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Do Corporate Monitors Challenge the Status Quo?

11/5/2012 --

Research by Ross professor suggests monitors used in settlement agreements aren't effective change agents.

ANN ARBOR, Mich. — An increasingly common way for corporations to settle criminal and civil matters with prosecutors and regulators is to hire an independent monitor to oversee a reform movement.

But research by David Hess, Michigan Ross business law professor, indicates corporate monitors haven't been the change agents that proponents of the practice had hoped. Along with Christie Ford of the University of British Columbia, he interviewed both monitors and regulators. Together, they co-authored a paper titled, "Corporate Monitorships and New Governance Regulation: In Theory, Practice, and Context," which takes an empirical look at how corporate monitors work.

What did they find? A system more focused on checking boxes than changing a culture.

They say improving the monitor process would be better than eliminating it entirely, since the theory behind it is sound. In practice, it needs some tweaks.

"In many cases, we're not seeing a broader approach that looks at incentives or the culture of the organization," Hess says. "One of the goals of this compliance monitoring process is to see where the problems are and try to successfully manage change. If it's just viewed as something to get through and you check the box that the company did training and started a program, you still have the status quo."

One of the goals of using corporate monitors — which usually is part of a settlement with the government — was to encourage self-regulation and get companies to change their ways outside of the punitive environment of fines and enforcement actions.

The idea was controversial because some saw it as being soft on corporate wrongdoing. Others viewed it as a way of arm-twisting companies into accepting monitors to avoid being charged with a crime or heavily fined.

"It gets attacked from both sides," Hess says.

There have been successful outcomes, but one problem Hess and Ford uncovered was a wide interpretation of how monitors operate. Some treat the firm almost as an audit client, while others are more proactive.

"They're operating under the same language, but some monitors said their job was to stand back and just audit what a company does. Others said their job was to talk with management, sit in on meetings, and provide advice," Hess says. "There is not a uniform standard on how to do these things. I'd say we're still in the learning stages."

Another concern is that the Department of Justice, which oversees many of these settlements with monitors, isn't set up for post-action review.

"The way they operate is they get their cases and move on," Hess says. "Nobody has systematically looked at all of this information and compared and contrasted these reports from the monitors. Nobody has brought the monitors together to debrief them or ask them what they saw and how to improve the process."

Hess' study also noted that most monitors are attorneys, who usually have a particular skill set. It might be a good idea to hire monitors with broader managerial experience, he says.

Despite some of the problems they found, Hess and Ford think it's better to learn from past cases and make improvements rather than do away with monitors in settlement agreements.

"There's a place for an improved structure for monitorships," Hess says. "The existing alternatives — sanctions and credit-for-cooperation schemes — still aren't optimal. So let's study and learn so we can make them better."

— Terry Kosdrosky



For more information, contact:
Terry Kosdrosky, (734) 936-2502, terrykos@umich.edu