, and again, I'm, I'm oversimplifying there were plenty

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of people who pointed out enduring problems with compliance,

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but I do think there is this sort of nice, universality

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to some of this earlier literature.

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Um, it's sort

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of challenging in the latter parts of the paper.

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Just to break it down.

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When we talk about, polarization,

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polarization means different things.

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There's now a tremendously deep

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and rich literature, by political psychologists.

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So I, I wanna be clear that I am not in any way an expert,

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but I've been consuming this literature

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and very interested in how it impacts compliance

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and what it means for compliance.

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This first paper gives you a, a little taste of it.

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'cause it was written in light of Sarbanes Oxley,

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a much larger paper than I'm working on called

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Polarized Networks.

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And I hope to have that,

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at least out on SSRN sometime in the next six months.

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Um, but, you know, just to give the basics, right?

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We know that there's this thing called, let's say we refer

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to it as ideological polarization.

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So you believe, once you agree, you, you hold one set

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of beliefs, and I hold another.

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Now we could still be friends,

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even though we are ideologically on

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different parts of the spectrum.

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And in fact, 20 or 30 years ago, it wasn't impossible.

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You might see, for example, you could have,

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some liberal folks who still agreed

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with conservative folks on certain issues, right?

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So we often refer to that, as ticket splitting, right?

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We might, you know, vote for one

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or Republican in one instance, in a Democrat in another,

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or we might have cross-cutting identities such

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that we aligned with each other on some issues,

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but dis you know, didn't align with each other on others.

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That has changed over time.

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And so now what we see is far more partisanship,

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far more extremism.

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And in fact, people don't split their ticket.

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They don't cross cut, they don't, in other words,

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even demographically, age wise, where people live,

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where people work, we're much more likely

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to see folks not talking to each other in siloed.

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That leads to a different phenomenon that's referred to

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as effective polarization.

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Now, that's where, you're able to measure

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through these various surveys that are given, every

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so often, how people feel about their ingroups

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and then how they feel about people in the outgroup.

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And the more there's a difference,

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the more hostility I have towards my outgroup,

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and the more, you know,

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positive feelings I have towards my ingroup, what

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that means is, even now,

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abstracting away from the poli political questions,

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if there's effective polarization, polarization, it means

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that I'm hostile to people outside my tribe,

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outside my out my in group.

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That's really problematic for compliance,

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because compliance is a kind of glue within the company

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that depends on people to, to trust each other,

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both within the company, right?

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That's what we're talking about when we talk about

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whistleblowers and internal company monitoring, right?

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The idea is we want people to talk to each other

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and even maybe raise flags as early

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as possible and question each other.

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Well, that requires trust.

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So both, what I would worry about

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with polarization is you're impairing trust within the

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company, but you're also creating problems

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between the relationship between the company

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and the government, because that's always,

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always been a key part.

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And Sarbanes talks about this too,

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or you could say implement, is that there's a relationship

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between the company and the public,

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and there's a relationship between the company

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and the government and

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what information it provides the government.

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And so what we're worried about is

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that people will stop talking to each other

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and people will stop talking to the government.

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And, and by that I mean, for example, bringing information

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to the Department of Justice in advance

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of even being caught.

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I mean, what you want is a company to come to the Department

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of Justice and say, Hey, we have a compliance problem.

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We fixed it, we identified it. Here's what's going on.

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You'd much rather they do

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that much earlier in time than some

12:32.565 --> 12:34.045
horrible situation blow up, right?

12:34.345 --> 12:36.725
Um, and that was the brainchild of, of, you know, the folks

12:36.745 --> 12:40.605
who really pushed for, the Department of Justices,

12:40.605 --> 12:43.925
what we call the charging principles, for corporations.

12:43.945 --> 12:47.245
The idea was we won't charge you with a crime if you come

12:47.245 --> 12:48.765
to us early in promptly

12:48.945 --> 12:50.445
and tell us what you've found, right?

12:50.585 --> 12:53.245
At least. And again, I'm, I'm vastly simplifying things.

12:53.625 --> 12:55.325
So what am I worried about? I'm worried about this.

12:55.325 --> 12:57.805
Effective polarization is gonna sort of alter and change.

12:57.835 --> 13:00.725
It's a political lens. So it changes how we see things.

13:01.065 --> 13:02.885
It changes how we see things within the company,

13:02.905 --> 13:04.765
but it changes how we even perceive,

13:04.825 --> 13:06.285
for example, the Department of Justice.

13:06.745 --> 13:08.325
So I talk about that in the paper,

13:08.385 --> 13:11.045
and I say the Department of Justice itself has seen

13:11.045 --> 13:15.015
as far more politicized than it was 20

13:15.035 --> 13:18.055
or 30 years ago, which means people are gonna care a lot

13:18.055 --> 13:22.215
more about, okay, are we perceived as a democratic,

13:22.645 --> 13:25.175
more part of the Democratic party more aligned

13:25.175 --> 13:27.175
with the Democratic party for a company?

13:27.635 --> 13:30.215
And is that, for example, a Republican administration?

13:30.735 --> 13:32.375
I think those are at least concepts

13:32.375 --> 13:35.815
that would matter more than they did three decades ago.

13:36.315 --> 13:38.975
And I think that impairs compliance in various ways.

13:39.035 --> 13:41.095
And then I give sort of examples of various trends

13:41.095 --> 13:42.095
that this may impact.

13:42.125 --> 13:43.535
There's these trust issues.

13:43.875 --> 13:46.375
And you could imagine, you know, what's concrete,

13:46.595 --> 13:49.015
if you just say, look, there's polarization that leads to us

13:50.055 --> 13:52.815
a certain amount of, of a trust gap.

13:53.765 --> 13:55.855
What, how might that play out concretely?

13:55.915 --> 13:58.215
So I give three examples at the end of the paper,

13:58.715 --> 14:00.695
and one is, for example, automation.

14:00.795 --> 14:03.575
Now we're gonna have automation and generative AI

14:03.735 --> 14:06.135
and all that, you know, chat, GPT is here to stay,

14:06.755 --> 14:10.375
but I think every company, every industry is gonna have

14:10.375 --> 14:12.175
to have some sort of reckoning where it kind

14:12.175 --> 14:16.615
of de decides what's the right amount of automation, right?

14:16.955 --> 14:19.895
Um, and that would obviously depend on all sorts of,

14:20.045 --> 14:22.135
very specific information and data.

14:22.245 --> 14:25.495
Like, you know, what can chat GPT

14:25.515 --> 14:27.335
or what can automation do for us?

14:27.335 --> 14:29.055
And by the way, those two are not the same things.

14:29.135 --> 14:30.935
I realize that. What are the benefits

14:30.935 --> 14:32.255
that one can derive from that?

14:32.255 --> 14:33.735
And then what are the obvious costs?

14:34.355 --> 14:36.175
Um, and obviously even within the company,

14:36.175 --> 14:38.135
there's always value in having human being.

14:38.195 --> 14:40.855
And, and everyone, I think most would agree, we,

14:40.875 --> 14:42.855
we care about, human judgment.

14:44.275 --> 14:48.375
My fear is that whatever the right equilibrium is, is

14:48.375 --> 14:50.895
that polarization will push us more

14:51.065 --> 14:52.565
In the direction of machines.

14:52.875 --> 14:55.285
Because machines don't fight with each other,

14:55.765 --> 14:58.525
machines aren't gonna have effective polarization.

14:58.655 --> 15:00.245
Again, whether that's right

15:00.245 --> 15:02.925
or not, I'm saying that would be the rationale, is

15:02.925 --> 15:05.245
that you would expect in a highly polarized world,

15:05.545 --> 15:06.885
you might expect managers

15:06.885 --> 15:10.685
to lean a little bit more into automation,

15:10.995 --> 15:12.205
than they might otherwise,

15:12.275 --> 15:14.245
because they think, well, I'd rather be dealing

15:14.245 --> 15:16.245
with machines than human beings, right?

15:16.345 --> 15:18.405
And that itself is, is a cost.

15:18.825 --> 15:21.605
The others would be, for example, remote work, right?

15:21.775 --> 15:23.485
Again, you might think,

15:23.705 --> 15:25.565
and I think we're all seeing again,

15:25.985 --> 15:28.405
in the United States, for example, there's a real back

15:28.405 --> 15:29.765
and forth here, which is

15:29.765 --> 15:32.285
how much remote work should we have in the light of the fact

15:32.285 --> 15:33.925
that as the pandemic recedes,

15:34.505 --> 15:36.765
and again, it depends on your industry,

15:36.765 --> 15:38.565
it depends on your particular function

15:38.565 --> 15:40.565
that you're talking about, but most would agree,

15:40.885 --> 15:42.165
probably there's some equilibrium, right?

15:42.415 --> 15:44.485
Maybe some remote work is really good and,

15:44.505 --> 15:45.885
and improves productivity.

15:46.215 --> 15:48.285
Maybe all of it is not so good, right?

15:48.285 --> 15:50.765
There's a lot of, in-person interactions that many

15:50.765 --> 15:52.725
of us see can be quite valuable.

15:53.365 --> 15:55.485
Whatever that equilibrium is, is I'm worried

15:55.485 --> 15:58.445
that polarization pushes us in the direction of more remote,

15:58.545 --> 16:01.125
remote work than we would otherwise want.

16:01.585 --> 16:03.245
Why? Because again, it might be

16:03.245 --> 16:06.085
that I feel like it's easier,

16:06.545 --> 16:10.565
to bring people together from disparate areas,

16:10.585 --> 16:12.085
and disparate ideologies and,

16:12.225 --> 16:15.765
and groups, on a Zoom call than in,

16:15.825 --> 16:17.885
in a actual physical setting.

16:18.265 --> 16:19.605
That's bad for two reasons.

16:19.985 --> 16:22.205
One, it may be that I'm foregoing the benefits

16:22.205 --> 16:23.605
of in-person interaction.

16:23.865 --> 16:26.645
Two, and this is the bigger reason I think it's worse, is

16:26.645 --> 16:29.005
that the one thing we've found with polarization is

16:29.005 --> 16:31.985
that the psychologists who, you know,

16:31.985 --> 16:33.305
study polarization have said

16:33.305 --> 16:36.465
that if you wanna depolarize people, your best bet

16:36.525 --> 16:39.705
for reducing polarization is getting people in the same

16:39.705 --> 16:40.985
room and working with each other.

16:41.245 --> 16:43.225
So there's a unfortunate cycle there.

16:43.445 --> 16:46.545
And then the third trend I talk about in the paper is

16:46.545 --> 16:48.625
that we might actually be seeing,

16:49.105 --> 16:51.185
a de federalization of enforcement.

16:51.405 --> 16:53.185
So that goes back to Sarbanes Oxley.

16:53.185 --> 16:55.705
The whole point was Sarbanes Oxley made compliance,

16:55.945 --> 16:59.785
a story about, to a certain degree, corporate crime,

16:59.785 --> 17:02.465
to a certain degree, a big degree corporate monitoring.

17:02.605 --> 17:05.425
And to a larger degree about the federal government, right?

17:05.425 --> 17:07.385
Federal enforcement, federal agencies,

17:07.385 --> 17:08.945
it directed attention to the feds.

17:09.205 --> 17:11.665
And what's interesting to me is, in this world

17:11.665 --> 17:15.345
of polarization, if polarization is most felt at the federal

17:15.345 --> 17:17.265
level, because it's so, you know, it's in the press,

17:17.335 --> 17:18.345
it's how we see things.

17:18.965 --> 17:22.585
The irony here might be is we might see a de federalization

17:22.765 --> 17:25.025
of enforcement, meaning we're gonna see money

17:25.125 --> 17:26.865
to the extent we're talking about corporate compliance.

17:26.925 --> 17:30.305
We might see stronger attorneys general, we might see more,

17:30.445 --> 17:33.955
even for example, the Delaware courts have started

17:33.975 --> 17:37.035
to take much, you know, greater pay,

17:37.035 --> 17:38.675
much greater attention to compliance.

17:38.785 --> 17:41.355
Many would argue that their cases have made it easier

17:41.375 --> 17:43.915
to bring what we call Caremark claims claims,

17:43.915 --> 17:46.115
where you say the board of directors didn't show enough

17:46.115 --> 17:48.195
attention to the compliance infrastructure.

17:48.855 --> 17:50.885
All of that would, it would sort of be part

17:50.885 --> 17:55.645
of a trend towards a de federalization of, compliance,

17:55.655 --> 17:58.205
which there again, I don't know that that's a bad thing,

17:58.425 --> 18:00.605
but there would still be many types of companies

18:00.605 --> 18:03.165
where probably the only way you could really enforce them is

18:03.165 --> 18:05.405
by having a strong federal enforcement agency.

18:05.745 --> 18:08.285
So that's another example of these trends

18:08.285 --> 18:09.725
where you don't want polarization

18:10.025 --> 18:11.565
to be the dog that's wagging the tail.

18:11.925 --> 18:14.645
I still feel that compliance is incredibly important.

18:15.225 --> 18:18.085
Um, and I think we should be, always thinking about

18:18.105 --> 18:19.525
how best to perfect it.

18:19.905 --> 18:23.525
Uh, I, I, I still have, you know, I don't mean this to be a,

18:23.685 --> 18:25.325
a, a, a depressing paper.

18:25.745 --> 18:28.685
Uh, I still have a great amount of optimism in how we

18:28.685 --> 18:31.125
as human beings can, run companies

18:31.125 --> 18:33.205
and do good things if we, you know,

18:33.395 --> 18:34.485
have the right incentives.

18:34.945 --> 18:36.405
So none of this is to deny

18:36.405 --> 18:38.685
that there's great value in what we've already done.

18:39.245 --> 18:41.085
I just think we need to pay greater attention

18:41.185 --> 18:44.365
to this polarization, element.

18:44.625 --> 18:47.005
And I think there may be even a good side of

18:47.005 --> 18:48.525
that compliance itself,

18:48.525 --> 18:51.525
because compliance has, has always been about,

18:51.865 --> 18:53.245
how do we monitor our company?

18:53.425 --> 18:56.445
How do we watch for problems? How do we watch for red flags?

18:56.795 --> 18:59.605
Some of the skills we develop in,

19:00.365 --> 19:01.965
creating good compliance programs

19:02.465 --> 19:04.805
and creating compliance officers, for example,

19:04.895 --> 19:08.685
might be skills that we can borrow in analyzing how best

19:08.685 --> 19:09.805
to handle polarization.

19:10.165 --> 19:14.445
Polarization at, at, at, at bottom is a story about,

19:15.165 --> 19:16.885
problems that force people apart

19:17.425 --> 19:19.565
and that make people, it's like magnets

19:19.565 --> 19:22.165
that push people apart and create cleavages.

19:22.465 --> 19:25.405
Uh, I don't, I don't mean to sound, pollyannish here,

19:25.745 --> 19:28.365
but it does seem to me if people recognize the problem,

19:28.665 --> 19:31.285
it may be that corporate compliance could even be one

19:31.285 --> 19:33.085
of the, nodes

19:33.105 --> 19:34.725
or areas where we,

19:34.735 --> 19:38.205
where we can actually improve polarization if we pay

19:38.205 --> 19:40.005
attention to the problem in the first place.

Evaluating Compliance Post-Sarbanes Oxley Act

00:00:00 - I don't mean to say that compliance is in a perilous position in the sense that, my gosh, the sky is falling and we're gonna end up with no compliance. In fact, I think the paper that I wrote really starts out with the opposite contention, right? That if you were to look at all of the metrics, and, and this paper by the way, was written for a symposium called Sarbanes Oxley at 20. So the idea was 20 years had elapsed, since the enactment in the United States of the Sarbanes Oxley Act, which had been in response
00:00:33 - of blowing up with Enron. So the idea was to look back at Sarbanes Oxley and say, you know, how has the world changed? How has corporate governance changed? and, and what did this law, do in terms of what kinds of permanent changes did it make? And so I was asked to address compliance because I write about corporate compliance. And my point was, if you look at all of, sort of the basic metrics out there, you'd actually, the likelihood is you'd say compliance is doing
00:01:02 - And the idea that, it's a bill billion dollar industry that everyone agrees it's a important governments governance function that, in other words, the firm, everyone accepts the idea that a company is responsible for monitoring itself, for wrongdoing, for, both, you know, acting as an internal policing, branch, but also for attempting to remedy wrongdoing, looking for red flags, citing those red flags and alleviating them. So in that sense, you could say, no, compliance is fine.
00:01:35 - before that, we weren't nearly as polarized in the United States, at least as a nation, and that this is the Achilles heel, right? That, and so that's what I mean by perilous, that there's this sort of, it's like you're looking at someone that looks really healthy and you'd, you'd say, wow, they just ran a marathon. They're doing great, but they've got this little insidious virus that's gonna hurt them. And that's the point of the paper. Okay? So in the wake of all of these major accounting schedule, scandals at publicly held companies, you know, Congress,
00:02:09 - to enact bipartisan legislation to improve how companies, both, their internal reporting, and then their external reporting of, of their financial, health, right? So there were all sorts of rules that were enacted. It was a massive statute. and it was a bipartisan statute. Congress went, in fact, if anything, it was criticized, by certain academics prominently as you know,
00:02:38 - called it Quack Corporate Governance. Her view was you rushed too quickly to, 'cause you wanted to do something. And this was actually during the Bush administration. so we often think of Republicans as pro-business, but this was, again, a bipartisan effort to say, here's how we're gonna respond to accounting fraud. And it included lots of different, components, Some of which are talked about by corporate governance experts about, for example, the reporting obligations. And even, for example, the obligation of the CEO

Impact of Sarbanes-Oxley on Corporate Compliance

00:03:11 - In other words, you couldn't just pretend that you didn't know what your underlings were doing when it came to financial reporting. If you were a CEO or CFO, I was interested with regard to Sarbanes Oxley in a number of its, provisions that one would call criminal provisions. In other words, it was under Sarbanes Oxley. And again, this doesn't, wasn't just directed at companies. The Senate ended up becoming the law for everybody. the sentence for, crimes like mail
00:03:41 - code, criminal code went from five years to 20 years. So those were important changes, that actually ended up having lasting effects for lots of folks, and not simply corporations. But one of my points in, in the paper is that Sarbanes Oxley turned our attention both to corporate crime. 'cause there were a bunch of, provisions that talked about either underlying crimes that happened within, within corporations, like mail or wire fraud, or things like anti,
00:04:10 - to retaliate against whistleblowers. So that's another example of, you know, sort of criminalizing behavior that you thought was inappropriate. so they turned our attention to ways in which corporations could be guilty of crime. They also, Sarbanes Oxley directed our attention to the federal government, meaning they were saying, this is a federal issue, right? How we think about corporate compliance is, is partially determined by, for example, how does the Department of Justice think about corporate compliance? What is it expecting of corporations?
00:04:43 - federalized compliance, made us think of compliance as something the federal government cares about. And so we as a corporation, better think about this in those terms. What is, you know, it wasn't surprising that in the wake of Sarbanes Oxley, and this was true for myself 'cause I was at the US Attorney's Office at the time as a federal prosecutor, you saw corporations hiring former federal prosecutors to work in their compliance departments. And another way in which we think of it was a federal story, very centralized story.
00:05:14 - you see a lot of energy, especially in that first decade post Sarbanes about, you know, a lot of scholarship about what does the Department of Justice want in a compliance program, right? if we, employ the right people and do the right things, will this make the Department of Justice happy? And again, why were you so worried about that? Because if the corporation should later on be accused of a crime, the Department of Justice makes a bunch of decisions about whether or not to charge that corporation. And one of the factors it considers is whether
00:05:44 - effective compliance program. So that is why, compliance often has had both a federal patina, but also this kind of criminal overlay, because it's often the Department of Justice, that is determining whether the corporation has a, effective compliance program. One of my points was that, look, if you were to spend a lot of time with the compliance literature, especially in those early days, you'd think that it's really just a story of structural problems

Corporate Incentives and Compliance Challenges

00:06:14 - that the idea is, look, for example, I'm A CEO. Do I have the right incentives to monitor my people? Well, maybe I don't because if I get paid, for example, based on how well the company does in terms of revenues and its stock price, maybe when the information that comes up through my direct reports is a little bit too good to be true, maybe I won't investigate that, because why would I wanna investigate that? That's bad news, right? I wanna, I want good news. That would be an example. The story I'm just telling you is
00:06:46 - The incentives are making me, you know, leave some bad news under the rug and not sufficiently investigate and monitor my people. Maybe the incentives are such that I'm also, if I, for example, tell everyone in the company, the look, I will fire everyone who's in the bottom 10% based on sales, guess what? You know, granted, some people want to legitimately not be in the 10%, but some people are gonna cheat their way outta being in the 10, bottom 10%.
00:07:18 - by the company or set externally. And so a lot of that early literature said, how do we deal with incentives? How do we change incentives? You know, what, what, what do we do? There was additional literature, that focused on, for example, behavioral blind spots and cognitive biases and heuristics, meaning sort of the universal mistakes we make in how we make decisions. And again, a lot of that literature was, was sort of pointing out how we're all quite alike, right? That in the right situation we could make really
00:07:48 - and so then the question was how to get us out of those situations, how to make sure we don't create those situations in the first place. So that's what, you see sort of this, and even norms, right? The idea of how do we have pro-social norms? How do we encourage people to behave? Well, and you could imagine these sort of nice virtual circles, or the opposite sort of these death cycles where people sort of end up behaving badly and the bad behavior spurs even more beha bad behavior. All of these are kind of universal stories and narratives that have almost a soothing feel to them,
00:08:22 - Everyone has the pote potential to do something bad. But that means we all have the potential to make the right changes and fixes. And if we just make these nice architectural decision making changes, somehow we're gonna fix this all and, and improve our compliance. And, and again, I'm, I'm oversimplifying there were plenty of people who pointed out enduring problems with compliance, but I do think there is this sort of nice, universality to some of this earlier literature. it's sort of challenging in the latter parts of the paper.
00:08:52 - When we talk about, polarization, polarization means different things. There's now a tremendously deep and rich literature, by political psychologists. So I, I wanna be clear that I am not in any way an expert, but I've been consuming this literature and very interested in how it impacts compliance and what it means for compliance. This first paper gives you a, a little taste of it. 'cause it was written in light of Sarbanes Oxley, a much larger paper than I'm working on called Polarized Networks. And I hope to have that,

Impact of Ideological Polarization on Compliance

00:09:26 - but, you know, just to give the basics, right? We know that there's this thing called, let's say we refer to it as ideological polarization. So you believe, once you agree, you, you hold one set of beliefs, and I hold another. Now we could still be friends, even though we are ideologically on different parts of the spectrum. And in fact, 20 or 30 years ago, it wasn't impossible. You might see, for example, you could have, some liberal folks who still agreed
00:09:56 - So we often refer to that, as ticket splitting, right? We might, you know, vote for one or Republican in one instance, in a Democrat in another, or we might have cross-cutting identities such that we aligned with each other on some issues, but dis you know, didn't align with each other on others. That has changed over time. And so now what we see is far more partisanship, far more extremism. And in fact, people don't split their ticket. They don't cross cut, they don't, in other words,
00:10:29 - where people work, we're much more likely to see folks not talking to each other in siloed. That leads to a different phenomenon that's referred to as effective polarization. Now, that's where, you're able to measure through these various surveys that are given, every so often, how people feel about their ingroups and then how they feel about people in the outgroup. And the more there's a difference,
00:10:58 - and the more, you know, positive feelings I have towards my ingroup, what that means is, even now, abstracting away from the poli political questions, if there's effective polarization, polarization, it means that I'm hostile to people outside my tribe, outside my out my in group. That's really problematic for compliance, because compliance is a kind of glue within the company that depends on people to, to trust each other,
00:11:27 - That's what we're talking about when we talk about whistleblowers and internal company monitoring, right? The idea is we want people to talk to each other and even maybe raise flags as early as possible and question each other. Well, that requires trust. So both, what I would worry about with polarization is you're impairing trust within the company, but you're also creating problems between the relationship between the company and the government, because that's always, always been a key part. And Sarbanes talks about this too,
00:11:58 - between the company and the public, and there's a relationship between the company and the government and what information it provides the government. And so what we're worried about is that people will stop talking to each other and people will stop talking to the government. And, and by that I mean, for example, bringing information to the Department of Justice in advance of even being caught. I mean, what you want is a company to come to the Department of Justice and say, Hey, we have a compliance problem. We fixed it, we identified it. Here's what's going on.

Impact of Polarization on Compliance and Automation

00:12:30 - that much earlier in time than some horrible situation blow up, right? and that was the brainchild of, of, you know, the folks who really pushed for, the Department of Justices, what we call the charging principles, for corporations. The idea was we won't charge you with a crime if you come to us early in promptly and tell us what you've found, right? At least. And again, I'm, I'm vastly simplifying things. So what am I worried about? I'm worried about this. Effective polarization is gonna sort of alter and change. It's a political lens. So it changes how we see things.
00:13:02 - but it changes how we even perceive, for example, the Department of Justice. So I talk about that in the paper, and I say the Department of Justice itself has seen as far more politicized than it was 20 or 30 years ago, which means people are gonna care a lot more about, okay, are we perceived as a democratic, more part of the Democratic party more aligned with the Democratic party for a company? And is that, for example, a Republican administration? I think those are at least concepts
00:13:36 - And I think that impairs compliance in various ways. And then I give sort of examples of various trends that this may impact. There's these trust issues. And you could imagine, you know, what's concrete, if you just say, look, there's polarization that leads to us a certain amount of, of a trust gap. What, how might that play out concretely? So I give three examples at the end of the paper, and one is, for example, automation. Now we're gonna have automation and generative AI
00:14:06 - but I think every company, every industry is gonna have to have some sort of reckoning where it kind of de decides what's the right amount of automation, right? and that would obviously depend on all sorts of, very specific information and data. Like, you know, what can chat GPT or what can automation do for us? And by the way, those two are not the same things. I realize that. What are the benefits that one can derive from that? And then what are the obvious costs?
00:14:36 - there's always value in having human being. And, and everyone, I think most would agree, we, we care about, human judgment. My fear is that whatever the right equilibrium is, is that polarization will push us more In the direction of machines. Because machines don't fight with each other, machines aren't gonna have effective polarization. Again, whether that's right or not, I'm saying that would be the rationale, is that you would expect in a highly polarized world,
00:15:06 - to lean a little bit more into automation, than they might otherwise, because they think, well, I'd rather be dealing with machines than human beings, right? And that itself is, is a cost. The others would be, for example, remote work, right? Again, you might think, and I think we're all seeing again, in the United States, for example, there's a real back and forth here, which is how much remote work should we have in the light of the fact that as the pandemic recedes, and again, it depends on your industry,

Polarization's Impact on Remote Work Dynamics

00:15:38 - that you're talking about, but most would agree, probably there's some equilibrium, right? Maybe some remote work is really good and, and improves productivity. Maybe all of it is not so good, right? There's a lot of, in-person interactions that many of us see can be quite valuable. Whatever that equilibrium is, is I'm worried that polarization pushes us in the direction of more remote, remote work than we would otherwise want. Why? Because again, it might be that I feel like it's easier, to bring people together from disparate areas,
00:16:12 - and groups, on a Zoom call than in, in a actual physical setting. That's bad for two reasons. One, it may be that I'm foregoing the benefits of in-person interaction. Two, and this is the bigger reason I think it's worse, is that the one thing we've found with polarization is that the psychologists who, you know, study polarization have said that if you wanna depolarize people, your best bet for reducing polarization is getting people in the same room and working with each other.
00:16:43 - And then the third trend I talk about in the paper is that we might actually be seeing, a de federalization of enforcement. So that goes back to Sarbanes Oxley. The whole point was Sarbanes Oxley made compliance, a story about, to a certain degree, corporate crime, to a certain degree, a big degree corporate monitoring. And to a larger degree about the federal government, right? Federal enforcement, federal agencies, it directed attention to the feds. And what's interesting to me is, in this world
00:17:15 - level, because it's so, you know, it's in the press, it's how we see things. The irony here might be is we might see a de federalization of enforcement, meaning we're gonna see money to the extent we're talking about corporate compliance. We might see stronger attorneys general, we might see more, even for example, the Delaware courts have started to take much, you know, greater pay, much greater attention to compliance. Many would argue that their cases have made it easier to bring what we call Caremark claims claims,
00:17:46 - attention to the compliance infrastructure. All of that would, it would sort of be part of a trend towards a de federalization of, compliance, which there again, I don't know that that's a bad thing, but there would still be many types of companies where probably the only way you could really enforce them is by having a strong federal enforcement agency. So that's another example of these trends where you don't want polarization to be the dog that's wagging the tail. I still feel that compliance is incredibly important.
00:18:18 - how best to perfect it. I, I, I still have, you know, I don't mean this to be a, a, a, a depressing paper. I still have a great amount of optimism in how we as human beings can, run companies and do good things if we, you know, have the right incentives. So none of this is to deny that there's great value in what we've already done. I just think we need to pay greater attention to this polarization, element. And I think there may be even a good side of

Leveraging Compliance to Address Polarization

00:18:48 - because compliance has, has always been about, how do we monitor our company? How do we watch for problems? How do we watch for red flags? Some of the skills we develop in, creating good compliance programs and creating compliance officers, for example, might be skills that we can borrow in analyzing how best to handle polarization. Polarization at, at, at, at bottom is a story about, problems that force people apart
00:19:38 - that push people apart and create cleavages. I don't, I don't mean to sound, pollyannish here, but it does seem to me if people recognize the problem, it may be that corporate compliance could even be one of the, nodes or areas where we, where we can actually improve polarization if we pay attention to the problem in the first place.

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