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Double trouble

30 September 2013 By Reynolds Holding

Goldman Sachs and JPMorgan have managed to get at least one job split right. Neither bank will cleave the chairman and chief executive roles, but they’ve figured out that allowing the general counsel to also run regulatory compliance invites trouble. Interpreting the rules and ensuring they’re followed too often conflict. Rival financial institutions – and companies in other industries, too – should follow suit.

In the past, one individual could safely preside over corporate lawsuits, contract negotiations and standards of conduct. Medicare rules, Sarbanes-Oxley financial reforms and other state and federal regulations, however, quickly overloaded top legal officers with complexity and competing interests.

Tenet Healthcare’s general counsel, for example, was forced to resign in 2003 over her conflicting roles as the company’s defender and watchdog in a Medicare fraud probe. Investigations of WellCare for Medicaid cheating and Pfizer for marketing scams prompted the companies to split their respective legal and compliance departments. In 2010, new federal sentencing guidelines gave a break to wrongdoers with compliance officers who reported directly to the board of directors.

Goldman and JPMorgan say best practices prompted them to create independent legal and compliance departments. While Goldman did so in 2004, JPMorgan waited until earlier this year, after regulators started scrutinizing the $6.2 billion London Whale trading losses and other matters. British banks HSBC and Barclays also have split legal and compliance in recent years.

Whatever the impetus, the policy makes sense. Defending a company against regulators is different from making sure it meets their standards. Keeping the jobs separate allows one to act as a check on the other while also showing that a company takes compliance seriously. Yet 41 percent of companies tuck the task into the legal department, while only 8 percent have an independent compliance officer reporting directly to the board, according to a 2011 survey by Compliance Week and PricewaterhouseCoopers.

There can be no guarantee, of course, that a more independent officer would have, say, curbed certain practices at JPMorgan, just as separating the chairman and CEO positions doesn’t ensure missteps won’t happen. The aim, however, is to put a company in the best position to avoid trouble. In either context, two heads are better than one.


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