Woodrow Wilson said it best: "If you want to make enemies, try to change something."

Nobody likes change.

And that's a problem, because governance rules are ultimately designed to change behavior. Whether the regulation is tied to process, like accelerated filing deadlines, or conduct, like ethical business codes, a fundamental organizational adjustment is likely.

SIDEBAR

Compliance Avoidance Disorder

A common weakness of rules-based reforms is that rule-breakers are a clever lot. If they were wily enough to break old rules, they'll be mentally nimble enough to break new regulations.

Effective monitoring programs should expose individuals with a propensity for rule-breaking. Organizational Psychologist Joan Pastor, president of JPA International Inc., in Oceanside, Calif., pulls a term from her clinical psychology training when describing the "small percentage of people who tend to excel at looking for loopholes, manipulating the system and deluding themselves that what they're doing is perfectly fine:" ego syntonic.

Ego syntonic personalities rarely, if ever, understand how their actions negatively affect other people. "They can't step back and take responsibility for a negative result," Pastor explains, "yet they're fully able to take all of the glory for the good stuff."

Pastor is one of the first psychologists to introduce the idea—and risk—of the ego syntonic personality in the corporate setting. She warns that the dysfunction, when combined with a high IQ, can destroy even the most rigorous compliance efforts. Pastor notes that these individuals tend to interview well, impress superiors and make life difficult for their peers and for the people the rule-breakers manage.

How can compliance officers and managers detect ego syntonic personalities? Pastor says that turnover surrounding a manager often is an indicator, particularly when those departures include highly talented employees. Sometimes candid exit interviews can also raise a red flag. Of course, that turnover might also be a sign of weak management skills or an abrasive personality, which is why monitoring activities should also be shrewd.

As is friction.

In fact, most compliance officers and organizational psychologists agree that resistance to governance changes is absolutely natural, and may even be essential to the long-term success of compliance programs.

They also note that the resistance may occur in varying degrees of intensity and at all levels of the organization.

Starting with the CEO.

Groan At The Top

Many governance experts acknowledge that Woodrow Wilson's comment accurately reflects the attitude of some toward the new regulatory regime and, more specifically, the Securities and Exchange Commission.

"Some CEOs view people at the SEC and in other regulatory positions as modestly paid, competent bureaucrats who don't know the first thing about running a business or making a payroll and who are out of touch with reality," says accounting professor Joseph Carcello, co-founder and director of research for the University of Tennessee's Corporate Governance Center in Knoxville.

But, while it's OK to show frustration with regulators and the new governance requirements, most say senior executives need to be careful about publicly broadcasting that frustration.

According to Neal Schmale, CFO of $6 billion Sempra Energy, complaints that are openly communicated by executives can spark resistance in the workforce, and that friction can hinder compliance progress. "The rest of the organization models its behavior on the behavior of senior management," says Schmale.

Daniel Cooperman, general counsel and corporate secretary of $9.5 billion Oracle, agrees. According to Cooperman, executive resistance can significantly devalue compliance efforts. For example, the lack of precise language in Section 404 of Sarbanes-Oxley tends to frustrate finance executives. Some frustration is acceptable, notes Cooperman, so long as a frustrated CFO does not undermine the value of Section 404 compliance efforts by openly and harshly deriding the regulations.

The Resistance Spectrum

Organizational psychologists tend to agree.

Joan Pastor, president of JPA International Inc., in Oceanside, Calif., is a clinical and organizational psychologist. She compares executives to parents of young children. The parents might share complaints or stresses in private, says Pastor, but good parents tend to put on a different face when communicating with their kids.

D. Matthew Dorny, general counsel and vice president of $687 million Nu Skin Enterprises, was one executive whose issues with Sarbanes-Oxley were muted when communicating with employees.

"I'll be the first to admit that I had some major complaints," Dorny says, referring to certain components of Sarbanes-Oxley. But that's not what he expressed to the rest of the company. Instead, the executive at the personal care products company spent extra time detailing for employees what occurred at Enron and WorldCom, and how that translated to a new law.

Dorny's muted resistance occupies an acceptable point on what Constance Dierickx, a management psychologist with RHR International in Atlanta, calls the resistance spectrum.

According to Dierickx, even "normal resistance"—like general confusion, and questions from employees about their responsibilities and lines of communication—can slow the pace at which an organization executes change.

Oracle's Cooperman recognized that early on, and worked to diffuse potential resistance among managers by emphasizing that the new rules represent an evolution—rather than a revolution—for Oracle and other large companies with established compliance programs.

That may have been critical to the success of Oracle's program, notes Dierickx, as organizational resistance needs to be addressed before constructive governance debate and changes can take place. "When people are in that resistance phase," she notes, "they literally don't learn as well."

Resistance can not only slow governance improvements, but may be a sign of other problems—particularly when resistance hardens into chronic cynicism. Dierickx, for example, once informed a client that she was concerned about the finance function within the company. Her red flag: the cynicism expressed by the CFO. It turns out that she was right—her client scrutinized the finance function and discovered that the books were off by nearly $20 million.

Preventing A Flash In The Pan

As was the case with the Oracle and Nu Skin examples, communication with the troops can be critical to the widespread adoption and success of compliance programs.

In fact, an active dialogue with employees can not only provide the catalyst to educate them on issues of governance and ethics, but can help build an ongoing and sustainable ethical culture.

Paul Makosz, who chairs the international ethics committee of the Institute of Internal Auditors, notes that a healthy dialogue on ethical issues can immunize an organization against corrupt behavior for the long term.

It's like a flu shot, he says: "You give it to people and then the internal immunity cells just multiply." That way, when a questionable issue emerges, "everyone spots it and speaks up … and the thing is killed at its source, just like the flu germ when it finally gets to you."

Sempra's Neal Schmale agrees, noting that sustainable governance requires an "environment of constructive dissent."

That means confronting everyone in the organization, top to bottom.

Sempra, for example, hired an academic consultant last year to inject its board of directors with Makosz' educational "flu shot," and earlier this year made the course available to 200 of the company's top managers. The three-day workshop featured not only college-level financial management courses—covering issues like financial statements and investment analysis—but also Sempra-specific topics, including the company's code of business conduct and its philosophy for managing risk.

Initiatives like Sempra's top-to-bottom educational series ostensibly become "change management" processes, through which new values are instilled and supported, and resistance is addressed. And the payoff can be immense. Schmale notes that Sempra's directors are putting their new knowledge to good use: "We expected to get tougher questions from our directors," he says, "and we have." The program is proof, says Schmale, that potential compliance resistance can be channeled into a much more productive brand of governance.

Oracle's Cooperman agrees that such processes are critical to long-term success. "If you don't think about it as change management and as a change in culture, you'll get the flash in a pan effect," he says. "People will do the right thing today because they know you're watching. But as soon as you move on to the next big issue, things go back to the way they always have been."

To counter that dynamic, Cooperman made systemic changes that supported compliance objectives and sent a clear message to the organization. For example, last year he bolstered Oracle's large legal department—110 lawyers and a global staff of 175—by creating the position of chief compliance officer, naming the well-respected general counsel of the company's Latin American division to the post.

Behavior Modification

Of course, the term "change management" may itself spur opposition. Management psychologist Dierickx acknowledges that change management is often executed poorly, and that the process can degenerate into a checklist exercise. "Managing change well ensures that complying with regulations will not become a shallow exercise," she says. "Good change management leverages the organic elements of the organization—what it already does well."

Sempra Energy's financial literacy workshop, for example, was an organic extension of the company's already-robust compliance training program. CFO Schmale says the company's extensive computer-based training regimen regularly tests managers and employees on state and federal energy rules, and completion rates are automatically tallied and closely monitored. That ethic of ongoing education made the financial workshops a natural cultural fit.

However, Sempra's workshops did not leverage the company's online training systems. Instead, the courses were based on a classroom format. And though the more traditional structure was chosen because of the demanding nature of the content, the face-to-face regimen may have played a critical role in the behavior modification process. In addition, the fact that the workshop was much more time-intensive than Sempra's other online training sessions sent another subtle but clear message.

Those types of symbols are commonly mentioned by compliance executives who emphasize the importance of sustained efforts.

That's why Oracle violates its "paperless office" ethic to emphasize the importance of its code of conduct: Hard copies of the code are mailed to the home addresses of new employees.

In other words, if you want to modify your employees' behavior, don't be afraid to modify your own policies.

Additional Tactics

To cultivate a culture that values corporate governance, three other approaches also are mentioned by compliance executives:

Communicate Context.

Leadership and communications efforts can be wasted if executives and employees fail to grasp the reason behind regulatory changes.

Oracle's Cooperman regularly points out to managers that corporate compliance programs existed before Sarbanes-Oxley, and that the regulatory pendulum typically swings between big government and small government.

And while that can set executives' minds at ease, lower level employees may require an even deeper explanation for the overtime hours they're logging on issues like internal controls. "Make the connection to the roots of those changes," advises organizational psychologist Pastor.

A sophisticated workforce may understand that it makes little sense to resist federal mandates; however, they may also be more likely to scrutinize executives for subtle clues. Employees will model their behavior, says Pastor, on the unspoken tone at the top.

When Nu Skin's Dorny explained the origins of Sarbanes-Oxley to his workforce, he discovered that many employees already understood the new law, in part because their own investment portfolios had suffered as a result of recent corporate failures. That helped ease resistance, but it may not do the trick in the future. "As the economy picks up and some governance issues move toward the back burner," Dorny cautions, "corporate legal staff and those responsible for corporate governance will face the challenge of sustaining buy-in while continuing to implement and refine compliance."

Acknowledge The Burden Of Governance.

Dorny funneled his doubts about Sarbanes-Oxley into an empathetic response to employees who bore a heavy load of Nu Skin's compliance work. When employees convey negative feelings about compliance, Dorny and his staff acknowledge that the new rules can be burdensome and then reinforce the reasons for the new law.

"People can buy into this if it can be explained," he says. "Here's exactly what happened at WorldCom, here are the issues they're concerned about, and here's why they adopted it."

Those discussions also provide an opportunity for two-way communication, which—according to Makosz at the IIA—is a necessary ingredient of effective governance. "At companies with more than about 500 employees, the workforce tends to serve as a microcosm of the external community," he explains. "That's where we get our ethics from—and a company's ethics should be in line with what the community expects."

Explanations of the source of rules and governance changes should also touch on the value of compliance efforts. Both Dorny and Cooperman discuss with employees the benefits of stronger governance. Cooperman, for example, discusses recent survey results that show many executives believe that Sarbanes-Oxley requirements will make their companies more competitive.

Timing Is Everything.

For many legal, financial and compliance teams, the recent regulatory onslaught has been difficult to manage. Between reviewing equity compensation plans, codifying internal controls, rewriting charters, making new GAAP reconciliation and MD&A disclosures, and preparing for accelerating filing deadlines (not to mention implementing whistleblower programs, preparing for stock option expensing, educating the staff on "Reg. G," and making myriad other changes), the past year has been, well, busy.

And if the changes aren't well-timed, the organizational chaos can be great.

"People are willing to accept a major change once," says Dorny. "It becomes psychologically more difficult for people to deal with a barrage of changes."

Avoiding such a barrage was a critical consideration in Nu Skin's recent governance and compliance decisions. Last October, the company changed its ownership structure so that the founders held roughly 40 percent of the voting power, instead of 90 percent. By monitoring the rulemaking initiatives resulting from The Sarbanes-Oxley Act, the company was able to strategically time related compliance initiatives, thereby minimizing organizational chaos. "We felt strongly that it would be better for our workforce if waited until we saw the final Sarbanes-Oxley rules before we took significant action," says Dorny.

That sensitivity to the workforce's psyche has paid off for Nu Skin, which—according to Dorny—is experiencing less resistance to significant changes.

Neil Schmale at Sempra Energy agrees, noting that executives can also set an example by demonstrating their own commitment through the appropriate allocation of their own time and energy. His team, for example, spent a significant amount of time reviewing its filings immediately after the passage of SOX. "Everyone in our company really had to know that senior management was spending days looking at the filings," he says. "It's the example that really matters."

 

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