FCPA Compliance and Ethics Blog

April 8, 2015

The WPA and More Productive Compliance Meetings

WPA LogoOn this day 80 years ago, Congress created the Works Progress Administration (WPA), a central part of President Franklin D. Roosevelt’s New Deal. The WPA was established under the Emergency Relief Appropriation Act, as a means of creating government jobs for some of the nations many unemployed. Under the direction of Harry L. Hopkins, the WPA employed approximately 8 million people who worked on 1.4 million public projects before it was disbanded in 1943. Its programs were extremely popular and contributed significantly to Roosevelt’s landslide reelection in 1936.

I have always been amazed at the variety of works that the WPA had a hand in creating, from vast public building projects like the construction of highways, bridges, and dams to the careers of several important American artists, including Jackson Pollock and Willem de Kooning. Many of the most interesting art deco buildings still in use were built during the 1930s through the auspices of the WPA.

While the WPA constructed and led to many good works during its existence, one of the banes of corporate existence is the number of meetings that one must attend. Even worse than the raw number of meetings is the lack of any good that comes out of most meetings. Most meeting organizers have no clue how to run a successful or even useful meeting. I thought about this when I read a recent article in the Houston Business Journal (HBJ), entitled “10 ways to make your next meeting more productive by Dana Manciagli.

Manciagli began her piece by noting that researchers from the London School of Economics and Harvard University found that business leaders “spend 60% of their time in meetings, and only 15% working alone.” While this statistic alone is troubling enough, when you overlay that with the number of meetings where nothing is accomplished, it is clear to me you have a complete waste of time and resources. I do recognize that some companies have taken accomplishing nothing in meetings as a matter of corporate policy. General Motors (GM) took this to an art form in the well-documented GM Nod, which signified that there was agreement on an issue but that no one would actually do anything about it.

But for those who might want to actually accomplish something in a meeting, Manciagli pointed to Andrea Driessen whom she described as “chief boredom buster” at Seattle-based No More Bored Meetings . How is that for a moniker and company name? Manciagli related Driessen’s top ten tips for developing, running and ultimately having a successful meeting.

  1. Be a Know-it-all

Manciagli writes that because it is “natural to disengage when meeting content isn’t relevant. The most effective meeting hosts review all potential agenda segments to determine whether they apply to all attendees. If participants already know a particular content slice, then simply don’t cover that segment for the broader audience. Or if you have vastly different levels of awareness in the room, divide people accordingly to ensure maximum relevance for all.” Of course this means you will need to put some thought into your pre-meeting planning.

  1. No Problem? No Meeting!

We have all been subjected to it, the daily, weekly, monthly meeting check-in to see how the project is progressing. But Manciagli believes that “many of these less-than-productive meetings could be canceled or shortened if we identified the problem the meeting is intended to solve. And if we can’t find an identifiable problem, then don’t have the meeting.” Manciagli concludes, “Sometimes, it’s that simple.”

  1. Get Real

This is another pre-meeting planning point. Do you try to squeeze 13 action items for discussion and resolution into a 30-minute meeting? Conversely you do not need to book a 60-minute window to handle a couple of points. If you can handle a matter via email or need to go offline, do so.

  1. Prioritize, Prioritize, Prioritize!

Like its related cousin, Document, Document and Document, this phase should be more than simply a catchword. It should be an action item in your meeting planning process. Tackle your important issues first to “save time and solve your most pressing problem.”

  1. Play “Pass the Pad” To Avoid Late Arrivals

The biggest offender of this rule is, unfortunately, us lawyers. Why, because we are always (in our eyes) the most important. Yet not being able to start because someone is not present or having to repeat points is one of the worst problems there is around efficient meetings. The article notes, “Meeting productivity suffers when people arrive late, and the punctual are penalized.” Her solution is to require the latecomer to take notes in the meeting, writing “People learn quickly that they can either be on time, or become the dreaded note-taker if they are late. As host, you’ll see positive behavior change with little effort on your part.”

  1. Be a Meeting Bouncer

Manciagli tactfully writes about that “common meeting malady: the tangent talker.” I would perhaps less tactfully say there are way too many people who like to hear the sound of their own voices way too much. Manciagli suggests a little humor by “naming a tangent officer who monitors and records tangents for later. Use that parking lot! And you can lighten it up by using a toy police badge.” Nothing like a little corporate shame to keep things moving.

  1. Make it Multi-Sensory

It is not simply millennials who respond to social media. Most people do better when they are visually engaged. Manciagli suggests using more than simply oral presentations, use other tools, including the following: “Graphic illustration, in which someone draws out ideas in real time; Customer testimonials that emotionally inspire; Quizzes and games; Product demos; Surprise guests; Props that foster kinesthetic learning.”

  1. PPPPP

Everyone understands the Five P rule, aka prior planning prevents poor performance. As a meeting host, this means you must absolutely be prepared prior to the meeting. If there are technical issues, you should pass out that information prior to the meeting. Manciagli pointed out that “the more skin we all have in the game, the more likely we are to own and be accountable to group outcomes.”

  1. Hire an “Accountant”

Accountability. How many meetings have you attended where there was no accountability? Manciagli believes “Most meetings lack built-in accountability structures.” She gives the tangible hint to “ask everyone to record at least one goal related to the meeting that they’ll commit to completing in the next week or month, and have them check in with one another. Teams gain measurable accountability, and you get recognized for generating stronger results tied to your meetings.”

  1. Remember: Humor is No Joke

Humor has a big use in meetings, “The power of humor — if used effectively within the meeting mix — is no laughing matter. Indeed, there is a strong business case to be made for laughing while learning.” It can also lower the stress level in meetings, once again if used properly.

I am sure that you have your own horror stories of aimless, wandering meetings that go nowhere painfully slow. As a Chief Compliance Officer (CCO) or compliance practitioner, one of your most valuable items in a corporation is time. You can set an example about running an efficient and productive meeting and then lead your company down the path laid out in the article. Who knows, the results of what you start in your company may last as long as WPA work.

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, 2015

April 2, 2015

Managing Your Third Parties in a FCPA Compliance Program

7K0A0501The building blocks of any Foreign Corrupt Practices Act (FCPA) anti-corruption compliance program lay the foundations for a best practices compliance program. For instance in the lifecycle management of third parties, most compliance practitioners understand the need for a business justification, questionnaire, due diligence, evaluation and compliance terms and conditions in contracts. However, as many companies mature in their compliance programs, the issue of third party management becomes more important. It is also the one where the rubber meets the road of actually doing compliance.

In the March/April issue of Supply Chain Management Review is an article by Mark Trowbridge, entitled “Put it in Writing: Sharpening Contracts Management to Reduce Risk and Boost Supply Chain Performance”, that provides some useful insights into the management of the third party relationship. While the focus of the article was about having a “strategic approach to contracts management” I found the author’s “five ways to start professionalizing your approach to outsourcing contracts” as steps a compliance practitioner can use in the management of third party relationships, both on the sales side and those which come into your company through the Supply Chain.

By taking his analysis into the compliance realm, I believe there are concrete steps you can take going forward. The key is to have a strategic approach to how you structure and manage your third party relationships. This may mean more closely partnering with your third parties to help manage the anti-corruption compliance risk. It would certainly lead towards enabling your company to “control risk while optimizing the performance” of your third parties. To achieve these goals, I have revised Trowbridge’s prescriptions from suppliers to third parties.

I. Consolidate Third Parties but Retain Redundancy

It is incumbent that consolidation in your third party relationships on the Supply Chain side to a smaller number of suppliers will “yield better cost leverage.” From the compliance perspective it also should make the entire third party lifecycle easier to manage, particularly steps 1-4. However a company must not “over-consolidate” by going down to a single source supplier. Trowbridge advocates a diversified supplier base, with a technique he calls “dual-sourcing”. From the compliance perspective, you may want to have a primary and secondary third party that you work with in a service line or geographic area to retain this redundancy.

II. Keep Tabs on Subcontracted Work

This is one area that requires an appropriate level of management. If your direct contracting party has the right or will need to subcontract some work out, you need to have visibility into this from the compliance perspective. You will need to require and monitor that your direct third party relationship has your approved compliance terms and conditions in their contracts with their subcontractors. You will also need to test that proposition. In other words, you must require, trust and then verify.

III. When Disaster Strikes, Make Sure Your Company is Legally Protected Too

This is where your compliance terms and conditions will come into play. One of the things that I advocate is a full indemnity if your third party violates the FCPA and your company is dragged into an investigation because of the third party’s actions. Such an indemnity may not be worth too much but if you do not have one, there will be no chance to recoup any of your legal or investigative costs. Another important clause is that any FCPA violation is a material breach of contract. This means that you can legally, under the terms of the contract, terminate it immediately, with no requirement for notice and cure. Once again you may be somewhat constrained by local laws but if you do not have the clause, you will have to give written notice and an opportunity to cure. This notice and cure process may be too long to satisfy the Department of Justice (DOJ) or Securities and Exchange Commission (SEC) during the pendency of a FCPA investigation. Finally, you need a clause that requires your third party to cooperate in any FCPA investigation. This means cooperation with you and your designated investigation team but it may also mean cooperation with US governmental authorities as well.

You also need the ability to move between third parties if the need arises. This is the redundancy issue raised above. You do not want to be stuck with no approved freight forwarders or other transporters in a certain geographic area. If a compliance related matter occurs, you may well need certain contractual rights to move your work and to require your prime third party to cooperate with the transition to your secondary third party.

IV. Keep Track of Your Third Parties’ Financial Stability

This is one area that is not usually discussed in the compliance arena around third parties but it seems almost self-evident. You can certainly imagine the disruption that could occur if your prime third party supplier in a country or region went bankrupt; but in the compliance realm there is another untoward Red Flag that is raised in such circumstances. Those third parties under financial pressure may be more easily persuaded to engage in bribery and corruption than third parties that stand on a more solid financial footing. You can do this by a simple requirement that your third party provide annual audited financial statements. For a worldwide logistics company, this should be something easily accomplished.

Trowbridge says, “Automated financial tracking tools can also be used to keep track of material changes in a supplier’s financial stability.” You should also use your in-house relationship manager to regularly visit key third party relationships so an on-the-ground assessment can be a part of an ongoing conversation between your company and your third parties.

V. Formalize Incentives for Third Party Performance

One of the key elements for any third party contract under the FCPA or UK Bribery Act is the compensation issue. If the commission rate is too high, it could create a very large pool of money that could be used to pay bribes. It is mandatory that your company link any commission or payment to the performance of the third party. If you have a long-term stable relationship with a third party, you can tie compensation into long-term performance, specifically including long-term compliance performance. This requires the third party to put skin into the compliance game so that they have a vested, financial interest in getting things done in compliance with the FCPA or other anti-corruption compliance regime.

Additionally, as Trowbridge notes, “The fact is, linking contractual compensation to performance does make a significant difference in supplier performance. This is especially valuable when agreed upon key performance indicator (KPI) metrics can be accurately tracked.” This would seem to be low hanging for the compliance practitioner. If you cannot come up with some type of metric from the compliance perspective, you can work with your business relationship team to develop such compliance KPIs.

While Trowbridge’s article focused on the suppliers, I found his ideas easily transferable to the compliance field. Near the end of the article Trowbridge suggested ranking suppliers based upon a variety of factors including performance, length of relationship, benchmarking metrics and KPIs. This is a way for the compliance practitioner to have an ongoing risk ranking for third parties that can work as a preventative and even proscription prong of a compliance program and allow the delivery of compliance resources to those third parties that might need or even warrant them.

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, 2015

April 1, 2015

Supply Chain as a Source of Compliance Innovation

Supply ChainOn this day we celebrate the greatest upset in the history of the NCAA Basketball Tournament, when Villanova beat Georgetown for the 1985 national championship. Georgetown was the defending national champion and had beaten Villanova at each of their regular season meetings. In the final the Wildcats shot an amazing 79% from the field, hitting 22 of 28 shots plus 22 of 27 free throws. Wildcats forward Dwayne McCain, the leading scorer, had 17 points and 3 assists. The Wildcats’ 6’ 9” center Ed Pinckney outscored 7’ Hoyas’ center, Patrick Ewing, 16 points to 14 and 6 rebounds to 5 and was named MVP of the Final Four. It was one of the greatest basketball games I have ever seen and certainly one for the ages.

I thought about this game when I read an article in the most recent issue of Supply Chain Management Review by Jennifer Blackhurst, Pam Manhart and Emily Kohnke, entitled “The Five Key Components for SUPPLY CHAIN”. In their article the authors asked “what does it take to create meaningful innovation across supply chain partners?” Their findings were “Our researchers identify five components that are common to the most successful supply chain innovation partnerships.” The reason innovation in the Supply Chain is so important is that it is an area where companies cannot only affect costs but can move to gain a competitive advantage. To do so companies need to see their Supply Chain third parties as partners and not simply as entities to be squeezed for costs savings. By doing so, companies can use the Supply Chain in “not only new product development but also [in] process improvements”.

I found their article resonated for the compliance professional as well. It is almost universally recognized that third parties are your highest Foreign Corrupt Practices Act (FCPA) risk. What if you could turn your Supply Chain from being considered a liability under the FCPA to an area that brings innovation to your compliance program? This is an area that not many compliance professionals have mined so I think the article is a useful starting point. The authors set out five keys to successful innovation spanning Supply Chain partners. They are: “(1) Don’t Settle for the Status Quo; (2) Hit the Road in Order to Hit Your Metrics; (3) Send Prospectors Not Auditors; (4) Show Me Yours and I’ll Show You Mine; and (5) Who’s Running the Show?”

Don’t Settle for the Status Quo

This means that you should not settle for simply the status quo. Innovation does not always come from a customer or even an in-house compliance practitioner. Here the key characteristics were noted to be “cooperative, proactive and incremental”. The authors emphasize that “you need to be leading the innovation change rather than catching up from behind.” If a company in your Supply Chain can suggest a better method to do compliance, particularly through a technological solution, it may be something you should well consider.

Hit the Road in Order to Hit Your Metrics

To truly understand your compliance risk from all third parties, including those in the Supply Chain, you have to get out of the ivory tower and on the road. This is even truer when exploring innovation. You do not have hit the road with the “primary goal to be the inception point for innovation” but through such interactions, innovation can come about “organically”. There is little downside for a compliance practitioner to go and visit a Supply Chain partner and have a “face-to-face meeting simply to get to know the partner better and more precisely identify that partner’s needs.”

Send Prospectors Not Auditors

While an audit clause is critical in any Supply Chain contract, both from a commercial and FCPA perspective, the authors believe that “Too often firms use supply chain managers as auditors when they are dealing with supply chain partners.” The authors call these types of managers “innovation partners.” Every third party should have a relationship manager, whether that third party is on the sales side or the Supply Chain side of the business. Moreover, the innovation partners are “able to see synergies where [business] partners can work together for the benefit of everyone involved.”

Show Me Yours and I’ll Show You Mine

Here the authors note, “Trust plays an extremely important role in supply chain innovation. Firms in successful innovations discussed a willingness to share resources and rewards and to develop their partners’ capabilities.” The authors believe that “Through the process of developing trust, firms understand their partner’s strategic goals.” I cannot think of a more applicable statement about FCPA compliance. Another way to consider this issue is that if your Supply Chain partner has trust in you and your compliance program, they could be more willing to work with you on the prevent and detect prongs of compliance regimes. Top down command structures may well be counter-productive.

Who’s Running the Show?

I found this point particularly interesting as for the authors, this prong means “who is doing what, but also what each firm is bringing to the relationship in terms of resources and capabilities.” In the compliance regime it could well lead to your Supply Chain partner taking a greater role in managing compliance in a specific arena or down a certain set of vendors. Your local Supply Chain partner might be stronger in the local culture, which could allow it to lead to collaborations by other vendors in localized anti-corruption networks or roundtables to help move the ball forward for doing business in compliance with the FCPA or other anti-corruption laws such as the UK Bribery Act.

The authors ended by remarking, “we noticed that leveraging lean and process improvement was mentioned by virtually every firm.” This is true in the area of process improvement, which is the essential nature of FCPA compliance. Another interesting insight from the authors was that utilization can increase through such innovation in the Supply Chain. Now imagine if you could increase your compliance process performance by considering innovations from your Supply Chain third parties? The authors conclude by stating that such innovation could lead to three “interesting outcomes 1) The trust and culture alignment is strengthened through the partnership innovation process leading to future innovations and improvement; 2) firms see what is needed in terms of characteristics in a partner firm so that they can propagate the success of prior innovations to additional partners; 3) by engaging supply chain partners as innovation partners, both sides reap rewards in a low cost, low risk, highly achievable manner.” With some innovation Villanova coach Rollie Massimino led his team over the prohibitive favorite Georgetown, and you may be able to tap into a resource immediately available at your fingertips, your Supply Chain.

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, 2015

March 31, 2015

Do Your Executives Have (Compensation) Skin in the Game?

Whymper and MatterhornThis year marks the 150th anniversary of the ascent of the most famous mountain in Europe, the Matterhorn. On Bastille Day, in 1865, four British climbers and three guides were the first climbers to reach the summit. In an article in the Financial Times (FT), entitled “In Whymper’s steps”, Edward Douglas wrote, “It was a defining moment in the history of mountaineering, arguably as pivotal as the first ascent of Everest. Before this calamity climbing was a quirky minority pastime and Zermatt an indigent and obscure village. All that changed on July 14, 1865. As locals cheerfully acknowledge, the Matterhorn disaster enthralled the public around the world and sparked an unprecedented tourist boom.”

The disaster had befallen the climbing team on its descent after having scaled the summit. The team was led by Edward Whymper. As they were coming back down, they were all tied together with rope. When one of the team slipped, he knocked over his guide and “their weight on the rope pulled off the next man…and a fourth climber as well.” Only expedition leader Whymper and two Swiss guides, a father and son duo from Zermott, survived the disaster when “they dug in and the rope tightened – then snapped – leaving them to watch in horror as the bodies of their companions cartwheeled thousands of feet down the mountain.” The depiction of the disaster by the French artist Gustave Doré captures for me the full horror of the tragedy.

Yesterday I wrote about the role of compensation in your best practices compliance program. Today I want to focus on the same issue but looking at senior management and compensation. I thought about this inter-connectedness of compensation in a compliance program, focusing up the corporate ladder when I read a recent article in the New York Times (NYT) by Gretchen Morgenson, in her Fair Game column, entitled “Ways to Put the Boss’s Skin In the Game”. Her piece dealt with a long-standing question about how to make senior executives more responsible for corporate malfeasance? Her article had some direct application to anti-corruption compliance programs such as those based on the US Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. Morgenson said the issue was “Whenever a big corporation settles an enforcement matter with prosecutors, penalties levied in the case – and they can be enormous – are usually paid by the company’s shareholders. Yet the people who actually did the deeds or oversaw the operations rarely so much as open their wallets.”

She went on to explain that it is an economic phenomenon called “perverse incentive” which is one where “corporate executives are encouraged to take outsized risks because they can earn princely amounts from their actions. At the same time, they know that they rarely have to pay any fines or face other costly consequences from their actions.” To help remedy this situation, the idea has come to the fore about senior managers putting some ‘skin in the game’. Her article discussed three different sources for this initiative.

The first is a current proxy proposal in front of Citigroup shareholders which “would require that top executives at the company contribute a substantial portion of their compensation each year to a pool of money that would be available to pay penalties if legal violations were uncovered at the bank.” Further, “To ensure that the money would be available for a long enough period – investigations into wrongdoing take years to develop – the proposal would require that the executives keep their pay in the pool for 10 years.”

The second came from William Dudley, the President of the Federal Reserve Bank of New York, who made a similar suggestion in a speech last fall. His proscription involved a performance bond for the actions of bank executives. Morgenson quoted Dudley from his speech, “In the case of a large fine, the senior management and material risk takes would forfeit their performance bond. Not only would this deferred debt compensation discipline individual behavior and decision-making, but it would provide strong incentives for individuals to flag issues when problems develop.”

Morgenson reported on a third approach which was delineated in an article in the Michigan State Journal of Business and Securities Law by Greg Zipes, “a trial lawyer for the Office of the United States Trustee, the nation’s watchdog over the bankruptcy system, who also teaches at the New York University School for Professional Studies.” The article is entitled, “Ties that Bind: Codes of Conduct That Require Automatic Reductions to the Pay of Directors, Officers and Their Advisors for Failures of Corporate Governance”. Zipes proposal is to create a “contract to be signed by a company’s top executives that could be enforced after a significant corporate governance failure. Executives would agree to pay back 25 percent of their gross compensation for the three years before the beginning of improprieties. The agreement would be in effect whether or not the executives knew about the misdeeds inside their company.”

As you might guess, corporate leaders are somewhat less than thrilled at the prospect of being held accountable. Zipes was cited for the following, “Corporate executives are unlikely to sign such codes of conduct of their own volition.” Indeed Citibank went so far as to petition the Securities and Exchange Commission (SEC) “for permission to exclude the policy from its 2015 shareholder proxy.” But the SEC declined to do and at least Citibank shareholders will have the chance to vote on the proposal.

In the FCPA compliance context, these types of proposals seem to me to be exactly the type of response that a company or its Board of Directors should want to put in place. Moreover, they all have the benefit of a business solution to a legal problem. In an interview for her piece, Morgenson quoted Zipes as noting, “This idea doesn’t require regulation and its doesn’t require new laws. Executives can sign the binding code of conduct or not, but the idea is that the marketplace would reward those who do.” For those who might argue that senior executives can not or should not be responsible for the nefarious actions of other; they readily take credit for “positive corporate activities in which they had little role or knew nothing about.” Moreover, under Sarbanes-Oxley (SOX), corporate executives must make certain certifications about financial statement and reporting so there is currently some obligations along these lines.

Finally, perhaps shareholders will simply become tired of senior executives claiming they could not know what was happening in their businesses; have their fill of hearing about some rogue employee(s) who went off the rails by engaging in bribery and corruption to obtain or retain business; and not accept that leaders should not be held responsible.

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, 2015

March 30, 2015

Compensation Incentives in a Best Practices Compliance Program

Compensation IncentivesOne of the areas that many companies have not paid as much attention to in their Foreign Corrupt Practices Act (FCPA) anti-corruption compliance programs is compensation. However the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have long made clear that they view incentives, rewarding those employees who do business in compliance with their employer’s compliance program, as one of the ways to reinforce the compliance program and the message of compliance. As far back as 2004, the then SEC Director of Enforcement, Stephen M. Cutler, said “[M]ake integrity, ethics and compliance part of the promotion, compensation and evaluation processes as well. For at the end of the day, the most effective way to communicate that “doing the right thing” is a priority, is to reward it.” The FCPA Guidance states the “DOJ and SEC recognize that positive incentives can also drive compliant behavior. These incentives can take many forms such as personnel evaluations and promotions, rewards for improving and developing a company’s compliance pro­gram, and rewards for ethics and compliance leadership.”

In a Harvard Business Review (HBR) article, entitled “The Right Way to Use Compensation, Mark Roberge, Chief Revenue Officer of HubSpot, wrote about his company’s design and redesign of its employee’s compensation system to help drive certain behaviors. The piece’s subtitle indicated how the company fared in this technique as it read, “To shift strategy, change how you pay your team.” Several interesting ideas were presented, which I thought could be applicable for the Chief Compliance Officer (CCO) or compliance practitioner when thinking about compensation as a mechanism in a best practices compliance program.

Obviously Roberge and HubSpot were focused on creating and retaining a customer base for a start-up company. However because the company was a start-up, I found many of their lessons to be applicable for the compliance practitioner. As your compliance program matures and your strategy shifts, “it’s critical that the employees who bring in the revenue-the sales force-understand and behave in ways that support the new strategy. The sales compensation system can help ventures achieve that compliance.” The prescription for you as the compliance practitioner is to revise the incentive system to focus your employees on the goals of your compliance program. This may mean that you need to change the incentives as the compliance programs matures; from installing the building blocks of compliance to burning anti-corruption compliance into the DNA of your company.

Roberge wrote that there were three key questions you should ask yourself in modifying your compensation incentive structure. First, is the change simple? Second, is the changed aligned with your company values? Third, is the effective on behavior immediate due to the change?

Simplicity

Your employees should not need “a spreadsheet to calculate their earnings.” This is because if “too many variables are included, they may become confused about which behaviors” you are rewarding. Keep the plan simple and even employee KISS, Keep it simple sir, when designing your program. If you do not do so, your employees might fall back on old behaviors that worked in the past. Roberge notes, “It should be extraordinarily clear which outcomes you are rewarding.”

The simplest way to incentive employees is to create metrics that they readily understand and are achievable in the context of the compliance program that you are trying to implement or enhance. This can start with attending Code of Conduct and compliance program training. Next might be a test to determine how much of that training was retained. It could be follow up, online training. It could mean instances of being a compliance champion in certain areas, whether with your employee base or third party sales force.

Alignment

As the CCO or compliance practitioner, you need to posit the most important compliance goal your entity needs to achieve. From there you should determine how your compensation program can be aligned with that goal. Roberge cautions what the DOJ and SEC both seem to understand, that you should not “underestimate the power of your compensation plan.” You can tweak your compliance communication, be it training, compliance videos, compliance reminders or other forms of compliance messaging but it is incumbent to remember that “if the majority of your company’s revenue is generated by salespeople, properly aligning their compensation plan will have greater impact than anything else.”

The beauty of this alignment prong is that it works with your sales force throughout the entire sales channel. So if your sales channel is employee based then their direct compensation can be used for alignment. However such alignment also works with a third party sales force such as agents, representatives, channel ops partners and even distributors. Here Roberge had another suggestion regarding compensation that I thought had interesting concepts for third parties, the holdback or even clawback. This would come into place at some point in the future for these third parties who might meet certain compliance metrics that you design into your third party management program.

Immediacy

Finally, under immediacy, it is important that such structures be put in place “immediately” but in a way that incentives employees. Roberge believes that “any delay in the good (or bad) behavior and the related financial outcome will decrease the impact of the plan.” As a part of immediacy, I would add there must be sufficient communication with your employee or other third party sales base. Roberge suggested a town hall meeting or other similar event where you can communicate to a large number of people.

Even in the world of employee compensation incentives, there should be transparency. He cautioned that transparency does not mean the design of the incentive system is a “democratic process. It was critical that the salespeople did not confuse transparency and involvement with an invitation to selfishly design the plan around their own needs.” However, he did believe that the employee base “appreciated the openness, even when the changes were not favorable to their individual situations.” Finally, he concluded, “Because of this involvement, when a new plan was rolled out, the sales team would understand why the final structure was chosen.”

So just as Roberge, working with HubSpot as a start-up, learned through this experience “the power of a compensation plan to motivate salespeople not only to sell more but to act in ways that support a start-up’s evolving business model and overall strategy”; you can also use your compensation program as such an incentive. For the compliance practitioner one of the biggest reasons is to first change a company’s culture to make compliance more important but to then burn it into the fabric of your organization. But you must be able to evolve in your thinking and professionalism as a compliance practitioner to recognize the opportunities to change and then adapt your incentive program to make the doing of compliance part of your company’s everyday business process.

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, 2015

March 26, 2015

The Power of Positive Thinking

Tough CookieEd. Note-I am on Spring Break this week and the Two Tough Cookies graciously agreed to provide a week of guest posts.

Wrapping up this week’s communication series, I am reminded of my own personal flaws… and I can be my own worst enemy. Nothing you’ve read these past few days should be surprising to you, but I hope they have served as a reminder on some easy things you can do to improve your communications within your organization. You need to be a “trusted resource” within your organization to be an effective change agent. Even if you aren’t leading the change efforts, just reinforcing the concepts for your organizational leaders makes you an important part of the change underway. How you present yourself to the larger organization goes a long way to reinforcing your credentials as a “trusted resource” and gives you the staying power to ride the tide of change.

Take this short quiz, and recognize your thought patterns from your answers:

  • You’ve been dieting for a while and you just lost 10 pounds. You think:
    1. This diet is taking so long I’m never going to look good in that suit for my brother’s wedding
    2. I’m proud of the self-control I’ve had so far
  • You miss your flight, and have to wait for a later one. You think:
    1. No matter what I do, something always makes me late
    2. I should have looked at the gap between connecting flights and given myself more time to change gates
  • Work rolls out a new computer app for you to use, and you are still struggling to get the hang of it. You think:
    1. I’ll embarrass myself if I ask for help
    2. I’m going to ask for help with this

In all three scenarios above, answer B is “positive thinking” because they

  • Give credit for positive outcomes
  • Identify strengths that make success possible
  • “Failures” are “foot faults” and not a personal flaw

Answer A, on the other hand, demonstrates negative thinking because

  • Success is due to luck or external factors
  • Success is random and had nothing to do with hard work
  • There’s assumption of failure and not success, and
  • Failure comes as no surprise

Circling back to Appreciative Inquiry, we already know to focus on what success looks like to you and your organization. Emotional Intelligence has you presenting yourself in the most positive way possible through the use of understanding and working with your emotions, knowing that the power to control your reactions goes a long way to controlling the outcome of your interactions with others in the workplace. Both these disciplines focus on the positives, and the Power of Positive Thinking takes it to the next level. As Gandhi is quoted as saying:

Watch your thoughts, for they become your words… Watch your words, for they become your actions…. Watch your actions, for they become your habits… Watch your habits, for they become your values…. And understand your values, for they become your destiny.

Positive thinkers are better at coping with workplace challenges. They are more resilient, they look to be part of the solution and not the problem, are more likely to ask for help, and function better in a crisis. They also tend to have an increased capacity for joy, are kinder, and less likely to feel the negative effects of stress, because they focus on what they can change. As compliance professionals, we work in a world ripe with stress of all kinds.     So how does positive thinking help us cope with workplace challenges? Here’s an example that I hope you can derive some useful tips from….

I was faced with a situation in a manufacturing plant where one worker hated another with a vengeance, and the Helpline had multiple calls from her over the course of a couple weeks, precipitating an “intervention.” The HR manager, new to the plant (but not new to HR), had thrown his hands up and said “I can’t deal with these two!” so I offered to personally come, hear them out, and help him work through a solution.

We sat the two down in a joint session, and I set some simple ground rules. Each would get 10 minutes to “present” their case and “air” their concerns, with another 5 minutes to rebut once the other had finished talking. First instance of interruption would take a minute off their “air time,” second interruption, two minutes, third interruption would and so on. Both agreed to the terms, and I tossed a coin for who would go first. The first, who had “seniority” in the plant, argued her case, and insisted that the other be reassigned to second shift so she wouldn’t have to see her face every day. The other worker stated she’d been given a hard time since day one, and learned it was because the complainant wanted her friend (who worked second shift) to get the job on first shift instead so they could have more friend time together. She then told us that first shift was important to her, because her husband worked second shift, and this meant they didn’t have to worry about day care for their kids. What was critical was that neither party had a performance issue, nor an attendance issue. It was clear to both myself and the HR manager it simply a matter of the complainant wanting her friend to get the first shift slot instead.

We “recessed” before rebuttal, and I told the HR manager that I had an idea, if he wouldn’t mind me trying something. So, using the power of positive thinking, I invited the complainant to speak with us privately, to rebut what the other employee had to say. Giving us no new “evidence” of misbehavior, after she finished speaking the “dialogue” ensued as follows:

Q: So, you’re unhappy about Employee X working the day shift, correct?
A: Yes
Q: So, you want to have a different shift than Employee X, correct?
A: Yes
Q: And you are suggesting that we move Employee X to second shift, correct?
A: Yes
Q: Are you willing to pay for day care for Employee X’s kids while she works?
A: What?
Q: I asked, are you willing to pay for day care for Employee X to have her kids watched while she works second shift?
A: You crazy or what? That’s not my responsibility! That’s her problem!
Q: Okay, but it wasn’t her problem until you insisted we change her shift. We need help figuring out how to solve this new problem if we do as you ask. Ultimately, you want her to work a different shift than you, right? That’s what you want?
A: That’s right! So she needs to be moved to second shift!
Q: Or, you can be moved to second shift, right? I mean, that will do as you ask, won’t it? You don’t have any kids at home (focus on her “strength”), so it’s what will create the least hardship for everyone, isn’t it (focus on success)? She won’t have to get day care, you won’t have to pay for her day care (win-win), you’ll get to be with your friend, you’ll have what you want (another win-win), right? So, the way I see it we have three choices in front of us: 1) we leave things alone and you leave her alone (best choice), 2) we move her to second shift and you pay her day care (worst choice for complainant and definitely not what she anticipated), or 3) you move to second shift to be with your friend (unlikely, but “accountable” choice). What do you suggest we do from those three options? The choice is yours, all you have to do is tell us what you want us to do, and there’s really no wrong answer here from those three options (all options = success) ….

The silence in the room was deafening. The HR manager later pulled me aside and told me it took everything he had to keep a straight face, and he never in his life saw such an awestruck look on a factory worker’s face. He then thanked me for helping “document” the real issue, and giving him the insight to deal with that worker going forward. I was an instant hero for Employee X, too, as a result, and the HR manager confirmed that there were no more complaints coming from the complainant.

By simply shifting the focus of the problem a little bit, I “helped” the HR manager deal with the stressful complainant, and helped each focus on what they could change and resolve the conflict at work. By intervening on his behalf, I also took on the role of “bad cop” and he was able to preserve his “good cop” image at the plant while also successfully resolving the conflict. Further more, he was able to point to the experience any time other personal conflicts arose, and offered to bring me back anytime to work through the conflicts with the employees. No one took him up on the offer, and I still chuckle when I think back on that episode.

Our brains mimic what we see, so when we spread positivity, and show people alternative ways of thinking through problems, magic happens. I had fun with the exercise above, because it gave me the opportunity to show the complainant how her negative thinking was bringing everyone around her down, when the solution to her “problem” was really simple – I empowered her to think in terms of the hardships she was presenting to others (negativity) and gave her the tools to arrive at a positive outcome, if she was willing to take on some personal accountability in the process. Instead of thinking to myself “this woman is impossible to deal with” I thought instead “how can I empower her to solve this problem herself?” Another priceless leadership moment that I will take with me forever.

So how do you manage your thoughts to ensure positive outcomes? Like any leadership exercise, it’s a marathon, not a sprint. You have to be aware of what you’re doing (that’s where EQ comes in), and examine the triggers that send you into negativity. Change the critical thoughts into goals. Think about your values, and determine what it is you want to be. You don’t have to be positive all the time, nor should you – negative thinking can help you prepare, can also help you see the lighter side of things… It’s the yin to your yang, and helps you aim for balance. But practice your positivity, ask for help (go ahead, guys, ask for directions, it won’t hurt you), have a sense of humor, and enjoy yourself. And remember one thing if nothing else: You cannot be what you cannot see.

The Two Tough Cookies will be publishing a book of their tales shortly, under the title “You Can Not Be What You Can Not See” – look for it from Corporate Compliance Insights, coming soon. 

This publication contains general information only and is based on the experiences and research of the authors. The authors are 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. 

March 25, 2015

Emotional Intelligence and Mindfulness

Tough CookieEd. Note-I am on Spring Break this week. The Two Tough Cookies graciously agreed to once again provide a week of guest posts. 

Remember when I said many “leaders” either aren’t aware, or don’t care, to take a few extra precautions to communicate authentically and in a manner that is meaningful, relevant, and targeted for specific results? That’s where emotional intelligence plays a big part in how you communicate. First and foremost, understand the root origin of the word “Emotion” is “to motivate.” So consider the following: When asked, how do you respond to questions like “How are you” or “How’s Things?” If you answer anything other than “fine” or “great” (or any quirky response you might deploy to illicit a chuckle), know that your response will adversely impact your effectiveness and trust in the organization. People really don’t want to know how sick your kids are, or how awful your commute was. They don’t want facts. They want nice. Drawing from what we just wrote about Appreciative Inquiry, people with a high EQ understand the importance of positivity in getting results. You must understand how your emotional state drives your performance in terms of being effective, being “trusted” and being well-received by others. So learn well how to distance yourself a bit from your reaction “in the moment,” and pay attention to what emotion group your reactions tend to fall into: Pleasant (caring, upbeat, happy), Neutral (anticipation, real interest, surprise), or Unpleasant (anger, disgust, fear). Once you master this, you will be demonstrating effective levels of “Professional Intimacy.

The truth is, our emotions provide a wealth of information about our state of mind in any given situation. It’s our “feedback loop” which we can’t, and shouldn’t, ignore. That sinking pit in your stomach when advised of a pending issue is something that is hard-wired into your brain? You can try to hide your reservations about proceeding, but emotions show even in the most seasoned communicator – we each have our little ‘tells.’ Yale University even has developed a mood meter for your iPhone, and I frequently fondle a “Tensometer” that I have at my desk, a token given to me by a former HR colleague as a joke that tells me, much like a mood ring, if I am tense, or chilled out. I take immense satisfaction knowing that I register most often in the blue and green scales (chilled) and only rarely register in the black and red scales (freaked out). The very act of checking my mood would make me testy if it registered otherwise!

Our emotions serve to motivate us, yes indeed they do. Fight or flight responses are served up based on our emotions. Are we afraid (negative emotion) of the outcome? If so, we might go into avoidance mode (flight). If we are interested in something (neutral emotion) we might try to engage others to explore and learn more. If we are happy about something (like being told you just did a great job on a project), we will strive to repeat that performance (fight), because we like to feel good about ourselves (as we just demonstrated, AI focuses on the positive changes the “pleasant” emotions can elicit).

So what happens when we feel emotions? The brain has two minds – the emotional mind and the rational mind – and unfortunately for many of us (myself included, thanks to my “latin” heritage), the emotional mind responds more quickly than the rational mind. Emotional Intelligence is an exercise in impulse control in favor of the thinking/rational mind to ensure that we don’t allow the emotional mind to hijack the rational mind.  So slow down, step back, when you notice a strong impulse taking over. Pause, be mindful of the moment, take your time. Recognize the effects your emotions may have on your effectiveness as a leader and communicator. A common tip people recommend is to count to 10, but darn, that can be awkward in a meeting. Instead, reach for a glass of water, and take a long, slow draught. While you are swallowing, you can reset the pace of your beating heart, collect your thoughts and emotions, and formulate your response. And remember too – you cannot cry and drink at the same time (just try it, and I promise you won’t be disappointed). That trusty glass of water has saved me on many occasions, and I never go to a meeting without something to drink, just in case I have to check my emotions at the door.

EQ as a communication tool helps you develop the emotional and social skills to establish how well we

  • Perceive and express ourselves
  • Perceive others reactions to ourselves
  • Develop and maintain appropriate social relationships
  • Cope with challenges
  • And use emotional information in an effective and meaningful way.

When deployed successfully, EQ can aid you in self-perception – understanding your emotional triggers and developing coping skills to let the rational mind emerge triumphant. By doing so, you develop adaptive behaviors that aid you in properly expressing your emotions, develop and maintain better personal relationships, and make better decisions as a result. With a strong sense of identity, you begin to develop the tools to accept and respect yourself, which helps you appreciate perceived positives, as well as develop inner strength, self-assuredness, and self-confidence. And it will glow off of you…

Please don’t confuse emotional control with emotional intelligence, however. People with strong emotional control but without EQ often come across as uncaring, cold, unfeeling. Conversely, people with little emotional control come across as too “touchy feely,” or “unstable” or, my personal favorite, a “loose cannon.” Neither extreme make for leaders worth following when trying to effect a positive organizational shift in culture, because neither comes across as trustworthy or authentic. What’s prescribed is a balance of appropriate distance paired with professional intimacy.   People with a high EQ have mastered the art of instilling a sense of caring, while motivating others to act in ways that suit their purpose, never crossing the line of familiarity that breeds contempt.

Another trap to avoid at all costs is passive aggressiveness. I am ashamed to admit I have been guilty of it on many occasions, and didn’t even know it, until someone used the term describing someone else and I had the temerity to finally look it up. To my surprise, I saw myself described, writ large and crystal clear on the pages of Wikipedia. I was decidedly NOT guilty of passive resistance to expected work requirements, opposition, stubbornness, and negative attitudes in response to requirements for normal performance levels expected of others. Definitely not me. I am a renowned overachiever, and but for my one run-in at my previous employer, I have always received high performance ratings. What I was guilty of, however, was conflict avoidance, rarely saying what I truly felt whenever I felt a disservice had been done to me, or my colleagues. I had a hard time asking for what I felt was right, and as a result, did not come across as powerfully as I could have or should have, given my role. I have since learned my lesson that you can’t get what you want if you don’t ask for it, and there is a proper way to express your feelings and not alienate the world, but boy, it took me a LONG time to get there.

So how does one get started with EQ? There are gobs of resources on the internet – just search ‘emotional intelligence’ (with quotes to narrow your results), and you are on your way. Take this EQ test to determine your EQ at home. But while you are at it, I suggest you look at “mindfulness” as well, as an EQ companion primer to help you practice impulse control, which will serve you well when you want your rational mind to speak first.

Worksheet in Two Tough Cookies Guest Posts-Spring Break 2015

This publication contains general information only and is based on the experiences and research of the authors. The authors are 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. 

March 19, 2015

Ingots of Gold & SEC FCPA Enforcement – Communication – Part IV

Ingots of GoldToday I want to use the Christie’s story Ingots of Gold as an introduction to some of the regular communications that the Securities and Exchange Commission (SEC) representatives frequently provide in public forums, regarding their views on Foreign Corrupt Practices Act (FCPA) enforcement and, more importantly for the compliance practitioner, FCPA compliance. In this story, told by Miss Marple’s friend, he was spending a holiday in Cornwall with an acquaintance called John Newman. It involved a shipwreck and, as the title foretold, valuable cargo. After a stormy night Newman was missing but was later found bound and gagged in a ditch. It is revealed that Newman used this as ruse to cover his tracks from a theft of gold, which, of course, Miss Marple resolves when no one else can do so.

It was the language of this story that struck me. For as famous as Agatha Christie is for her puzzles, she had a great facility for language. At one point Miss Marple said, “You wouldn’t like my opinion, dear. Young people never do, I notice.” Later she describes the antagonist with the following, “his mind might run in strange, unrecognized channels”. Fortunately for the compliance community, one of the significant ways that the SEC communicates with compliance practitioners is through public speeches. We were recently treated to another such example when Andrew Ceresney, the SEC Director, Division of Enforcement, spoke at CBI’s Pharmaceutical Compliance Congress in Washington DC. Ceresney provided some clear guidelines for the compliance practitioner about what the SEC expects from companies in the area of FCPA compliance. More specifically he talked about some specific bribery schemes the SEC has seen in FCPA enforcement actions involving the pharmaceutical industry. These examples provided scenarios that any compliance practitioner in the pharmaceutical space can investigate for their organization.

Pharmaceutical Industry Bribery Schemes

Ceresney discussed ‘Pay-to-Prescribe’ bribery schemes where physicians and hospitals are paid bribes in “exchange for prescribing certain medication, or other products such as medical devices.” These schemes can involve payments of cash or other forms of non-cash benefits such as gifts, travel and entertainment. He described an example where a company “invited “high-prescribing doctors” in the Chinese government to club-like meetings that included extensive recreational and entertainment activities to reward doctors’ past product sales or prescriptions.” Another such scheme involved a running total of points for doctors who prescribed a company’s products, which could later be cashed in for items of value. Another involved a rebate of part of a hospitals overall purchase to certain doctors or hospital administrators.

Another form of bribery was seen where a company would direct charitable donations to the decision-makers “pet” charity. In a couple of FCPA enforcement actions, the charity had nothing to do with the pharmaceutical industry but in one case there was “a purported donation of nearly $200,000 to a public university to fund a laboratory that was the pet project of a public hospital doctor. In return, the doctor agreed to provide business to” the company in question. The point of all of these examples is that “that bribes come in many shapes and sizes, and those made under the guise of charitable giving are of particular risk in the pharmaceutical industry. So it is critical that we carefully scrutinize a wide range of unfair benefits to foreign officials when assessing compliance with the FCPA – whether it is cash, gifts, travel, entertainment, or charitable contributions.”

Compliance Programs

I certainly agree with Ceresney, only adding that I do not think you can say it too loud or too often, when he stated, “The best way for a company to avoid some of the violations that I have just described is a robust FCPA compliance program.” It all begins with a risk assessment so that you will understand what your company’s risks are and you can manage them accordingly through your compliance program. From there Ceresney said, “The best companies have adopted strong FCPA compliance programs that include compliance personnel, extensive policies and procedures, training, vendor reviews, due diligence on third-party agents, expense controls, escalation of red flags, and internal audits to review compliance.” He also specifically mentioned third parties, as they are still perceived to be the highest risk in any FCPA risk matrix. He stated, “To properly combat against these abuses, a compliance program must thoroughly vet its third-party agents to include an understanding of the business rationale for contracting with the agent. Appropriate expense controls must also be in place to ensure that payments to third-parties are legitimate business expenses and not being used to funnel bribes to foreign officials.”

Self-Reporting and Cooperation

Next Ceresney turned to self-reporting and cooperation. After initially noting that the current enforcement environment is greatly aided by self-reporting, he went on to explain why it is in a company’s interest to do so. Beyond the simple credit a company receives for self-reporting, by doing so “parties are positioned to also help themselves by aggressively policing their own conduct”. The SEC will also “continue to find ways to enhance our cooperation program to encourage issuers, regulated entities, and individuals to promptly report suspected misconduct. The Division has a wide spectrum of tools to facilitate and reward meaningful cooperation, from reduced charges and penalties, to non-prosecution or deferred prosecution agreements in instances of outstanding cooperation.” He ended this section of his remarks with a couple of thoughts that I believe succinctly provided the SEC’s position on self-reporting and cooperation. First he said “When I was a defense lawyer, I would explain to clients that by the time you become aware of the misconduct, there are only two things that you can do to improve your plight – remediate the misconduct and cooperate in the investigation.” He then ended with the following, “Companies that choose not to self-report are thus taking a huge gamble because if we learn of the misconduct through other means, including through a whistleblower, the result will be far worse. “

Internal Controls 

Ceresney had some interesting remarks around internal controls. He said they were in the “context of financial reporting”; however I found that they might well have significant implications for the compliance practitioner. I thought his money line was “Internal control problems have been prominently featured in recent enforcement cases we have brought in the financial reporting area, even in cases without accompanying charges of fraud.  This reflects our view that adequate internal controls are the building blocks for accurate financial reporting and can prevent fraudulent activity.” While the specified area of these remarks was around SOX §§302 and 404, I think this portends directly to internal controls under the FCPA.

He went on to state, “my key takeaway is that senior leadership of companies should place strong emphasis on the importance of designing and implementing strong internal controls. Senior officers need to ask questions about what they are being told about their internal controls – but perhaps more importantly, ask questions about the things that are not being reported to them. Dropping those occasional inquiries into conversations where they won’t be expected sends a powerful message that you want these issues to be on your employees’ minds. And what is needed is not just involvement from senior leadership but also from the audit committee. Instead of a check-the-box mentality, it is important to use careful thought at the outset to how controls should be designed in light of a firm’s business operations. This entails an up-front assessment of financial reporting risks, designing controls that address those risks, and ensuring that the resulting controls are well documented and communicated. And, as the company’s business evolves and changes, management must consider whether the existing internal controls are appropriate, or need to be enhanced or changed. Appropriate resources and attention also need to be devoted to monitoring those controls for effectiveness and making changes as needed.” Every time you see the words ‘financial’ simply substitute compliance and I think you will see where the SEC is headed in its internal controls enforcement of the FCPA.

Just as Agatha Christie communicated with her audience in ways broader than simply puzzles, through her great facility for delicious language, the SEC communicates in substantive ways with the compliance community through its speeches. You really do not have to read the tea leaves when you have such a clear message as was delivered by Ceresney at the CBI conference. Moreover, with all the sites that reported on it, talked about it and even linked to the printed text, you did not have to pay to attend. It is all there for you to read and to read for free.

For a copy of the text of Ceresney’s remarks, click here.

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, 2015

 

 

March 12, 2015

Protections for CCOs from Wrongful Termination

Wrongful TerminationThis week the Houston Texans unceremoniously cut the franchise’s greatest player in its short history, receiver Andre Johnson. This was after his being hauled into the office of the head coach and being told that he would only need to work half as hard next year. As reported by Jerome Solomon in the Houston Chronicle article entitled “Move inevitable, but team bungles its handling”, Head Coach Bill O’Brien told Johnson that his catch total would drop from the 84 he has averaged in his 12 year career with the Texans down to “around 40 passes next season.” But O’Brien went on to add the team’s certain Hall of Fame receiver “wasn’t likely to be a starter next season, definitely not for all of the games.” So much for playing your best player at his position on a full-time basis, but hey, at least the information was made public.

Now imagine you are a Chief Compliance Officer (CCO) and have been one of your company’s senior management for the better part of the past 12 years. While you may not have been the most important member of the management team you certainly have helped navigate the company through rough compliance waters. Now imagine the company Chief Executive Officer (CEO) who tells you that although he has no one in mind to replace you (other than a less experienced and a smaller-salaried compliance specialist) your services will only be needed half the time in the coming year. What if this is in response to advice the head of the company did not like? What should the response be?

You can consider the departure from MF Global of its Chief Risk Officer, the financial services equivalent of a CCO. As reported in a New York Times (NYT) article entitled “MF Global’s Risk Officer Said to Lack Authority” Ben Protess and Azam Ahmed reported that the company replaced its Chief Risk Officer, Michael Roseman, after he “repeatedly clashed with Mr. Corzine [the CEO] over the firm’s purchase of European sovereign debt.” He was given a large severance package and left the company. When he left, there was no public reason given. His replacement was brought into the position with reduced authority.

If you are a public company, you may well need to heed the advice of fraud and compliance expert Jonathan Marks, a partner at Crowe Horwath LLP, who advocates that any time a CCO, a key executive, is dismissed it should be an 8K reporting event because the departure may be a signal of a change in the company’s attitude towards compliance or an alleged ethical breach had taken place. A similar view was expressed by Michael W. Peregrine in a NYT article entitled “Another View: MF Global’s Corporate Governance Lesson”, where he wrote that a “compliance officer is the equivalent of a “protected class” for governance purposes, and the sooner leadership gets that, the better.” Particularly in the post Sarbanes-Oxley world, a company’s CCO is a “linchpin in organizational efforts to comply with applicable law.” When a company fires (or asks him/her to resign), it is a significance decision for all involved in corporate governance and should not be solely done at the discretion of the CEO alone.

In its Code of Ethics for Compliance and Ethics Professionals, the Society for Corporate Compliance and Ethics (SCCE) has postulated Rule 1.4, which reads, “If, in the course of their work, CEPs become aware of any decision by their employing organization which, if implemented, would constitute misconduct, the professional shall: (a) refuse to consent to the decision; (b) escalate the matter, including to the highest governing body, as appropriate; (c) if serious issues remain unresolved after exercising “a” and “b”, consider resignation; and (d) report the decision to public officials when required by law.” As commentary to this rule, the SCCE said, “The duty of a compliance and ethics professional goes beyond a duty to the employing organization, inasmuch as his/her duty to the public and to the profession includes prevention of organizational misconduct. The CEP should exhaust all internal means available to deter his/her employing organization, its employees and agents from engaging in misconduct. The CEP should escalate matters to the highest governing body as appropriate, including whenever: a) directed to do so by that body, e.g., by a board resolution; b) escalation to management has proved ineffective; or c) the CEP believes escalation to management would be futile. CEPs should consider resignation only as a last resort, since CEPs may be the only remaining barrier to misconduct. A letter of resignation should set forth to senior management and the highest governing body of the employing organization in full detail and with complete candor all of the conditions that necessitate his/her action. In complex organizations, the highest governing body may be the highest governing body of a parent corporation.”

What about compensation? The Department of Justice (DOJ) has made clear that it expects a CCO to resign if the company refuses advice and violates the Foreign Corrupt Practices Act (FCPA). The former head of the DOJ-FCPA unit Chuck Duross went so far as to compare CCOs and compliance practitioners to the Texans at the Alamo. To be fair to Duross, I think he was focusing more on the line in the sand part of the story, while I took that to mean they were all slaughtered for what they believed in. But whichever interpretation you may choose to put on it, the DOJ clearly expects a CCO to stand up and if a CEO does not like what they say, he or she must resign. This puts CCOs and compliance practitioners in a very difficult position, particularly if there is no exit compensation for doing the right thing by standing up.

I think the next step should be for the DOJ and Securities and Exchange Commission (SEC) to begin to discuss the need for contractual protection of CCOs and other compliance practitioners against retaliation for standing up against corruption and bribery. The standard could simply be one that protects a CCO and other compliance practitioners against termination without cause. Just as the SEC is investigating whether companies are trying to muzzle whistleblowers through post-employment Confidentiality Agreements, I think they should consider whether CCOs and other compliance practitioners need more employment protection. I think the SEC should also consider the proposals of Marks regarding the required 8K or other public reporting of the dismissal or resignation of any CCO. Finally, I would expand on Peregrine’s suggestion and require that a company Board of Directors approve any dismissal of a CCO. With these protections in place, a CCO or compliance practitioner would have the ability to confront management who might take business decisions that violate the FCPA.

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, 2015

 

 

March 10, 2015

Taking the Rolls Out for a Spin? Maybe You Should Avoid Brazil

Rolls RoyceJust as the GlaxoSmithKline PLC (GSK) case in China heralded a new day in international anti-corruption enforcement, the Petrobras case may be equally important going forward. The scope and breadth of the investigation is truly becoming worldwide. Last fall, one of the first questions raised was why was the US Securities and Exchange Commission (SEC) was investigating the company as it is headquartered in Brazil. While there is subsidiary Petrobras USA, which is a publicly listed company, it was not immediately apparent what role the US entity might have had in the bribery scandal, which was apparently centered in Brazil. However some recent revelations from across the pond may shed some light on the topic.

As with any corruption scandal there are both bribe payors and bribe receivers. The Petrobras corruption scandal initially focused on the bribe receivers in Petrobras. But last month one of the key bribe receivers, who is now cooperating with the Brazilian authorities, Pedro Barusco has identified the UK Company Rolls-Royce Group PLC as a bribe payor. As reported in the Financial Times (FT) by Samantha Pearson and Joe Leahy, in an article entitled “Rolls-Royce accused in Petrobras scandal”, Barusco has “told police he personally received at least $200,000 from Rolls-Royce — only part of the bribes he alleged were paid to a ring of politicians and other executives at the oil company.”

However the allegations moved far beyond simply Rolls-Royce. The article also reported, “Brazil’s authorities are already investigating allegations that Petrobras officials accepted bribes from SBM Offshore, a Netherlands-based supplier of offshore oil vessels. SBM has said it is co-operating with the investigation. Units of two Singaporean companies, Keppel Corporation and Sembcorp Marine, along with three Brazilian shipbuilders with large Japanese shareholders, have also been accused of participating in the bribes-for-contracts scheme.” Finally, they reported that “Mr Barusco alleged that his friend Luiz Eduardo Barbosa, a former executive of Swiss engineering group ABB, was responsible for organising bribes from Rolls-Royce, SBM and Alusa, a Brazilian construction company.”

Rolls-Royce is currently under investigation by the UK Serious Fraud Office (SFO) and Department of Justice (DOJ) for allegations of corruption in several countries. Katherine Rushton, reporting in The Telegraph in an article entitled “Rolls-Royce investigated in US over bribery claims”, said “Rolls-Royce is being investigated by the US Department of Justice (DoJ), following allegations that its executives bribed officials in Indonesia, China and India in order to win lucrative contracts.” She cited to the company’s annual report for the following, ““The group is currently under investigation by law enforcement agencies, primarily the Serious Fraud Office in the UK and the US Department of Justice. Breaches of laws and regulations in this area can lead to fines, penalties, criminal prosecution, commercial litigation and restrictions on future business.””

But more than simply Rolls-Royce, readers will recognize several names from a rogue gallery of companies either implicated with corruption violations or under investigation. SBM Offshore was a poster child last year for the DOJ deferring to foreign authorities to prosecute claims of bribery and corruption. I wonder if SBM Offshore attested in its settlement documents with the relevant Netherlands authorities that it had not engaged in any other bribery and corruption beyond that which was the basis of its settlement? I wonder if the company made any such averments to the DOJ? I wonder if the DOJ will make any such deferments again given the SBM Offshore settlement with the Dutch authorities? What about ABB?

In addition to the above, SBM Offshore may be the most relevant example in the debate of an international double jeopardy standard. Jordan Moran, writing in the Global Anti-Corruption Blog, has consistently argued that international double jeopardy is a bad idea. Most recently, in an article entitled “Why International Double Jeopardy Is a Bad Idea”, he said, “when it comes to the global fight against transnational bribery, double jeopardy probably isn’t all it’s cracked up to be. To begin, most arguments calling for the U.S. and other OECD member countries to recognize international double jeopardy are nonstarters.”

Also interesting was the reference to ABB as the company went through its own Foreign Corrupt Practices Act (FCPA) enforcement action. As reported by Dick Cassin, in a 2010 FCPA Blog post entitled “ABB Reaches $58 Million Settlement (Updated)”, the company “reached a settlement Wednesday with the DOJ of criminal FCPA charges and will pay a fine $19 million. And in resolving civil charges with the SEC, the company will disgorge $22.8 million and pay a $16.5 million civil penalty. ABB Ltd’s U.S. subsidiary, ABB Inc., pleaded guilty to a criminal information charging it with one count of violating the anti-bribery provisions of the FCPA and one count of conspiracy to violate the FCPA. The court imposed a sentence that included a criminal fine of $17.1 million.” There was no information at that time as to whether the individual that Barusco named as the bribe payment facilitator, one Luiz Eduardo Barbosa, was involved in the prior ABB enforcement action in any way.

We have one or more companies, who are under current DOJ investigations, now being investigated in connection with the Petrobras bribery scandal. There are also companies that have gone through prior bribery and corruption enforcement actions now identified in the scandal. All of this now leads me to have some type of understanding of why the SEC might be investigating Petrobras USA. First, and most probably, it would be to see if the US entity was involved in the apparent decade long bribery scheme that the Brazilian parent now finds itself embroiled in. What if the US subsidiary was paying bribes to its parent to obtain or retain a benefit? Next would be any evidence of violations of the accounting provisions or internal controls requirements found in the FCPA. Finally, the SEC might be looking at Petrobras USA to see who its suppliers might be and if those companies merited investigation. Similar to looking that the Panalpina customer lists the SEC could review the Petrobras USA contractor list.

Just as GSK heralded the first time the Chinese government prosecuted a western company for violation of Chinese law, I believe the Petrobras bribery scandal will be a watershed. The outpouring of information and allegations at this time point to a multi-year, truly worldwide, bribery scheme. While it may in part have been Petrobras officials shaking down contractors for payments, it really does not matter under the FCPA or UK Bribery Act. If any company subject to either or both of those laws paid monies to Petrobras I expect they will be fully prosecuted. Further, given the arguments against an international double jeopardy standard made by Moran and others AND the apparent recidivism of prior bribery offenders, some companies may be in for a long and expensive ride.

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, 2015

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