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The Rupp Report: Compliance - The Underestimated Necessity

Jürg Rupp, Executive Editor

The term "compliance" is associated with the U.S. financial sector and affected areas of high risk with reference to insider trading and conflicts of interest. In Germany, compliance structures have been developed since the 1990s due to legislative requirements that apply to all the banks and insurance companies.

In Accordance With Established Guidelines
Compliance has been defined as "either a state of being in accordance with established guidelines, specifications, or legislation or the process of [implementation]." As a legal concern, compliance generally refers to behavior as it conforms to legislative provisions, such as those of the Sarbanes-Oxley Act (SOX) of 2002.

Compliance in a regulatory context is an important issue for businesses, perhaps because the number of regulations is increasing and companies often do not understand what they must do to be in compliance with new laws. For example, SOX was passed to protect shareholders and the general public from accounting errors and fraudulent practices such as those carried out by Enron and WorldCom. As corporate managers have become more and more concerned with compliance issues, businesses have begun using specialized software, consulting with compliance experts, and even instituting a new corporate position of chief compliance officer (CCO).

Meanwhile, compliance structures and processes, developed in response to increasing regulatory requirements for listed companies, are helping industrial companies prevent specific business risks. The Compliance Department also covers the ethical conduct of a company's own compliance and other non-statutory regulations. On financial markets, compliance can build confidence for the capital markets and their participants. Insider trading should be prevented. Should be!

A Must For Stock Listed Companies
Large corporations take compliance issues very seriously — especially since some of them were involved in costly corruption issues. In 2006, it was revealed that Siemens AG was keeping black accounts — that is, an alternate set of books under the table. Employees of the industrial group corrupted business partners in order to win contracts. When this news emerged to the public, Siemens had to pay a high price: The forfeits in the United States and Germany amounted to 1.2 billion euros. The damage to the company's image was huge, too. Siemens learned its lesson: Hundreds of employees are now working in the compliance department.

Big Textile Companies Involved
In the meantime, compliance standards also have reached the textile machinery manufacturers. For example, both big Swiss textile machinery producers — Rieter Management AG and OC Oerlikon AG — are working strictly according to compliance rules or to the so-called "code of conduct." In Rieter's annual report, it is mentioned that "Rieter revised its Code of Conduct in the year under review (2011), taking into account customers' current requirements and the OECD [Organisation for Economic Co-operation and Development] guidelines for companies operating internationally. The code of conduct remains an integral part of the contract of employment. Members of top management were again examined in the year under review. In this way Rieter ensures that all those in positions of leadership are also familiar with the principles of conduct and communicate them to their employees."

On the other hand, the Oerlikon Group mentions in its annual report for 2011 that "the basis of the Group's compliance program is the Oerlikon Code of Conduct introduced in 2009. The code serves as the compass for our employees, pointing the way to responsible, ethically and legally proper behavior in their everyday business dealings.

"Oerlikon undertook extensive steps in 2011 to further integrate compliance into its corporate culture and business processes. An important addition to our current policy is the new whistle blowing hotline — which was set up early in the year to serve as an additional reporting channel for potential irregularities. ... [Four hundred] managers received comprehensive ethics training as part of a Group-wide program, the main goal of which was to increase awareness and to teach the correct approach when facing this compliance risk. The training was focused on international and regional anti-corruption regulations and on Oerlikon's own anti-corruption policy."

Suppliers Are Involved
The compliance rules of the big companies extend increasingly to their suppliers. As Oerlikon states in its 2011 report: "To further increase the transparency of Oerlikon's working relationships and minimize potential third-party compliance risks, a process for business partner due diligence was introduced in 2011. Under this process, an exhaustive integrity review is conducted before Oerlikon enters into business relationships with third parties. The results of these comprehensive background checks are carefully reviewed and form the basis of Oerlikon's decision to enter any working relationship."

More Efforts Necessary?
It is understandable that company executives don't like the issue of compliance. Too much work, they say. However, compliance specialists warn strongly not to underestimate the risk of violations of law. Thus, for example, the risk to get into a bribery scandal has increased tremendously. Especially the United States and the United Kingdom have issued sharp anti-corruption laws.

Consequences
Coming back to textiles, Oerlikon further writes: "All alerts [undertaken by Oerlikon] are carefully examined. Should any allegations be substantiated, a thorough investigation will be launched. The focus of such an investigation is twofold: first, to identify and correct wrong doing and, second, to uncover possible weaknesses in processes or organization and to introduce improvements."

As a consequence, in 2011, the company reported taking disciplinary steps in five compliance violation cases: "[Seventeen] alerts to potential compliance cases were received through the various reporting channels in 2011 — five more than in the previous year. ... These actions included letters of reprimand, dismissals and, in one case, charges against a former employee."

To summarize these entire costly activities, one could say what many fathers have told their young children: "Behave!"

April 10, 2012

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