FCPA Compliance and Ethics Blog

November 8, 2012

How Do You Change a Corrupt Culture?

As most compliance practitioners know Siemens AG paid not only the largest Foreign Corrupt Practices Act (FCPA) fine in the history of the world at $800MM but also paid the same amount to the German government, this makes for a total fine of $1.6bn back in 2008 when that was real money. In addition to these fines and penalties the New York Times (NYT), in an article entitled “The Mounting Costs of Internal Investigations”, stated that Siemens “reported incurring costs of more than $1 billion for a global inquiry into payment of bribes to foreign officials to win business.” In other words, it cost Siemens an uber amount money to clean up this huge mess.

Nevertheless clean it up they did and the company has come back even stronger and more profitable. A recent article in the November issue of the Harvard Business Review (HBR), entitled “The CEO of Siemens On Using a Scandal To Drive Change” explains how he did so. In late 2007, Peter Löscher was hired as the first outsider to become the company’s Chief Executive Officer (CEO) since its founding in 1847. Löscher’s attitude when he was hired can be summed up with the following quote from the article “never miss the opportunities that come from a good crisis – and we certainly didn’t miss ours.” More importantly, Löscher’s recognized that as strong as a strategy might be, the key is in how you execute that strategy. In other words, it does not matter how strong your compliance program is, if you do not follow it, you will most probably fail in this area.

The First 100 Days

Löscher had two immediate goals to achieve in his first 100 days as Siemens’ CEO. The first was to get to know the company. The second was to work quickly to change how it was organized. To accomplish his first goal Löscher literally went on a round the world tour of the company’s facilities, including meetings with customers, local governmental officials and Siemens employees. He accomplished this final component through meetings with local leadership teams, town hall-style meetings with all employees and dinners with top leadership teams in specific locations. He basically learned that Siemens employees were “shocked and ashamed, because they were very proud to be a part of Siemens.”

This last point, the pride that company employees had in Siemens, made his next series of steps not only easier but possible. Löscher had to get rid of the two tiered Board system that Siemens had in place; that being a Managing Board and a Supervisory Board. He had to ask 80% of the membership of the Managing Board to leave their positions. He reduced 12 operating units down to eight. Finally, Löscher had to create new positions for the heads of Supply Chain, Legal and Compliance.

Löscher recognized that Siemens would have to change its operational structure as well. Many of the country organizations were focusing on non-core business or were actually competing against other groups within Siemens. The geographic organization of the company was grouped into 70 clusters of such businesses and Löscher reduced them down to 20. Global CEO’s of these clusters would report directly back to Löscher. He believed all of these changes were important to help reduce the company’s bureaucratic structure so that it could operate more nimbly across the globe.

Löscher thought it was also important for all of the company to review what Siemens termed “megatrends” through which it would organize its businesses to take advantage of broad global changes. For instance, changes in demographics, globalization and one added by Löscher, that being an environmental portfolio. This last component was the company’s first new strategic pillar. To this Löscher then added an emphasis on company infrastructure and lastly to be industry “pioneers” through innovation.

Löscher also took on the diversity, or rather the lack of it, in Siemens. This campaign began with this simple statement to the Financial Times (FT), “Our organization is too male, too white and too German.” While this statement caused an uproar, it did clearly set out the tone that Löscher was trying to communicate to the employees of the company. He clearly set the tone at the top of the company and the employees knew that if Löscher said it, he meant it.

From the Compliance Perspective

Löscher stepped into a company where bribes were not only legal in its home country of Germany until 1999 but German corporations could deduct bribes from taxable income as business expenses. The HBR article reported that Siemens identified $1.6bn in “questionable payments” that it made around the globe from 2000-2006. Both US and German prosecutors investigated the company in what has to date been the most massive international corporate corruption and bribery investigation.

The lessons from Peter Löscher and how he changed the business culture at Siemens are very pertinent for the compliance practitioner. The first is that there must be a clear ‘tone at the top’ that bribery and corruption will not be tolerated and he made it clear that bribery and corruption would not be tolerated. While the company instituted the gold standard of compliance programs, it is the execution of this program which makes Siemens stand out today. From the organizational perspective it is the direct and clear reporting channels which are the biggest structural change. The compliance function needs not only clear reporting channels but there must be clear lines of authority for the business units to access when compliance issues arise. This leads not only to transparency but also accountability by the business unit. This last point makes the monitoring and auditing function more viable as tools within the company’s overall compliance regime.

The Siemens story is an important one in both the compliance world and in the greater business world. It demonstrates that a company can change not only its culture but its infrastructure so that it can operate and do business ethically. The final word is that Siemens is now more profitable that it ever has been, even with all the investigative costs, fines and penalties and organization and structural changes. It has become an example of how a company can do business ethically and profitably.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

Wal-Mart Cover Up- Would a Hot-Line Have Helped?

Ed. Note-we continue our series of guest posts from our colleague Mary Shaddock Jones, who today draws some lessons from the Wal-Mart matter.

On November 8, 2006 Wal-Mart entered the Canadian Market opening three supercenters in Ancaster, London and Stouffville in Ontario, Canada.  On April 21, 2012, the New York Times published an article which included the following statements:

“In September 2005, a senior Wal-Mart lawyer received an alarming e-mail from a former executive at the company’s largest foreign subsidiary, Wal-Mart de Mexico. In the e-mail and follow-up conversations, the former executive described how Wal-Mart de Mexico had orchestrated a campaign of bribery to win market dominance. In its rush to build stores, he said, the company had paid bribes to obtain permits in virtually every corner of the country.   The former executive gave names, dates and bribe amounts. He knew so much, he explained, because for years he had been the lawyer in charge of obtaining construction permits for Wal-Mart de Mexico.   Wal-Mart dispatched investigators to Mexico City, and within days they unearthed evidence of widespread bribery. They found a paper trail of hundreds of suspect payments totaling more than $24 million. They also found documents showing that Wal-Mart de Mexico’s top executives not only knew about the payments, but had taken steps to conceal them from Wal-Mart’s headquarters in Bentonville, Ark. In a confidential report to his superiors, Wal-Mart’s lead investigator, a former F.B.I. special agent, summed up their initial findings this way: “There is reasonable suspicion to believe that Mexican and USA laws have been violated.”   The lead investigator recommended that Wal-Mart expand the investigation.   Instead, an examination by The New York Times found, Wal-Mart’s leaders shut it down.”

This is not the type of news that the Board of Directors of U.S. public company wants to learn about through a newspaper headline. Section 301(4) of the Sarbanes-Oxley Act requires the audit committee of every United States based  publicly traded company to establish procedures for “the confidential, anonymous submission by employees….of concerns regarding questionable accounting or auditing matters” (emphasis supplied). To comply with § 301(4), many employers have designed whistle blowing systems, such as telephone “hotlines”, enabling employees to report potential violations anonymously.

I do not know if Wal-Mart had a “hotline” in 2005, but in order to give employees and/ or third parties the tools necessary to alert executives or members of the Board of Directors to potential illegal or questionable activity- the existence and promotion of an anonymous hotline system is invaluable.

The practical pointer for today’s blog is this- one essential element of a compliance program is an anonymous hotline. Companies do have to be careful when implementing a hotline to understand and abide by European data privacy laws.  However, in the United States,  under most of the recent “Schedule C’s” attached to Deferred Prosecution Agreements, the Department of Justice clearly outlines anonymous reporting systems as one of the required “best practices” for a compliance program: “The Company should establish or maintain an effective system for: a) Providing guidance to directors, officers, employees, and its agents and business partners, on complying with the Company’s anti-corruption compliance policies, including when they need advice on an urgent basis or in any country in which the Company operates; b) Internal and confidential reporting and protection of those reporting breaches of the law or professional standards or ethics concerning anticorruption occurring within the company, suspected criminal conduct, and/or violations of the compliance policies directors, officers, employees; and c) Responding to such requests and undertaking appropriate action in response to such reports.”

 Consider the following policy language on reporting questions and concerns, along with a clear statement regarding non-retaliation for such reporting:

 Reporting Obligations of Company Personnel, Agents, and Partners

All Company Personnel, Agents, and Partners are required to report any knowledge, awareness or suspicion of a potential violation of: (i) the FCPA, the UKBA, or any other anti-corruption and/or anti-bribery laws applicable to the Company; (ii) the Policy; or (iii) the Compliance Manual by the Company or any of its Personnel, Agents, or Partners.

  • Company Personnel are required to report such information to the Company Compliance Officer or his or her designee, or to the hotline described below.
  • Company Agents and Partners are required to report such information to a Company representative, the Company Compliance Officer or his or her designee, or to the hotline described below.  Any Company representative that receives such a report from an Agent or Partner must report that information to the Company Compliance Officer or his or her designee, or to the hotline described below.

Non-Retaliation Policy

The Company has zero tolerance for any retaliation of any kind against any individual who in good faith makes inquiries, reports concerns, or participates in external or internal investigations.  This policy extends to any whistleblower or individual who makes a report to government authorities outside of the procedures described in this Manual.  Any individual who is concerned about retaliation or feels he or she has been subjected to such retaliation should immediately contact your Human Resources representative, the Vice President of Human Resources, the Company Compliance Officer or his or her designee, or through XYZ Hotline .

Retaliation against any individual for making a report as described in this Section in good faith can result in serious disciplinary action up to and including termination.

On a final note, it is not sufficient to just have an anonymous reporting system/hotline number tucked away in a Code of Conduct or a company’s Anti-Corruption policy.  The existence of the hotline should be prominently displayed through the use of posters or wallet cards, preferably in the native language of the employees at each particular location.  Periodic reminders should also be sent out to employees and to third party business agents encouraging them to use the anonymous reporting system if they have questions or concerns that they want answered or reported.

 Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries.  She was of the first individuals in the United States to earn TRACE Anti-bribery Specialist Accreditation (TASA).  She can be reached at msjones@msjllc.com or 337-513-0335. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.com.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor.

 

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