Corporate Monitors: Praised in Theory, But Practice Needs Improvement

Published December 14, 2012

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, assistant professor of business law and business ethics at Ross School of Business at the University of Michigan, indicates corporate monitors haven’t been the change agents proponents of the practice had hoped.

Along with Christie Ford of the University of British Columbia, he interviewed both monitors and regulators. Their report, “Corporate Monitorships and New Governance Regulation: In Theory, Practice, and Context,” takes an empirical look at how corporate monitors work.

Their study showed them a system focused more on checking boxes than changing corporate culture.

Good Theory, Poor Practice

Hess and Ford 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 was to encourage self-regulation and get companies to change their ways outside of the punitive environment of fines and enforcement actions.

‘Attacked from Both Sides’

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.

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.”

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.”

Terry Kosdrosky ([email protected]) writes for the Ross School of Business at the University of Michigan-Ann Arbor.

Internet Info

“Corporate Monitorships and New Governance Regulation: In Theory, In Practice, and In Context,” Christie Ford and David Hess: