Less than a month into the 2012 calendar year, we are already seeing signs that the federal government is continuing to take serious aim at insider trading and seeking to raise the stakes for those organizations and individuals who don’t believe the hype.

Just this week, the New York Times outlined some proposed amendments to the U.S. Federal Sentencing Guidelines that, among other things, would impose harsher penalties for senior leaders implicated in insider trading and increase the “offense level” and penalties for instances of “sophisticated insider trading.” According to article, these amendments would impact not only public companies, but also brokerage firms and investment advisors, two industries beset with scandal in 2011. By increasing the offense level for both “sophisticated” insider trading and for involvement by officers or directors in insider trading, the U.S. Sentencing Commission would accordingly increase the potential sentences for those crimes.

From my perspective, this news is hardly surprising. After a year that saw the enactment of the Dodd-Frank Act, as well as a series of highly-publicized insider trading charges by the DOJ and unprecedented sentences for prominent financial leaders like Raj Rajaratnam, it seemed only a matter of time before the U.S. Sentencing Commission would seek to appropriately raise the bar for financial crimes and insider trading.

What is surprising, however, is the indirect impact that these amendments may have on future insider trading prosecutions. As the article astutely points out, the likelihood of an increased sentence for many defendants may incentivize them to cooperate with the DOJ and to testify on behalf of the government in an effort to avoid the more significant fines and jail time.

It certainly bears watching as to whether the proposed amendments will be approved later this year.

I was interested by the results of two recent surveys.  The first, by the Ethics Resource Center, presents a good news/bad news story. The good news:  Misconduct witnessed by U.S. workers has reached historic lows while reporting of misconduct is almost as high as it’s ever been. Great! Now, the bad news: U.S. workers report increasing pressure to violate corporate policies. Also, the percentage of employees who say their business has a weak ethics culture is increasing.  As the ERC report notes:

These trends heighten business risk by increasing ethical misconduct and discouraging reporting, thereby depriving organizations of the chance to identify and fix potential problems before they become sig­nificant.

Pointing to historical data, the ERC warns:

As the economy gets better – and companies and employees become more optimistic about their financial futures – it seems likely that misconduct will rise and reporting will drop, mirroring the growth in pressure and retaliation that have already taken place and conforming to historic patterns.

A second, unrelated survey found that compliance and ethics professionals tasked with ensuring corporate compliance are experiencing high levels of stress.  The “Stress, Compliance and Ethics” survey report, by the Society of Corporate Compliance and Ethics and the Health Care Compliance Association, states that:

New regulations, adversarial relationships and difficulty with groups such as sales are causing sleepless nights for most and leading a clear majority to consider leaving their jobs. Although there were some differences between industries, most of the differences were very small.

According to the report:

• 58% of respondents felt that they were in an adversarial relationship with or isolated from other colleagues
• Several factors contribute to the high stress level, including the challenges of keeping up with new laws and regulations, and preventing and remediating compliance and ethics violations
• Budget considerations are also a source of stress

Given the findings of the first survey, the results of the second are not that surprising. If, in fact, we’re facing the beginning of an ethics downturn, the C&E professional may now be the proverbial canary in the coal mine.  And, if an ethics downturn is underway, what can C&E professionals do to shore up their current compliance programs? Now is the time to start putting together management ethics training, so managers know they can’t ask people to break the rules or retaliate against employees who raise concerns; “Tone from the middle” products, so employees hear an ethics message from their managers instead of pressure to do the wrong thing; and new and fresh ethics messaging through shorter, more frequent and targeted training. It’s also time to look at reporting processes to make sure that you receive and respond to the issues employees raise.  With the ERC reporting “signs of an ethics downturn,” organizations can take steps now to reverse the trend. Fortunately, data shows the benefits that organizations can achieve if they take steps to support their ethics initiatives.

In Andrea Falcione’s last Viewpoint post, she commented on the fact that compliance and ethics need to be fully integrated into corporate culture, with compliance and ethics leadership playing an integral role on the management team.  (She also expressed some surprise that this is news to some organizations.)

Matt Kelly from Compliance Week makes a similar point in his December blog post, using MF Global’s meltdown to talk about how important it is for company leadership to look for—and act on—indications of strategic risk:

…[O]ne theme kept emerging: the apparent inability of the chief risk officer to raise concerns about strategic risks. Those concerns go well beyond warnings like, “The value of our European sovereign debt now exceeds the limit set by the board,” which MF Global’s chief risk officer did give. Any CRO can do that, and he or she doesn’t even need the fierce independence advocated by the U.S. Sentencing Guidelines to do so. These days, warnings that some risk has exceeded pre-determined risk tolerances are practically pro forma.

Strategic risks are an order of magnitude more serious; they require the CRO—or the chief compliance officer, or head of internal audit, or chief ethics officer—to go the CEO or the board and say, “This is a bad idea.” When I last broached this subject in October, speaking more about internal audit’s role in auditing strategic risks, that led to furious protests from the Institute of Internal Auditors and others that a careless approach to auditing strategic risks would compromise independence.

But the fact remains that strategic risks are what boards worry about, and are what can bring a company to swift demise—as MF Global shows. Compliance and governance executives need a way to handle strategic risks if they ever want that fabled “seat at the table” to help steer a company to sustained success. That’s just the reality of the situation.

Interestingly, Kelly goes on to report that MF Global sacked its previous chief risk officer for raising exactly the same kinds of strategic concerns—which reinforces Andrea’s statement that, for all this to work, organizations must be run by people of integrity in the first place.

It’s a kind of compliance catch-22—organizations that are genuinely open to hearing about and dealing with strategic risk, even when it means raising concerns about a compelling business opportunity, are probably also organizations that already include the compliance and ethics leadership in key strategic decisions, set a compelling tone from the top, and fund robust training and awareness programs. But even well-meaning companies can be shortsighted when facing objections to promising business initiatives.

On the training side of our business, we talk a lot about the human factors that cause well-intentioned employees to bend or break the rules. A top sales person might change the date on a big contract so that it counts in the current quarter, allowing him and his team to make their numbers—and, consequently, their bonuses. An employee might agree to a course of action recommended by a manager she admires. Even though she knows it’s not exactly by the book, she trusts her manager and assumes the manager knows what’s appropriate. Plus, she thinks it might create issues for her career if she objects.

Since organizations are led by people, these same business pressures and human factors can come into play at the top. It can be difficult, on a personal level, to break with consensus. It might not be clear that others fully appreciate your concerns. There can be pressure to support a proposal that’s popular with your colleagues. And, in some organizations, there may be actual job risks to objecting.

What happens when strategic risks are raised at your organization? Is there transparency when these types of issues are discussed? Would you get a fair hearing from the right people?