The Federal Trade Commission has determined that Herbalife is not a pyramid scheme, but the nutritional supplement marketer will still be required to pay $200 million to consumers and “fully restructure” its “unfair” business in a comprehensive settlement, the federal regulator said Friday, according to a report by USA Today.

“The settlement caps a two-year investigation by the FTC, which probed Herbalife over accusations that the company’s main focuses less on retail sales of products than on on bringing in increasing numbers of new sales people who were deceived into believing they could reap substantial profits by selling diet, nutritional supplement and personal care products,” report Nathan Bomey and Kevin McCoy.

Under the settlement, Herbalife must “fundamentally restructure its business, so that participants are rewarded for what they sell, not how many people the recruit,” FTC Chairwoman Edith Ramirez said in a statement.

Read the article.

The National Association of Corporate Directors (NACD) recently released Director Essentials: Preparing the Board for Shareholder Activism and provides an executive summary of the report for free download.

As year-round shareholder activism becomes the new norm in the American boardroom, directors are called upon to prepare for and respond to any possible activist challenges, the NACD reports. The new publication is designed to equip directors with the knowledge and tools they need to address this challenge.

This report includes information on trends in activist campaigns, types of investors and their methods of influence, and the board’s role in preparing for and responding to an activist campaign.

The full publication is available exclusively to NACD members, but the executive summary is freely available.

Download the executive summary.

Littler Mendelson, the world’s largest employment and labor law practice representing management, has released the results of its 2016 Executive Employer Survey. The fifth annual survey, completed by 844 in-house counsel, human resources professionals and C-suite executives from some of America’s largest companies, examines the key legal, economic and social issues impacting employers as the 2016 presidential election approaches.

New Overtime Rules, Aggressive DOL Enforcement Plague Employers

The Department of Labor (DOL) has advanced several regulatory initiatives that have brought the agency’s enforcement of federal employment laws more to the forefront for employers. The vast majority of respondents to this year’s survey (82 percent) expect DOL enforcement to have an impact on their workplace over the next 12 months, with 31 percent anticipating a significant impact (up from 18 percent in the 2015 survey).

This concern is no doubt driven in large part by the recently finalized Fair Labor Standard Act “white collar” overtime regulations that drastically increase the number of Americans who can qualify for overtime pay. Although respondents completed the survey in the weeks prior to the release of the final rule, 65 percent had already conducted audits to identify affected employees.

“Employers are clearly feeling the impact of the DOL’s increasingly aggressive regulatory agenda, most notably the new overtime regulations,” said Littler attorneys Tammy McCutchen and Lee Schreter in a joint statement. “While it is encouraging that the majority of respondents started to prepare before the rule was finalized, more than a quarter (28 percent) said they had taken no action given delays in the rulemaking process. Given that the reclassification process can take up to six months and the rule is unlikely to be blocked from going into effect on December 1, 2016, employers should move quickly to ensure compliance.”

Further, in ranking the priority they expect a presidential candidate from each party to place on various issues, the majority of respondents (75 percent) said income inequality (e.g., overtime rules, state equal pay, minimum wage laws, etc.) would be a significant priority of the Democratic candidate. This is in comparison to only 4 percent who felt income inequality would be a significant priority of the Republican candidate.

Joint Employer, ACA among Top Regulatory and Legislative Issues Facing Workplace

Increased DOL enforcement is just one example of employers grappling with a continuously shifting regulatory and enforcement landscape, as federal agencies continue to be the governmental bodies inflicting the most pressure on employers.

With the National Labor Relations Board’s recent expansion of the definition of a “joint employer,” 70 percent of respondents expect a rise in claims over the next year based on actions of subcontractors, staffing agencies and franchisees. Approximately half of respondents predicted higher costs (53 percent) and increased caution in entering into arrangements that might constitute joint employment (49 percent).

“It is significant and telling that only 2 percent of respondents said the expanded definition of a joint employer will have no impact on their workplace,” said Michael Lotito, co-chair of Littler’s Workplace Policy Institute. “This finding shows the breadth of the NLRB’s decision, overturning a standard of joint employment that had been in place for decades, which required a relationship that was actual, direct and substantial.”

As was the case in the 2015 survey, 85 percent of employers said the Affordable Care Act (ACA) would have an impact on their workplace in the next 12 months. While two-thirds said they do not expect a repeal of the ACA if a Republican is elected president this fall, respondents saw a greater likelihood of changes to individual provisions. Fifty-three percent said a Republican administration could lead to a repeal of or changes to the Cadillac excise tax and 48 percent saw a likelihood for changes to the play-or-pay mandate.

Rising Public Attention to Social Issues Influences the Workplace

Employers have always had to keep an eye on demographic and social trends, but as information spreads more rapidly and as office culture shifts to accommodate a new generation, today’s companies are increasingly experiencing the incursion of social issues into the workplace.

In the largest year-over-year change in Littler’s survey results, 74 percent of respondents expect more discrimination claims over the next year related to the rights of LGBT workers (up from 31 percent in 2015) and 61 percent expect more claims based on equal pay (up from 34 percent in 2015). This change is driven by LGBT discrimination and equal pay ranking among the top enforcement priorities for the Equal Employment Opportunity Commission (EEOC), but it also mirrors key focus areas for the Obama administration, government efforts at the state and federal levels, and increased public awareness.

“The EEOC has sent a clear signal that it will continue to prioritize rooting out discrimination based on sexual orientation and equal pay, so employers’ instincts that claims in this area will likely rise are right on the mark,” said Barry Hartstein, co-chair of Littler’s EEO & Diversity practice. “As LGBT rights and the gender pay gap continue to be in the headlines and topics of discussion among the general public, employers can expect to face increased pressure to address these issues in the workplace.”

In addition, the changing nature of work and the rise of the so-called gig economy have given companies more hiring options than ever, including independent contractors, contingent workers and an online workforce. While this shift has created greater flexibility for workers and increased efficiency for employers, it has also given rise to more independent contractor misclassification lawsuits and regulatory investigations. Despite the legal challenges, more than half of respondents at large-cap organizations either said they were not reluctant to hire more freelancers or contractors (24 percent) or they were neutral on the matter (35 percent).

Employers Take Steps to Prevent Workplace Violence

In response to tragic mass shootings across the nation, companies are taking a range of actions to keep their employees safe, including updating or implementing a zero-tolerance workplace policy (52 percent), conducting pre-employment screenings (40 percent) and holding training programs (38 percent). Only 11 percent of respondents said they had not taken any action because violence is not a concern for their company.

“Putting policies in place to increase awareness of workplace violence and ensure that employees understand how to report threats in the workplace are steps that all employers would be advised to take,” said Terri Solomon, a Littler shareholder with extensive experience counseling employers on workplace violence prevention. “Unfortunately, even though workplace violence – and particularly active shooter instances – are statistically rare, no employer is truly immune, so taking preventative action can help save lives.”

View the 2016 Executive Employer Survey Report here: http://www.littler.com/files/2016_littler_executive_employer_survey.pdf

About Littler

Littler is the largest global employment and labor law practice, with more than 1,000 attorneys in over 70 offices worldwide. Littler represents management in all aspects of employment and labor law and serves as a single-source solution provider to the global employer community. Consistently recognized in the industry as a leading and innovative law practice, Littler has been litigating, mediating and negotiating some of the most influential employment law cases and labor contracts on record for over 70 years. Littler Global is the collective trade name for an international legal practice, the practicing entities of which are separate and distinct professional firms. For more information visit: www.littler.com.

Image by Marc van der Chijs

Google’s self-driving car project has created a general counsel position—and hired Kevin Vosen, the chief legal officer of The Climate Corporation to fill it—as it prepares to shift from moonshot to company, reports Kirsten Korosec for Fortune.

“Alphabet’s Google has teams of lawyers. And even the Google self-driving project, which is housed under X (the division where the company’s experimental projects reside), has lawyers. But until now, it’s never had one dedicated to the project full time and of this level of seniority,” she writes.

The article points out that the hiring comes at a critical time as Google aims to commercialize self-driving cars by 2020. With a CEO and a director already in place, a chief lawyer has been a missing piece.

Read the article.

One of the founders of futuristic transportation start-up Hyperloop One has filed a wrongful termination suit against his former co-founder, alleging nepotism and harassment, CNN is reporting.

The company is competing to build a Hyperloop transportation system to transport people and cargo up to 760 mph in a partially pressurized tube.

“On the outside, Hyperloop One appeared to be leading the competition with plans to have a working Hyperloop by 2020.” report Heather Kelly & Laurie Segall. “Inside, the startup was apparently being torn apart by mismanagement and growing tensions between leaders, according to the lawsuit filed in Los Angeles Superior Court on July 12.”

Plaintiffs allege the current leaders of the company gave  lucrative jobs and raises to relatives and, and in one case, a girlfriend, pocketed money themselves and harassed other employees.

Read the article.

Onex Corporation and Baring Private Equity Asia have announced their affiliated private equity funds have agreed to acquire the Intellectual Property & Science business (IP&S) from Thomson Reuters, for $3.55 billion. IP&S owns a collection of leading subscription-based businesses that provide a diverse customer base with access to scientific literature, patent, trademark, pharmaceutical and other curated content. The transaction is expected to close later this year subject to customary closing conditions and regulatory approvals.

Latham & Watkins LLP advised Onex and Baring Asia on the transaction with an M&A team led by Washington, D.C. partner Paul Sheridan and Chicago partner Shaun Hartley. Advice was also provided on benefits and compensation matters by Washington, D.C. partner Adam Kestenbaum; on tax matters by New York partner Lisa Watts; on intellectual property matters by New York partner Steven Betensky and Washington D.C. counsel Kieran Dickinson; on real estate matters by New York partner Dara Denberg; on senior secured bank financing matters by Washington, D.C. partner Jeffrey Chenard; on bond financing matters by Washington, D.C. partners Rachel Sheridan and Shagufa Hossain; on antitrust matters by Washington, D.C. partner Marc Williamson and Brussels partner Sven Völcker; and on other corporate matters by Boston partner William Schwab.

In a release, the company said IP&S provides comprehensive intellectual property and scientific information, decision support tools and services that enable academia, corporations, governments and the legal community to discover, protect and commercialize content, ideas and brands that are important to them. Its portfolio includes Web of Science, Thomson CompuMark, Thomson Innovation, MarkMonitor, Cortellis and Thomson IP Manager. Headquartered in Philadelphia, IP&S employs approximately 4,100 people across more than 75 offices in over 40 countries.

The release continues:

“IP&S is a diversified portfolio of high-quality, well-positioned businesses providing proprietary, curated content through products and services that are entrenched in their customers’ day-to-day activities,” said Kosty Gilis, a Managing Director with Onex. “We are delighted to have the opportunity to acquire the company and partner with management and Baring Asia to enhance IP&S’ operations and support its growth in the years to come.”

“We look forward to partnering with IP&S management and Onex to support the development of the company globally, particularly in Asia where we see a differentiated growth opportunity,” said Jean Eric Salata, Founder and Chief Executive of Baring Asia. “Already an established leader in China and across the region, we believe the outlook for the business is underpinned by an increasing shift towards more knowledge driven economies and a continued emphasis on research and development.”

“We are pleased to announce the agreement today to sell our Intellectual Property & Science business to Onex and Baring Asia,” said Jim Smith, President and Chief Executive Officer of Thomson Reuters. “With the completion of this divestiture, Thomson Reuters will be even more focused on operating at the intersection of global commerce and regulation.”

The transaction is expected to be funded with an equity investment of approximately $1.6 billion for 100% ownership of IP&S. Onex’ portion of the equity investment (approximately $1.2 billion) will be made by Onex Partners IV and certain limited partners as co-investors, including Onex.

Latham & Watkins LLP is serving as legal advisor to Onex and Baring Asia on the transaction.

About Onex 
Onex is one of the oldest and most successful private equity firms. Through its Onex Partners and ONCAP private equity funds, Onex acquires and builds high-quality businesses in partnership with talented management teams. At Onex Credit, Onex manages and invests in leveraged loans, collateralized loan obligations and other credit securities. The Company has approximately $23 billion of assets under management, including $6 billion of Onex proprietary capital, in private equity and credit securities. With offices in Toronto, New York, New Jersey and London, Onex invests its capital through its two investing platforms and is the largest limited partner in each of its private equity funds.

Onex’ businesses have assets of $36 billion, generate annual revenues of $23 billion and employ approximately 145,000 people worldwide. Onex shares trade on the Toronto Stock Exchange under the stock symbol OCX. For more information on Onex, visit its website at www.onex.com. The Company’s security filings can also be accessed at www.sedar.com.

About Baring Private Equity Asia
Baring Private Equity Asia is one of the largest and most established independent alternative asset management firms in Asia, with a total committed capital of over $10 billion. The firm runs a pan-Asian investment program, sponsoring management buyouts and providing growth capital to companies for expansion or acquisitions, as well as a pan-Asian real estate private equity investment program. The firm has been investing in Asia since its formation in 1997 and has over 125 employees located across seven Asian offices in Hong Kong, Shanghai, Beijing, Mumbai, Singapore, Jakarta, and Tokyo. Baring Asia currently has over 35 portfolio companies active across Asia with a total of 150,000 employees and sales of approximately $31 billion in 2015. For more information, please visit www.bpeasia.com.

Limited Liability Companies, or LLCs, are now the most popular legal entity for organizing businesses in the United States, according to a new report issued by Berkman Solutions.

“While it is tempting to conclude that S Corporations are substantially more popular than LLCs, this conclusion is based on the total number of legal entities. S Corporations have a more than 15 year head start on LLCs. Adjusting for that head start, the data reveals that LLCs are eclipsing S Corps,” according to Berkman’s analysis.

“Looking at the year-over-year net change in tax filings demonstrates that LLCs have a slight edge over S Corporations since 2004, except for 2006,” it continues. “The year-over-year net change captures the addition (or reduction) in tax returns from the prior year by legal entity type.”

Read the article.

Archer Norris published its second annual California Business Litigation Report, revealing that corporate lawyers continue to view many aspects of California’s business environment as perplexing, downright exasperating, and in many ways more challenging than other states.

In a release, the firm said employment laws and labor issues were found to be by far the most significant legal concern of companies doing business in California, reported by 62% of respondents. When it comes to areas in which litigating in California is more challenging than in other states, employment law and labor issues again landed in the top spot (69%), followed by environmental law and regulation (57%). The survey showed that the most-cited legal stumbling blocks also include commercial litigation, product liability, intellectual property, land use, and health care. Among out-of-state counsel specifically, regulatory compliance was repeatedly cited as a chief challenge across a wide spectrum of legal concerns.

Conducted in partnership with ALM Marketing Services, Archer Norris’s survey polled general and corporate counsel with business interests in California on their opinions of the California legal climate, how they evaluate litigation matters, and how they choose outside counsel for handling these matters.

This year, Archer Norris also examined current attitudes toward hot issues such as cybersecurity, finding that anxiety about exposure to cyber risks indeed runs deep among in-house counsel, with nearly two-thirds reporting they are “very concerned.” They are most worried about information loss and associated costs resulting from data leakage or systems attacks, damage to critical IT infrastructure, and risk arising from malware and computer viruses.

“The results of our 2016 survey make it clear the legal terrain in California continues to prove daunting not only to companies new to litigating in the state, but also to those who have been handling matters here for some time,” said Gene Blackard, Managing Partner of Archer Norris. “In order to overcome these challenges, it’s more critical than ever for companies doing business in California to have highly responsive and knowledgeable outside counsel. Archer Norris has guided hundreds of businesses through the complex litigation and transactional landscape here, with the goal of seeing our clients succeed in California long-term. With more than 100 attorneys practicing in five offices across the state, we’re exactly where our clients need us to be to best handle their diverse needs.”

The survey also yielded insights about how in-house counsel evaluate which outside California counsel is the right partner. While 55% of respondents noted the importance of a firm offering competitive rates and fees, a number of other factors were deemed more important than cost. Respondents first and foremost look for dependability and consistency (74%), followed by responsiveness, depth of experience, knowledge of the business and industry, and whether the law firm is one known for thoroughly exploring options for resolution other than going to trial.

Respondents reported spending about one-quarter of their overall legal budgets on outside counsel, and most said their budgets will stay the same or increase this year (37% and 29% respectively) compared to last. Many admit they would consider paying “premium” fees (up to 30% above the norm) to defend “bet the company” issues (23%) or legal matters where the client risks losing $1 million or more (32%).

The previous Business Litigation Playbook white paper, which also reveals corporate counsels’ greatest legal concerns within a variety of practice areas, can be downloaded.

Theranos Inc.’s Chief Executive Officer Elizabeth Holmes was banned for two years from owning or operating laboratories by U.S. regulators, a major blow against the controversial blood-testing startup that’s come under scrutiny for risking patient harm with unreliable tests, reports Doni Bloomfield for Bloomberg Technology.

“The once high-flying Silicon Valley company was also penalized for an undisclosed amount and lost its eligibility to get payments from federal health insurance programs for lab services, according to a statement late Thursday from Theranos, citing a notice it received from the Centers for Medicare and Medicaid Services,” the report says. “The closely-held firm is shutting down its Newark, California, lab and plans to rebuild it, Holmes said.”

The company founded by Holmes at one time had a $9 billion private valuation, based on technology that it said would allow for cheap, less-painful blood tests processed with breakthrough analyzers. Regulators soon stepped in, citing violations that put patients’ health and safety at risk.

Read the article.

With U.S. crude almost doubling in price since February and natural gas gaining about 38 percent just since May 26, stakeholders in at least three bankrupt energy companies are contending that corporate assets have risen so much in value that they deserve a bigger payout, reports Bloomberg News.

The news service, citing a letter by its reporter, says that “Sabine Oil & Gas Corp.’s unsecured creditors and note holders of Forest Oil Co., which merged with Sabine in 2014, filed a report last week seeking a jump in recoveries. Shareholders of bankrupt driller Penn Virginia Corp. questioned current valuations, while Ultra Petroleum Corp. shareholders, who are the first to be wiped out in a bankruptcy, said earlier this month that they are “very likely ‘in the money.’”

Sabine creditors creditors are claiming the company is ignoring the recent increase in oil and gas prices to inflate the amount paid to the secured lenders at the expense of junior ones.

Read the article.

Bank of America’s top lawyer isn’t the only in-house attorney expressing displeasure with associate salary raises announced recently by BigLaw firms and boutiques, reports Sara Randazzo of The Wall Street Journal. She says other general counsel are sending letters to their outside law firms, warning them of the potential for relationship problems if they join in the pay hikes.

The report quotes a letter Allstate Corp.’s general counsel, Susan Lees, sent to some law firms, challenging the logic of paying first-year associates $180,000.

“[O]ne must question the merits of a business model that compensates fresh law school graduates, who are devoid of any meaningful lawyering experience, with a salary greater than that of a seasoned in-house corporate attorney with a decade or more of experience counseling senior leaders in our organization,” states Ms. Lees’s letter, which was reviewed by Law Blog.

Read the article.

On June 17 the Austin Court of Appeals unanimously ruled in favor of Beck Redden‘s clients Statoil ASA and Fargo Acquisition, Inc., vacating a class certification order, the law firm reported.

The case, Brigham Exploration Co. et al. v. Boytim et al., involves Statoil’s 2011 acquisition of Brigham Exploration Company, the firm said in a release. Immediately following the announcement of the acquisition, a group of Brigham shareholders filed a purported class action, alleging claims for breach of fiduciary duty against Brigham’s board of directors and aiding and abetting that breach against Statoil, Fargo, and Brigham.

Beck Redden represents Statoil and Fargo in the litigation, led by partner Fields Alexander and associate Chris Cowan, and handled the second appeal of the class certification order. Appellate briefs were filed by appellate partner Russell Post with the assistance of Cowan and associate Parth Gejji.

After hearing oral argument by Post and lawyers for the Brigham defendants, the appellate court vacated the class certification on the ground that the class was not sufficiently defined because it included numerous shareholders who lacked standing, according to the release.

The case has been remanded for further proceedings in the trial court.

Image by NY Photographic

Chief executives of the biggest U.S. corporations saw their pay rise in 2015 at the slowest rate in seven years, but it’s not because their boards were suddenly getting tough, according to a study by ISS Corporate Solutions and reported by Reuters.

Companies’ allocations for pensions fell substantially last year, a result of rising bond yields and anticipation of the U.S. Federal Reserve’s first interest-rate hike in nearly a decade.

“The smaller pension component – a theoretical amount, to be paid in the future – has eaten into the value of total compensation packages and muddied the closely scrutinized relationship between company performance and executive pay,” writes Sai Sachin R.

“At 0.1 percent, the median pay rise in 2015 for the CEOs of more than 300 of the S&P 500 companies was the smallest since the financial crisis and a sharp decline from the 12.9 percent hike of 2014, data from ICS shows.”

Read the report.

Kirkland & Ellis LLP announced that it advised TSSP, a leading special situations investment platform of TPG, on its agreement with Hunt Oil Co., a privately held oil and gas exploration and production company, to develop certain of Hunt Oil’s assets in the Midland Basin in Texas.

The development area covers approximately 18,000 net acres across Martin, Glasscock, Midland and Upton counties. Under the agreement, TSSP has committed up to $400 million to fund the development which is expected to take approximately three years to deploy.  Additional terms were not disclosed.

The Kirkland team was led by corporate partners Anthony Speier and David Castro and associates Christopher Heasley, Nick Wenker, Ryan Martin and Lindsey Jaquillard; debt finance partners William Bos and Lucas Spivey; tax partner Chad McCormick and associate Joe Tobias; environmental transactions partner Paul Tanaka and associate Stefanie Gitler; restructuring partner Ryan Bennett; and litigation partner Anna Rotman.

Read more details.

A blog post on the Cooley M&A site discusses the “option to acquire” structure, which addresses both the needs of a target company to develop a product or business on the one hand and the desire by a buyer to identify growth opportunities on the other.

“In an option to acquire transaction, the buyer agrees to pay the target an option fee in exchange for the exclusive option to acquire the target for a fixed price during an option period subject to certain conditions and agreements that are set forth in a fully negotiated and executed acquisition agreement,” the post explains. “As part of the arrangement, the parties may also enter into a collaboration agreement covering certain development activities of the target during the option period, with the achievement of the developments functioning as milestones to the buyer’s ability to exercise its option to buy. The collaboration agreement is usually separate from the option and acquisition agreement. Sometimes, the specific terms of the option may also be set forth in a standalone option agreement that is separate from the acquisition agreement.”

While options to acquire are fairly common in the medical device and life sciences industries, the option also provides attractive opportunities for funds and companies in other industries as well, as a way to get an inside track on new technology, the firm writes.

Read the article.

The National Association of Corporate Directors’ 2016 edition of Governance Challenges combines guidance from five strategic content partners of the NACD with broad M&A expertise. The report addresses the importance of early board engagement in strategy, the need for proactive dialogue with all key stakeholders, and the imperative to balance short-term and long-term goals throughout the M&A process.

A complimentary copy of the report is available for download.

Boards can use this new resource to:

• identify “drive and drag” factors that can advance or delay transaction results;
• monitor key aspects of the due-diligence process before approving the deal;
• understand the tax implications of a prospective transaction;
• consider exposure to risk from antitrust liability, cybersecurity challenges, and environmental liability; and
• select and retain talent and adjust compensation arrangements during the leadership change.

Download the report.

The Center for Board Excellence is offering a free whitepaper that describes moving the directors and officers questionnaire process to a dynamic online system.

CBE says the paper explains how to save time and money by moving the D&O questionnaire online to:

• Reduce the number of questions
• Make them easier to follow and answer
• Turn definitions and schedules into dynamic flyovers or online links

“Focus particularly on the cost of your Directors’ and Officers’ time,” CBE suggests. “How much time did it take them to complete the process? How many irrelevant questions did they have to read and skip over? How many definitions did they have to look up in an appendix? Add to that the time it took you to compile the questionnaire and parse the results only to find that three forms came back incomplete.”

Download the paper or request a demo.

The key challenge for compensation committee members continues to be to approve compensation programs that directors believe are right for their companies, while maintaining an understanding of shareholder views and an ability to communicate the appropriateness of their compensation decisions sufficient to avoid criticism that could undermine directors’ abilities to act in their company’s best interest, according to a post on the Harvard Law School Forum on Corporate Governance and Financial Regulation.

In the post Compensation Season 2016, the authors identified key considerations for compensation committees in the upcoming compensation season.

Read the article.

Gearing up for a battle for control of media company Viacom, board members took the unusual step of vowing to fight an expected campaign by Sumner Redstone and his family to shake up the board, the Los Angeles Times reports.

“Sumner Redstone this month added to his legal team a prominent Los Angeles litigator, Michael Tu, who specializes in securities law – raising the possibility of a legal campaign to dump Viacom Chairman and Chief Executive Philippe Dauman and other members of the board,” according to the newspaper.

Viacom’s stock value has dropped more than 45 percent in the last two years. Redstone and his family control 80 percent of the Class A voting shares of Viacom, but their economic stake in the company is about 10 percent.

Read the article.

By Jose Tabuena, JD, CFE, CHC

Effectiveness is a cornerstone of modern corporate compliance. The U.S. Sentencing Guidelines expect it, and compliance officers spend substantial time and resources trying to create an effective program. And as reflected in recent studies and surveys, assessing compliance program effectiveness continues to be top-of-mind for senior compliance officers. On its face, the regular monitoring and measuring of the program can prove beneficial to company success.

Yet in spite of the Sentencing Guidelines for Organizations being in existence for over 20 years, and the recent focus on developing metrics, it remains challenging to demonstrate the effectiveness of the compliance function.

In recent columns I’ve raised the limitations on government pronouncements and socalled metrics, with the current lack of rigor in measuring effectiveness. Enforcers and regulators (typically lawyers) are not scientists, and the field of compliance can benefit from more empirical research. Surveys of compliance professions reveal that many are not confident that the metrics they use to assess compliance program effectiveness give them a true picture of program success.

Still, a company will want to be able to demonstrate that it is creditworthy under the sentencing guidelines to benefit from penalty reductions, and more importantly to avoid indictment altogether. The company’s other constituents, including shareholders, the board, and management, will also seek some level of assurance that the compliance program is effective and worthy of investments that have been made. Program “efficiency” is another consideration for evaluating performance. Without an agreed-upon methodology, and needing more than a qualitative description of “I know effectiveness when I see it,” how can a company approach this measurement challenge?

Regular reporting and meeting with the board

One way companies can respond to this concern is to compile regular (at least annual) compliance program reports that detail all key aspects of their respective programs at a particular time. The report can be a compilation of quarterly reporting with a summary of highlights for the fiscal year. If sufficiently comprehensive and persuasive, such reports may help a company surmount the evidentiary challenge of proving the effectiveness of its program at a given point of time in the relatively distant past.

Of course this begs the question of what goes into a program report. At a minimum you want to make sure your board is up to speed with your compliance program by summarizing the key changes and developments. The compliance framework essentially boils down to three basic questions which form the basis of an effectiveness evaluation and program audit methodology: 1) Is the compliance program well-designed? 2) Is it being applied in good faith? and 3) Does it work?

The science and mostly art of effectiveness assessments is still evolving. You need to carefully identify types of data available, apply insight to the data, and design metrics to create the story around effectiveness.

Compliance programs, particularly in highly regulated industries, have matured to the point where data for the first two questions are periodically collected and reviewed. This is at least a good start with building the case for effectiveness. To evaluate effectiveness, compliance departments now analyze internal audit findings, track hotline calls, monitor training completion rates, review the disposition of internal investigations, perform self-assessments, survey employees, compare themselves against peer companies, retain outside professionals to review the compliance function, and track performance on regulatory reviews. When meeting with the board you can talk through progress, results, and challenges as they stand today, in relation to previous years, and benchmarked against other companies:

• Implementation Process – Status of important compliance initiatives, any major program operational updates, and what work remains.
• Risk Profile Changes – Any new, emerging risks or noteworthy changes to the likelihood or severity of your organizational profile, either due to business changes or environmental developments.
• Policy Attestation and Training Certification – What percentage of employees have successfully completed training and policy requirements, including the results of any post-training tests and policy attestation rates? Are there consequences for those who have not completed?
• Employee Feedback – Highlights of feedback received through employee focus groups, culture surveys, suggestion box, and how you are using this feedback to drive improvements.
• Compliance Audit Findings – Results of internal or external audits, and what these findings mean for the organization and the compliance program.
• Hotline/Internal Reporting Data – How many tips your hotline or other reporting channels have received, trends by type of incidents being reported, and any hotspots that have emerged in particular locations, departments, or business units.
• Incidents and Investigations – The number and type of investigations that took place, the disposition of cases, and what ongoing investigations the board should be aware of.

Risk focus

A feature of an effective program is the regular performance of a compliance risk assessment. Regulators and enforcement agencies will be looking for correlation between the risk assessment measures and performance indicators that are being used to monitor those risks and compliance performance. These measures should consider the high-risk areas and what has been put in place to address those special risks; internal audit will undertake an annualized range of audits as part to identify compliance issues that provides a good source of measures and also indicate to the regulator that the company is operating cohesively.

The COSO Enterprise Risk Management and Risk Framework identifies the core elements of well-designed KRIs (Key Risk Indicators) to link business objectives to strategies to risk. The KRIs, if robust, should give you visibility into your riskiest areas. Periodic risk assessment results should be used to determine whether compliance risks are increasing or decreasing.

The data and results from a compliance risk assessment provide an opportunity to support program effectiveness. An approach to consider is to incorporate risk ratings that are generated from the risk assessment into routine monitoring reports. The status of mitigation efforts can be tracked and the impact on the risk rating reported as part of regular compliance program updates to senior management and the board. Such reports can be trended to (hopefully) depict the impact of mitigation activities with risk ratings adjusting over time.

Dashboards

Some organizations use dashboards (or scorecards) as a shortcut to giving executives and board members information about what is being accomplished by the compliance program and where the organization is at risk. The challenge is figuring out what metrics will go on the dashboard. Your metrics need to be specific and unique to your company and what business it conducts along with what goals you’re trying to achieve as a whole and as a compliance program—there is no one-size list of these metrics. Best practice and regulatory standards call for risk-based program reviews to specifically account for an organization’s unique risk profile.

Given the lack of standard measurement techniques, how else can dashboard metrics be identified? A rigorous audit to evaluate a compliance program will analyze specific program elements. The auditor can start with tools utilized when conducting a review of the compliance environment under COSO. This includes techniques for evaluating entitylevel controls, the control environment, and fraud-control activities. There are metrics around surveillance and testing but, in the end, do we know if we have an effective program? It’s still difficult to say. For purposes of the sentencing guidelines a company can stand-up a program that ticks all the boxes. One can engage independent consultants to come in and validate the existence and good faith effort being made. From benchmarking we know how our company compares to others. While metrics do not yet fully answer the crucial question of program efficacy, it can help build the case for effectiveness.

The science and mostly art of effectiveness assessments is still evolving. You need to carefully identify types of data available, apply insight to the data, and design metrics to create the story around effectiveness. Ultimately you want to create a report that tells the story of the compliance program to leadership, and if ever needed—to enforcement authorities and industry regulators.

Originally published in Compliance Week