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Back to Our Future:
Challenging New Compliance
and Leadership Accountabilities
for Human Resources, Courtesy
of Sarbanes-Oxley
Patrick R, Dailey, Chicago Change Partners;
David A. Brookmire, Corporate Performance Strategies

38 HUMAN RESOURCE PLANNING 28.3

T
he Sarbanes-Oxley Act af 2002

(SOX) has created big new

challenges for publicly traded

organizations, most often with

little to no involvement by the HR func-

tion. The burden of compliance has

fallen primarily on , as SOX

has tangible implications that result in

severe penalties and reduced share-

holder value. Nevertheless, HR has a

key role in the development and imple-

mentation of systemic and sustaining

policies, procedures, and programs

that ensure the organization fully com-

plies with SOX. HR leaders need to

step up to these accountabilities, for

the benefit of their companies and their

functions. The authors detail five critical

opportunities for HR leaders to assist in

the implementation of successful SOX-

related initiatives and establish their

leadership roles with boards of direc-

tors and senior management. Ironically,

compliance, once a reason to criticize

HR, now becomes a way to elevate the

function and its leaders.

The Field Shifts, Again
Federal legislation oiice again has shifted the playing field for

Human Resources. This time, the Sarbanes-Oxley Act (SOX) of 2002
requires HR leaders to rise up to new accountabilities for building an
ethical culture, as well as partnering with other leaders, especially in
, to insure statutory compliance with the legislation. SOX
legislation was designed to restore public trust in corporate account-
ability and external auditor independence following the revelation of
concealed financial transactions and significant abuses by Enron,
HealthSoutb, Worldcom, Cilobal Crossing, and others
(PriceWaterhouscC^oopers, 2004). Overall, tbe legislation imposes:

• Fiigher standards for financial rep{)rting by public companies

• Greater acc()untabilit>’ from boards of directors for corporate
governance

• More stringent standards for insuring fxtcrnal audit independence

• Stiffer civil penalties to corporations for SOX violations

• CTiininal penalties against CEOs or C ; K ) S for significant noncom-
pliaiice or “bad faith” financial filings

Implementation and nHJiiitoring of SOX has thus far been the pri-
mary responsibility of Finauce, or newly created Compliance Officers
operating at tbe top levels of US corporations, but full compliance and
effective monitoring requires strategic leadership and operational
attention from HR leaders (Deloitte &; Touche, 2003). First, HR lead-
ers {iversee a significant portion of company expenses through payroll
and lieneFits. Yet HR leaders generally bave little experience in finan-
cial and internal controls. Instead they have relied on company
processes, without enough direct knowledge of proper controls and
accounting. Second, the legislation falls short in recognizing that
people make decisions daily about adhering to laws, p{>licies, and
company guidelines. SOX does not go far enough witb preventive
solutions that address the root of the problem: unethical and illegal

Build Ethical and Transparent Cultures
The SOX legislation was founded on the belief that ethical

behavior and an atmosphere characterized by “transparent” financial
transactions are essential elements in restoring shareholder confidence.
Ihinsparency was a matter of significant concern by law enforcement
arms of the SEC while investigating Enron and other violators of SEC
and federal legislation. Top management in these corrupt companies
effectively obfuscated the facts and the true picture of their business
dealings and financial conditions, while enriching chemselves beyond
the imaginations of most people.

Where was HR leadership at Enrou? Enron had a Code of Ethics.
It was a 65-pagc handbook issued to employees by C!EO Ken Lay;
bowcver, senior Enron leadership winked at its own code while
creating a culture that encouraged employees to “push the envelope,”
including cooking the numbers. Enron rewarded employees who
produced bottom-line profits, even while they manipulated tbe figures
to conceal operating losses. Rewards went to those who played the
game, while the few people who raised objections were persecuted.
HR leaders were silent and compllcit, as were most of their colleagues.

Wong (2002) described tbis an “ethical deficit,” created hy toxic
executives. In his view, an organization must have strengths in four
areas to be healthy and productive: financial capital, technological
capital, human capital, and social-spiritual capital. Enron failed in
most of these areas, particularly the last one, the most difficult to man-
age and to quantify. FnroEi’s executives, and its board, were lacking in
ethical leadership and personal integrity.

Now, SOX legislation clearly places the creation of an ethical and
transparent culture as an essential, yet still subjective, goal for corpo-
rations. The expectation extends beyond attention to purely financial
transactions. The new reality acknowledges that senior leaders play
the most critical role in successful, ethical companies. They need to be
openly supportive and strongly committed to tbe ethical values of the
company. Leaders must promote and uphold this commitment in

For all the times HR has been criticized in the past as
the policy police, now compliance is vital to ensure
ethical behavior, proper compensation practices, and
the financial future of the company.

bebaviors performed by employees in tbe company as well as compa-
ny agents and outsourced partners.

Compliance, of all things, once again becomes a primary focal
point for HR leaders. For all the times HR has been criticized in the
past as tbe policy police, now compliance is vital to ensure ethical
behavior, proper compensation practices, and the financial future of
the company. In achieve this level of compliancL’—much further-
reaching than before—HR leaders must engage iu tbese five behaviors:

1. Build ethicnl and transparent cultures
2. Strengthen HR’s role in corporate governance
3. Bring executive compensation practices into compliance
4. Adopt robust vendor management prtKcsses
5. Partner witb to liuplement safeguards and ensure

compliance

speeches, directives, company publications, employee meetings, and
personal actions. Leaders set the tone for the company’s ethics; when
they do not, the “grapevine” is quick to spread the story of expedience
over ethics.

The HR leader has a clear responsibility to grow this ethical
culture. No other position, aside from the CEO, has the scope and
reach to external stakeholders and internal employees to build a
culture of integrity aud honesty. Progressive policy development,
employee training, and controlled monitoring all help create this.
Encouraging the reporting of unethical and illegal situations and
appropriately addressing unethical and illegal behaviors enables HR
to oversee dealing with these issues. Compliance with ethical behavior
is necessary daily, in an affirmative manner, not just by exception
when things break down (PriceWatcrhouseCoopers, 20()3|.

HUMAN RESOURCE PLANNING 28.3

are three things HR can and should do immediately to bnlld
transparency and ethical behavior:

1. Upgrade the code of conduct policy. Creation of a code ot conduct
is among the first tangib!e steps a company should use to comnmni-
cate company requirements and employee obligations for business
and financial conduct, ethical Ix-haviors., and reporting suspected
“code of conduct” violations. An improved policy should address the
company’s supp‘pe of monitoring
is essential in compliance efforts.

Conclusion
(Compliance with SOX is not optional, and is no longer the sole

accountability ot or the compliance officer. Sarbanes-Oxley
elevates the accountabilities and responsibilities of HR leaders toward
increasing levels of business focus and requires a strong and informed
partnership wirh , as well as with other corporate leaders. HR
accountabilities span policy creation, stakeholder communication and
trainmg, completion of regular and proactive compliance audits, and,
finally, full documentation and storage of audit results and remedial
activiries. Refer to …