FCPA Compliance and Ethics Blog

February 25, 2015

Doing Less with Less and the Unification of Germany

Sqeezed Piggy BankI am attending the SCCE Utilities and Energy Conference in Houston this week. As usual, the SCCE has put on a great event for the compliance practitioner. This year there is live blogging by Kortney Nordum so there should be much about the conference up on the SCCE blogsite, this week and into the future. Lizza Catalano has put together a first rate program for compliance practitioners of many stripes. As an added benefit, SCCE Chief Executive Officer (CEO) Roy Snell has brought some cold weather down to Houston for the event for our late February enjoyment. While it was 80 on Saturday, today is was a balmy 36 courtesy of our Minnesotan guests.

As you might guess the current economic downturn is on everyone’s mind and a subject of much conversation. Last week I wrote a post about the depression of oil and gas prices in the energy space and some of the increased Foreign Corrupt Practices Act (FCPA) or other anti-corruption risks that might well arise from this economic downturn. Over the next couple of days, I want to explore how a Chief Compliance Officer (CCO) or compliance practitioner might think through responses to this increased compliance risk. Today I will focus on doing less with less. Tomorrow I will suggest some technological solutions.

I have been around long enough to see more than one of these economic events in the energy space. While not suggesting that we Texans never learn not to repeat our mistakes, they do seem to have a pattern. Prices drop precipitously, companies who are overstocked, over-leverage or generally over-panic; over-react and cut head count and spending dramatically to some level that is not based on rational economic analysis. Then they get some handle on where the numbers might be heading and the cuts start to flatten out and some type of equilibrium is reached.

Right now, in the energy space, we are in the cutting phase. That means loss of personnel (head count) and loss of resources even if it was calculated last year based on a summer or fall 2014 economic projection in your annual budgeting process. This means one thing you will need get for a quarter or two will be financial resources to place the personnel your compliance function may have lost. This means that you will have to figure out a way to accomplish more with fewer resources. While I often advocate that the compliance function can and should draw on other disciplines such as Human Resources (HR), IT, Internal Audit and Marketing for support; those functions have most probably been ‘right-sized’ as well so they may not be able to assist the compliance function as much they could have previously.

Now would be a very good time to put into practice what Dresser-Rand CCO Jan Farley often says, “Don’t sweat the small (compliance) stuff.” Farley often speaks about the need not to waste your scarce compliance resources on areas or matters that are low compliance risks. But to do this, you need to understand what are your highest compliance risks. Since you will not have additional resources to perform such an analysis, I would suggest now would be a very good time for you to assess your compliance program and your business model to see what are your highest risks. If you believe there are several, you can fprioritize them. This exercise will give you the basis to deliver your ever-scarcer compliance resources to your highest risk areas.

While I do not believe the Department of Justice (DOJ) or Securities and Exchange Commission (SEC) will be sympathetic to some unsubstantiated claim along the lines of ‘I did my best with what I had’; they also made clear in the FCPA Guidance that “An effective compliance program promotes “an orga­nizational culture that encourages ethical conduct and a commitment to compliance with the law.” Such a program protects a company’s reputation, ensures investor value and confidence, reduces uncertainty in business transactions, and secures a company’s assets. A well-constructed, thought­fully implemented, and consistently enforced compliance and ethics program helps prevent, detect, remediate, and report misconduct, including FCPA violations.” (emphasis supplied)

So while the DOJ and SEC will not accept you bald-faced claims that our company simply did not have the money to spend on compliance, they will most-probably consider a compliance program where you have looked at your risks, in the context of this economic downturn, and delivered the compliance resources you do have to those risks. But the key is Document, Document, and Document your decision-making calculus and your implementation. (Stephen Martin would probably add here that if your annual spend on Yellow Post-It Notes is a factor of 10X your compliance spend, this approach would not be deemed credible.)

In her On work column in the Financial Times (FT), Lucy Kellaway wrote about this the concept of doing less with less for the corporate executive personally, in an article entitled, “No need to ‘lean in’ when laziness can be just as effective”. She cited to the Prussian General Helmuth von Moltke for “devising one of the world’s fist management matrices” when he assessed his officers on two scales: “clever v. dim and lazy v. energetic.” From this he came up with four permutations:

  • Dim and lazy – Good at executing orders.
  • Dim and energetic – Very dangerous, as they take the wrong decisions.
  • Clever and energetic – Excellent staff officers.
  • Clever and lazy – Top field commanders as they get results.

The point of Kellaway’s article has direct implications for the CCO or compliance practitioner currently facing an economic downturn, “It is only by being lazy that we become truly efficient, and come to see what is important and what is not.” Kellaway cautioned “the sort of laziness to encourage is not the slobbish variety that means you do bad work. That is not laziness: it is stupidity. Instead, we need the clever version that comes from knowing there is an opportunity cost to every minute we spend working, so we must use our time wisely.”

From the compliance perspective, this translates directly into using your compliance resources wisely. So whether you want to cite the Prussian general who unified Germany, columnist Kellaway, Dresser-Rand CCO Farley or this article’s theme of doing less with less, I would suggest to you there is a manner to maintain “A well-constructed, thought­fully implemented, and consistently enforced compliance and ethics program helps prevent, detect, remediate, and report misconduct, including FCPA violations” even in an economic downturn.

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

 

February 20, 2015

Assessing Internal Compliance Controls – Part II

Assessing Internal Controls IIn this blog post I continue my exploration of how you should assess your compliance internal controls using the Committee of Sponsoring Organization of the Treadway Organization (COSO), publication “Internal Controls – Integrated Framework, Illustrative Tools for Assessing Effectiveness of a System of Internal Controls” (herein ‘the Illustrative Guide’), as a starting point and basis for discussion. You will recall from my series on compliance internal controls under the COSO 2013 Framework there are five objectives: (1) Control Environment; (2) Risk Assessment; (3) Control Activities; (4) Information and Communication; and (5) Monitoring Activities. Today I will review issues around compliance internal control assessments on Control Environment and Risk Assessments.

First are some general definitions that you need to consider in your evaluation. A compliance internal control must be both present and functioning. A control is present if the “components and relevant principles exist in the design and implementation of the system of [compliance] internal control to achieve the specified objective.” A compliance internal control is functioning if the “components and relevant principles continue to exist in the conduct of the system of [compliance] internal controls to achieve specified objectives.”

I. Control Environment

Under the objective of Control Environment there are five principles which you will need to assess. The five principles are:

  1. The organization demonstrates a commitment to integrity and ethical values. Here you can look to see if there is a training program to help make employees cognizant of the importance of doing business ethically and in compliance with the standard’s of your company’s Code of Conduct. Also is there specific training on the Foreign Corrupt Practices Act (FCPA), UK Bribery Act or other relevant anti-corruption/anti-bribery legislation which may govern your organization? Next does your company have in place any process to evaluate “individuals against published integrity and ethics policy”? Finally, do you have in place any process to “identify and address deviations in the organization”?
  2. The board of directors demonstrates independence from management and exercises oversight of the development and performance of internal control. Under this Principle you must DOCUMENT the active involvement of your company’s Board of Directors. So not only must risk assessments be performed and evaluated by senior management, they must also be evaluated by the Board, separate and apart from senior management. A Board must also document its review of any remediation plans and monitoring activities.
  3. Management establishes, with board oversight, structures, reporting lines and appropriate authorities and responsibility in pursuit of the objectives. This Principle deals primarily with reporting lines and structures so you will need to consider not only the structure of your business but also whether or not both clear and sufficient reporting lines have been established throughout the company. The next analysis is to move down the chain to see if there definitions and assignments for your compliance function. Lastly you need to assess whether there are sufficient parameters around the responsibilities of the compliance function and if there are limitations which should be addressed.
  4. The organization demonstrates a commitment to attract, develop and retain competent individuals in alignment with the objectives. Under this Principle you will need to review the policies and procedures to make sure you have the minimum required under a best practices compliance program and then evaluate and address any shortcomings. This Principle also has a more personnel focus by requiring you to consider whether your organization attracts, develops and retains sufficient compliance personnel and is there an appropriate succession plan in place if someone ‘wins the lottery’ on the way to work.
  5. The organization holds individuals accountable for their internal control responsibilities in the pursuit of the objective. Under this Principle review is required to determine whether the Board established and communicated the mechanisms to hold employees accountable for your compliance internal controls. As suggested in the FCPA Guidance, there should be both a carrot and stick approach, so for the carrot is there some type of Board, senior management or employee compensation based on whether they did their assignments in compliance with your Code of Conduct or are bonuses based strictly on a sales formulation? For the stick, have any employees ever been disciplined under your compliance regimes?

II. Risk Assessment

This objective has four Principles that require assessment. They are (numbers follow the COSO Framework):

  1. The organization specifies objectives with sufficient clarity to enable the identification and assessment of risks relating to objectives which include Operations Objectives, External Financial Reporting Objectives, External Non-Financial Reporting Objectives, Internal Reporting Objectives and Compliance Objectives. Here I think the key is the documentation of several different topics and issues relating to your company and how it operations. This means you will need to assess such diverse concepts as what are your senior management’s choices for business and compliance? You will need to consider and assess tolerances for risk as demonstrated by such issues as operations and financial performance goals. Finally, it can be used as a basis for committing of compliance resources going forward.
  2. The organization identifies risks to the achievement of its objectives across the entity and analyzes risks as a basis for determining how the risks should be managed. This Principle requires you to take a look at not only your compliance organization but also your business structure including entity, subsidiary, division, operating unit, and functional levels. You should assess the involvement of your compliance function at each point identified and the appropriate levels of management therein. Finally, from the compliance perspective, you should attempt to estimate not only the significance of compliance risks identified in the risk assessment but also determine how to respond to such identified compliance risks.
  3. The organization considers the potential for fraud in assessing risks to the achievement of objectives. Bribery and corruption can be categorized as forms of fraud. Rather than being fraud against the company to obtain personal benefits it can be fraud in the form of bribery and corruption of foreign government officials. For the compliance internal control assessment around this Principle I would urge you to ‘follow the money’ in your organization and consider the mechanisms by which employees can generate the funds sufficient to pay bribes. Many of these are simply fraud schemes so you should consider this within the compliance context and assess incentive and pressures on employees to make their numbers or be fired. You should also assess your employees’ attitudes and rationalizations regarding same.
  4. The organization identifies and assesses changes that could significantly impact the system of internal control. This Principle speaks to the need of your organization to maintain personnel competent to use the risk assessment going forward. But it also requires you to assesses changes in the external environment, assess changes in the business model or other significant business changes and, finally, to consider any changes in compliance leadership and how that would impact this Principle.

I often say that good compliance is simply good business. These COSO objectives are not only important from the compliance perspective but they also speak to the issue of overall process in your organization. The more you can burn these activities into the DNA of your company, the better run your organization will be going forward. Auditing against the COSO standards will provide your management with greater information on the health of your organization and satisfy your legal requirements under 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

February 17, 2015

Gary Owens, Laugh-In and Accountability in Your Compliance Program

Gary OwensIf you were alive at all during the 1960s, you will recall that one of the cultural phenomenon’s was NBC’s television show Laugh-In. It was brought to you from the NBC studios in beautiful downtown Burbank and featured one very droll player, who always played himself, Gary Owens, as the show’s announcer – Gary Owens. Owens died last week and I was surprised but pleased to learn in reading his obituary in the New York Times (NYT) that he was also the voice for several cartoon characters in the Jay Ward stable (home of Rocky and Bullwinkle) and he was the voice of Space Ghost which had a renaissance during the early years of the Cartoon Network.

I thought about Owens’ role on Laugh-In not only as the straight man but also the character, who in many ways brought accountability to the manic show when I read this week’s article by Adam Bryant in his NYT Corner Office column, entitled “Making a Habit of Accountability”, which featured his interview of Natarajan Chandrasekaran, the Chief Executive Officer (CEO) of Tata Consulting Services. Chandrasekaran was raised on a farm and one of the things that he learned early on from his farmer father was “the value of money and the value of time. So he made us account for things. It wasn’t that there was a right or wrong way, but he wanted us to be accountable for what we did.”

I considered this concept of accountability in your best practices anti-corruption compliance program, whether based upon the Foreign Corrupt Practices Act (FCPA), UK Bribery Act or other program. With the Department of Justice’s (DOJ) recent pronouncements that it will more aggressively prosecute individuals for FCPA violations, perhaps companies should emphasize accountability more in their compliance programs. By doing so, perhaps employees might understand that there really is their personal liberty on the line when they engage in something which might even approach a FCPA violation. Further, by emphasizing personal accountability, companies could demonstrate more pro-active approaches to compliance that the DOJ wants to see going forward.

Chandrasekaran’s remarks went beyond simply emphasizing personal accountability. He also spoke about accountability in the context of a company’s overall culture. In particular I found his thoughts about accountability, learning and culture quite insightful. He said, “Learning cannot be achieved by mandate. It has to be achieved by culture.” He added, “In our executive team meetings, we share experiences and case studies about failures and successes.”

But beyond simply this insight there should also be accountability for helping others achieve the company’s overall goals. While he did not limit it to compliance, I still found it applicable to a best practice compliance regime when he said, “Everybody has to take some accountability for other people, and look for ways to make small contributions to help others. Looking after people has to become everybody’s responsibility. Innovation and caring for people are cultures; they are not departments.” He did admit that such a change would not happen overnight and indeed he has been emphasizing this message for five years at Tata because “It takes time to build that culture.”

Chandrasekaran also had an insight into compliance through his views on company structure. Tata is a flat organization, with multiple business units. He did this so the largest number of employees would feel empowered to make decisions and work collaboratively. While I recognize that such views might be antithetical to US based companies with a more ‘command and control’ approach, Chandrasekaran explained that the leaders of those units are expected “to work together. We said the power of our company will be driven by how well they work together. In some of our bigger monthly meetings, we will start with people presenting examples of their collaborations.”

I considered all of the above in the greater context of a best practices anti-corruption compliance program. One of the things that the FCPA Guidance emphasized was the inter-relatedness of each component of your compliance program. While you might have greater risk in the area of third parties or doing business in certain areas of the world where there are higher perceptions of corruption, you should not pick and choose what prongs of a compliance program you implement. Each step builds upon one another and should all point to accountability for your actions in decision-making calculus for business decisions and their implementations.

However the concept of accountability is not one that is spelled out in the FCPA Guidance or in any formulation of a best practices compliance regime. Yet it is clear that accountability is something that underlies what a compliance program is trying to achieve. Just as Chandrasekaran learned early on there is a value to things; there is a value to time and there is a value to money. So they should be accounted for in the way you do business.

This might best be described as oversight of your compliance program. The issue your company should focus on here is whether employees are accountable within the ambit of your compliance program. Even after all the important ethical messages from management have been communicated to the appropriate audiences and key standards and controls are in place, there should still be a question of whether the company’s employees are accountable to the compliance program.

Two mechanisms to do so are through the techniques of monitoring, which is a commitment to reviewing and detecting compliance programs in real time and then reacting quickly to remediate them. A primary goal of monitoring is to identify and address gaps in your program on a regular and consistent basis. A second tool is auditing, which is generally viewed as a more limited review that targets a specific business component, region or market sector during a particular timeframe in order to uncover and/or evaluate certain risks, particularly as seen in financial records. However, you should not assume that because your company conducts audits that it is effectively monitoring. A robust program should include separate functions for auditing and monitoring. While unique in protocol, however, the two functions are related and can operate in tandem. Monitoring activities can sometimes lead to audits. For instance if you notice a trend of suspicious payments in recent monitoring reports from Indonesia, it may be time to conduct an audit of those operations to further investigate the issue.

Your company should establish a regular monitoring system to hold employees accountable to doing business under your compliance regime and Code of Conduct. Effective monitoring means applying a consistent set of protocols, checks and controls tailored to your company’s risks to detect and remediate compliance problems on an ongoing basis. While it may seem that accountability means looking over every employees shoulder, it should not simply be seen as the workplace equivalent of parental oversight. Chandrasekaran explained that how you conduct yourself at work can have a huge impact on other employees. He said, “it’s sometimes very hard to imagine, early in your career, how much impact you can have. If you’re in a job and in an organization, the impact you can make is huge, because it’s all about being part of a group that’s driving impact. So look for those opportunities.” If you look for ways to demonstrate accountability you can influence a wide variety of others going forward.

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

February 16, 2015

Economic Downturns and Increased Compliance Risk

Oil PricesOil is hovering around $50 per barrel. For most of the US economy this drop in oil price has provided a much-needed economic boost. One piece on the NPR website, entitled “Oil Price Dip, Global Slowdown Create Crosscurrents For U.S.”, said “economists have suggested the big drop in oil prices is a gift to consumers that will propel the economy.” Liz Ann Sonders, who is the chief investment strategist at Charles Schwab, was quoted as saying “The U.S. economy is 68 percent consumer spending, so right there you know that falling oil prices is a benefit.” Another economist said the positive effects could be “worth $400 billion” for the US economy as a whole.

But in the energy space, particularly in the city of Houston, Texas, this plunge has been devastating. It is so bad that in this past week’s issue of the Houston Business Journal (HBJ), it provided a ‘Box Score’ for energy company lay-offs. And that was before Halliburton announced a 10%-15% reduction and Hercules Offshore announced that it had laid off some 30% of its work force since last October. Nationally, for the energy industry, it will be just as bad. In the NPR piece, David R. Kotok, of Cumberland Advisors, said, “cuts in production and energy company payrolls will cost the U.S. economy up to $150 billion.” The Houston Chronicle headlined it was a “Bloodbath”.

I thought about what this plunge in the price of oil could mean for the compliance function in energy and energy related companies going forward. Many Chief Compliance Officers (CCOs) and compliance practitioners struggle with metrics to demonstrate revenue generation. Most of the time, such functions are simply viewed as non-revenue generating cost drags on business. This may lead to compliance functions being severely reduced in this downturn. However I believe such cuts would be far from short-sighted; they would actually cost energy companies far more in the short and long term.

Almost any energy company of any size has gone through a Foreign Corrupt Practices Act (FCPA) investigation, whether internal or formal by the Department of Justice (DOJ) or Securities and Exchange Commission (SEC). Many had gone through enforcement actions. The risk profiles of these companies did not change because of the drop in oil prices. Extractive resources are still located largely in countries with a high perception of corruption. In others, the inherent compliance risks that currently exist for energy companies will certainly not lessen. Unfortunately they may well increase.

At this point I see two increasing compliance risks for energy companies. The first is that companies will attempt to reduce their costs by cutting their compliance personnel. A tangent but equally important component of this will be that companies that do not invest the monies needed to beef up their oversight through monitoring or other mechanisms are setting themselves up for serious compliance failures.

Moreover, what will be the pressure on the business folks of such companies to ‘get the deal done’ with this slashing of oil prices? Further, if there is a 10% to 30% overall employee reduction, what additional pressures will be on those employees remaining to make their numbers or face the same consequences as their former co-workers?

I think both of these scenarios are fraught with increased compliance risks. For companies to engage in behaviors as I have outlined above would certainly bring them into conflict with the Ten Hallmarks of an effective compliance program as set out in the FCPA Guidance. For instance on resources, the FCPA Guidance does not say in a time of less income, when your compliance risk remains the same or increases, you should cut your compliance function or the resources to support it. Indeed it intones the opposite, when stating, “Those individuals must have appropriate authority within the organization, adequate autonomy from management, and sufficient resources to ensure that the company’s compliance program is implemented effectively.” Moreover, the FCPA Guidance adds, “Moreover, the amount of resources devoted to compliance will depend on the company’s size, complex­ity, industry, geographical reach, and risks associated with the business. In assessing whether a company has reasonable internal controls, DOJ and SEC typically consider whether the company devoted adequate staffing and resources to the compliance program given the size, structure, and risk pro­file of the business.” So the resource issues is stated in reference to the risk profile of the business and not the current or fleeting economic issues of the day.

Also note that the FCPA Guidance speaks to an analysis from the DOJ side, which would presumably be a criminal side review. For instance, if a company cuts its compliance staff while its risk profile has not decreased, does this provide the required intent to commit a criminal act under the FCPA? Moreover, who would be the guilty party under such an analysis? Would it be the Chief Executive Officer (CEO) who ultimately decides we need a fixed percentage cut of employees or simply a raw number to be laid off? How about the department head (as in the CCO) who is told to cut your staff 10% or we will make the cuts for you? Or is it a company’s Human Resources (HR) department who delivers the dreaded knock on a compliance practitioner’s door (I’m from HR and could you come with me). What if a company’s decision-making authority is so decentralized that there is no one person who can be held accountable?

You should also note the SEC role in FCPA enforcement, as alluded to in the quote from the FCPA Guidance. There will be an assessment of internal controls. Now that the COSO 2013 Framework has become effective, will companies delay plans to implement the new Framework and to begin to audit against it? If so, would that be a per se FCPA violation?

But there is a second reason that I believe that energy companies risk profiles will increase in this industry-specific downturn. Unfortunately it will come from those employees who survive the lay offs. They will be under increased pressure to do the jobs of the laid-off folks so there will be a greater chance that something could slip through the cracks. If you are already working full time at one job and one, two or three other employees in your department are laid-off, which job is going to get priority? Will you only be able to put out fires or will you be able to accomplish what most business folks think is an administrative task?

But more than the extra work the survivors will have laid upon them will be the implicit message that some companies senior management may well lay down, that being Get the Deal Done. If economic times are tough, senior management will be looking even more closely at the sales numbers of employees. The sales incentives could very well move from a question of what will my bonus be if I close this transaction to one of will I be fired if I do not close this transaction. If senior management makes clear that it is bring in more business or the highway, employees will get that message.

Once again, where would the DOJ look for to find intent? Would it be the person out in the field who believed he was told that he or she either brought in twice as much work since there were half as many employees left after lay-offs? Would it be the middle manager who is more closely reviewing the sales numbers and sending out email reminders that if sales do not increase, there may well have to be more cuts? What about the CEO who simply raises one eyebrow and says we need to hunker down and get the job done?

What might be the DOJ or SEC reaction to the downsizing of compliance in the face of such increased compliance risk? The energy industry has not gone through this type of economic downsizing in the new age of FCPA prosecutions, largely since 2004, so there is no relevant time frame of FCPA enforcement to reflect from. However, the financial industry did go through such a contraction in the 2007-2010 time frame. We have seen the DOJ and other financial industry regulators draw huge penalties for a series of anti-money laundering (AML) and LIBOR scandals. My guess is that the DOJ and SEC will not allow companies to use economic arguments in the face of known and recognized increase in compliance risks. Indeed they may focus on some of these points as reasons for increased compliance vigilance in an energy company’s compliance function going forward.

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

February 6, 2015

Arsenale and Incentivizing Compliance

ArsenaleI continue with a Venice themed blog post today by focusing on the Arsenale. No this is no a precursor to that famous north London football club, the Arsenal Gunners, but the district in Venice where one of the main commercial enterprises of the city took place, that being ship building and ship repair. At one point, the Arsenale employed almost 10% of the city’s workforce or 12,000 people. This was in the mid 1200s to the 1400s when Venice was at or near the height of its trading and financial power. The Arsenale developed the first production line for the building of ships, when, of course, it was all done by hand. The equipment developed to drag ships up on shore and repair was simply amazing. Appropriately, the Arsenale is now an Italian naval facility.

But I also picked up some interesting compliance insights in learning more about the Arsenale. The ship building techniques were of such a high level and importance to the city that they were viewed as state secrets. To protect against the loss of such valuable intellectual property, the Venetian city fathers put in a series of incentives and punishments that can help inform your best practices compliance program up to this day. First, and foremost, Venice forbade any skilled worker from leaving the city to go to work at a neighboring or rival city; the first non-compete and still widely used by corporate America today. Second was the punishment that if you were caught passing secret, you were summarily executed only after excruciating torture; while these techniques are not as widely used by corporate America today I am sure there are some non-enlightened corporate leaders who might like to re-institute one or both practices.

However over on the incentive side there were several mechanisms the City of Venice used to help make the Arsenale work force more loyal and desirous to stay in their jobs, all for the betterment of themselves and their city. The first was job security. The Arsenale was so busy for so many years that lay-offs were unheard of. Even if someone lost their job, through injury, mishap or worse; they received enough of compensation that they could live in the city. Finally, when a worker died, the company provided not only funeral expenses but would assist in taking care of the family through stipends or finding other work for family members.

This dual focus on keeping the state secrets of ship building and repair within the City of Venice reminded me of one of the points that representatives of the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) continually remind compliance practitioners about when discussing any best practices compliance program; whether based on the Ten Hallmarks of an Effective Compliance Program, as articulated in their jointly released FCPA Guidance, or some other articulation such as in a Deferred Prosecution Agreement (DPA) Attachment C. They continually remind Chief Compliance Officers (CCOs) and compliance practitioners that any best practices compliance program should have both incentives and discipline as a part of the program.

Regarding disincentives for violating the Foreign Corruption Practices Act (FCPA), the Guidance is clear in stating, “DOJ and SEC will thus consider whether, when enforcing a compliance program, a company has appropri­ate and clear disciplinary procedures, whether those proce­dures are applied reliably and promptly, and whether they are commensurate with the violation. Many companies have found that publicizing disciplinary actions internally, where appropriate under local law, can have an important deterrent effect, demonstrating that unethical and unlawful actions have swift and sure consequences.”

However, the Guidance is equally clear that there should be incentives for not only following your own company’s internal Code of Conduct but also doing business the right way, i.e. not engaging in bribery and corruption. On incentives, the Guidance says, “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. Some organizations, for example, have made adherence to compliance a significant metric for management’s bonuses so that compliance becomes an integral part of management’s everyday concern.” But the Guidance also recognizes that incentives need not only be limited to financial rewards as sometime simply acknowledging employees for doing the right thing can be a powerful tool as well.

All of this was neatly summed up in the Guidance with a quote from a speech given in 2004 by Stephen M. Cutler, the then Director, Division of Enforcement, SEC, entitled, “Tone at the Top: Getting It Right”, to the Second Annual General Counsel Roundtable, where Director Cutler said the following:

[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. Conversely, if employees are led to believe that, when it comes to compensation and career advancement, all that counts is short-term profitability, and that cutting ethical corners is an ac­ceptable way of getting there, they’ll perform to that measure. To cite an example from a different walk of life: a college football coach can be told that the graduation rates of his players are what matters, but he’ll know differently if the sole focus of his contract extension talks or the decision to fire him is his win-loss record.

All of this demonstrates that incentives can take a wide range of avenues. At the recently held ACI FCPA Bootcamp in Houston, TX, one of the speakers said that the Houston based company Weatherford, annually awards cash bonuses of $10,000 for employees who go above and beyond in the area of ethics and compliance for the company. While some might intone that is to be expected from a company that only recently concluded a multi-year and multi-million dollar enforcement action; as the speaker said if you want emphasize a change on culture, not much says so more loudly than awarding that kind of money to an employee.

While I am sure that being handed a check for $10,000 is quite a nice prize, you can also consider much more mundane methods to incentivize compliance. You can make a compliance evaluation a part of any employee’s overall evaluation for some type of year end discretionary bonus payment. It can be 5%, 10% or even up to 20%. But once you put it in writing, you need to actually follow it.

But incentives can be burned into the DNA of a company through the hiring and promotion processes. There should be a compliance component to all senior management hires and promotions up to those august ranks within a company. Your Human Resources (HR) function can be a great aid to your cause in driving the right type of behavior through the design and implementation of such structures. Employees know who gets promoted and why. If someone who is only known for hitting their numbers continually is promoted, however they accomplished this feat will certainly be observed by his or her co-workers.

Just as the fathers of Venice viewed the workers of the Arsenale as critical to the well-being of their city, senior managers need to understand the same about their work force. In places like Texas, employees typically are incentivized with some enlightened remark along the lines of “You should just be happy you even have a job.” Fortunately there are real world examples of how corporate incentives can work into a compliance regime. The City of Venice long ago showed how such incentives could help it maintain a commercial advantage. Fortunately the DOJ and SEC still understand those valuable lessons and continue to talk about them as well.

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

February 5, 2015

Selfie-Sticks and Risk Assessments

Selfie-StickGreetings from Venice and a big thanks to Joe Oringel at Visual Risk IQ for allowing my to post his five tips on working with data analytics while I was on holiday in this most beautiful, haunting and romantic of cities. While my wife and I have come here several times, we somehow managed to arrive on the first weekend of Carnivale, without knowing when it began. On this first weekend, the crowds were not too bad and it was more of a local’s scene than the full all out tourist scene.

As usual, Venice provides several insights for the anti-corruption compliance practitioner, whether you harbor under the Foreign Corrupt Practices Act (FCPA), UK Bribery Act, both, or some other such law. One of the first things I noticed in Venice was the large number of selfie-sticks and their use by (obviously) tourists. But the thing that struck me was the street vendors who previously sold all manner of knock-off and counterfeit purses, wallets and otherwise fake leather goods had now moved exclusively to market these selfie-sticks. Clearly these street vendors were responding to a market need and have moved quickly to fill this niche.

While the economics, inventory, bureaucracy, market-responsiveness of such businesses may be a bit more nimble than the more traditional US entity doing business overseas it does bring up a very good lesson for the compliance practitioner. A risk assessment is a tool for a variety of purposes. Certainly moving into a new geographic area is an important reason to perform a risk assessment. However, it can also be used for a new product offering, such as a selfie-stick. As stated in the FCPA Guidance, “As a company’s risk for FCPA violations increases, that business should consider increasing its compliance procedures, including due diligence and periodic internal audits. The degree of appropriate due diligence is fact-specific and should vary based on industry, country, size, and nature of the transaction, and the method and amount of third-party compensation. Factors to consider, for instance, include risks presented by: the country and industry sector, the business opportunity, potential business partners, level of involvement with governments, amount of government regulation and oversight, and exposure to customs and immigration in conducting business affairs. When assessing a company’s compliance program, DOJ and SEC take into account whether and to what degree a company analyzes and addresses the particular risks it faces.”

So what if your company comes to market with a new product or, in the case of the Venetian street merchants, move to sell a product for the first time even if the product is not exactly ‘new’. Obviously you will need to consider all government touch points that could bring you into potential violation under the FCPA. You should determine not only what licenses you will need but also how you will obtain them. Avon has come to over $500MM in FCPA grief by paying bribes to obtain licenses (and then doubling down by going full Watergate in its cover-up). Wal-Mart is alleged to have gotten into hot water in Mexico for paying bribes to obtain permits to do business in that country. So will your company obtain these licenses directly or use a third party to obtain them?

What about continued quality control of your new product? If you are in the food product industry this will mean continued inspections of your products to assure they meet government standards. Make sure that you have a hiring process in place to weed out the wives, sons or daughters of any food service inspectors. Of course, do not hire such inspectors for jobs directly either, especially if they do not have to show up or perform any duties to get paid by your company.

If you are not going to manufacture your selfie-stick equivalent in the country where these new products will be sold, how will you import them? Who will be interfacing with the foreign government on tax issues for importing of products? Will they be there permanently or on a temporary basis? All questions that have gotten US companies into FCPA trouble when they paid bribes to answer, assuage or grease some or all of the answers.

It turns out the compliance practitioner can learn quite a bit from the selfie-stick; not all of it is simple self-indulgence. Your compliance program must respond to your business initiatives. To do so, you also need to have a seat that the big boy table where such initiatives are discussed. But that is another lesson from Venice for a different day. Until then, ciao.TexasBarToday_TopTen_Badge_Large

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

January 6, 2015

Byzantium and the Alstom FCPA Settlement – Part III

ByzantiumPorphyry is a type of stone that was much favored in the Roman world. In a review of several books in the New York Review of Books, entitled “The Purple Stone of Emperors”, Peter Brown looked into the history of the lithic in the context of Byzantium as the true heir of the Roman Empire. He theorized that if “porphyry was the blood of ancient empire, then it must be to Constantinople that we should look (and not to Western Europe) if we wish to understand the heritage of Rome in the Middle Ages.” I found that an appropriate way to think about an apparent anomaly in the recent Alstom Foreign Corrupt Practices Act (FCPA) enforcement action. In Part III of my series on the Alstom natter I consider the accounting records violations that the French parent, Alstom SA, agreed to in this enforcement action.

The FCPA Professor noted in his second blog post on this matter, entitled “Issues to Consider from the Alstom Action”, “The charges against Alstom S.A. are a real head-scratcher. The conventional wisdom for why the Alstom action involved only a DOJ (and not SEC) component is that Alstom ceased being an issuer in 2004 (in other words 10 years prior to the enforcement action). Yet, the actual criminal charges Alstom pleaded guilty to – violations of the FCPA’s books and records and internal controls provisions – were based on Alstom’s status as an issuer (as only issuers are subject to these substantive provisions). In other words, Alstom pleaded guilty to substantive legal provisions in 2014 that last applied to the company in 2004.”

The Professor had also raised this issue in his first blog post on the resolution, entitled “All About the Alstom Enforcement Action”. After considering his thoughts on this issue, I decided to look into it a bit more deeply. Alstom SA was charged with several different FCPA violations including the following, 15 U.S.C. 78m(b)(2)(A), 15 USC §78m(b)(2)(B) and 78m(b)(5) which read in whole,

15 U.S.C. § 78m [Section 13 of the Securities Exchange Act of 1934] 

(b) Form of report; books, records, and internal accounting; directives

(2) Every issuer which has a class of securities registered pursuant to section 78l of this title and every issuer which is required to file reports pursuant to section 78o(d) of this title shall—

(A) make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

(B) devise and maintain a system of internal accounting controls sufficient

to provide reasonable assurances that—

(5) No person shall knowingly circumvent or knowingly fail to imple­ment a system of internal accounting controls or knowingly falsify any book, record, or account described in paragraph (2).

These provisions are generally referred to as the ‘accounting provisions’ of the FCPA. As stated in the FCPA Guidance, “In addition to the anti-bribery provisions, the FCPA contains accounting provisions applicable to public companies. The FCPA’s accounting provisions operate in tandem with the anti-bribery provisions and prohibit off-the-books accounting. Company management and investors rely on a company’s financial statements and internal accounting controls to ensure transparency in the financial health of the business, the risks undertaken, and the transactions between the company and its customers and business partners. The accounting provisions are designed to “strengthen the accuracy of the corporate books and records and the reliability of the audit process which constitute the foundations of our system of corporate disclosure.””

Moreover, these accounting provisions, including both the books and records and internal control provisions, are defined to apply to “issuers”. As set out in the FCPA Guidance, “The FCPA’s accounting provisions apply to every issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file annual or other periodic reports pursuant to Section 15(d) of the Exchange Act.244 These provisions apply to any issuer whose securities trade on a national securities exchange in the United States, including foreign issuers with exchange traded American Depository Receipts. They also apply to companies whose stock trades in the over-the-counter market in the United States and which file periodic reports with the Commission, such as annual and quarterly reports. Unlike the FCPA’s anti-bribery provisions, the accounting provisions do not apply to private companies.”

Charging Box Score

Alstom Entity Charges Time of Criminal Conduct Issuer Status
Alstom SA 15 USC §78m(b)(2)(A)15 USC §78m(b)(2)(B)15 USC §78m(b)(5)

15 USC §78ff(a)

18 USC §2

1998-2004 Issuer until 2004
Alstom Power Inc. 18 USC §371-conspiracy to violate the FCPA 2002-2009 Subsidiary of Issuer until 2004
Alstom Grid Inc. 18 USC §371-conspiracy to violate the FCPA 2000-2010 Subsidiary of Issuer until 2004
Alstom Network Schweiz AG 18 USC §371-conspiracy to violate the FCPA 2000-2011 Subsidiary of Issuer until 2004

While I agree with the above, I do disagree with the Professor’s final statement that “This free-for-all, anything goes, as long as the enforcement agencies collect the money nature of FCPA enforcement undermines the legitimacy and credibility of FCPA enforcement.” The reason I disagree is that this was a negotiated settlement, not a dictat or court proceeding. With no doubt excellent FCPA defense counsel involved, Alstom must have had its own reasons for agreeing to such a settlement. Without any further comment by the company, we will have to speculate as to some of the reasons for this component of the resolution.

First and foremost is that clearly Alstom did engage in conduct which substantially violated the FCPA. It would further appear that the conduct reached right up into the corporate home offices in France. By agreeing to the books and records and internal control violations, Alstom may have avoided any direct admission of guilt under French law, which we now know from the Total FCPA enforcement action is significant for a French company, because what is illegal bribery and corruption under US law is not necessarily illegal under French law.

Other than the anomalous French law issue, there may be another important consideration going on here. Alstom is under acquisition by General Electric (GE). Not only does GE pride itself and very publicly inform about its anti-corruption compliance program, GE has a large number of contracts with the US and other governments which might looks askance at doing business with a business unit that admitted to substantive FCPA violations of bribery and corruption. While I do not think that GE would be in danger of being debarred, it might well be that certain governments might not want to do business with a new subsidiary which made such a court admission. I find this to be more than simply a distinction without a difference. Consider the trouble that Hewlett-Packard (HP) is in north of the border in Canada regarding potential debarment by the Canadian government for its FCPA violations as set forth in its FCPA resolution of last April. So perhaps from Alstom’s perspective, the company believed it received benefits from settling based upon accounting violations.

But whatever the reason, it is clear that Alstom did engage in substantive FCPA violations. It’s settlement is that, a settlement of outstanding issues, which the company was a willing participant. It may not have been what the company wanted but I do not find that by charging Alstom for books and records and internal controls violations for the time frame it was clearly liable in any way demeans, degrades or lessens FCPA enforcement going forward. But just as we need to look to Byzantium to determine the heritage of Rome through the Middle Ages, by looking at the facts and circumstances around Alstom’s FCPA from the Alstom perspective and what it hoped to obtain in the settlement, we might be able to glean some insights.

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

January 5, 2015

Germany in the World Cup and the Alstom FCPA Enforcement Action – Part II

Brazil-Germany Score“It was important that we played our game for 90 minutes.” That line was found in a The Daily Telegraph article entitled “The unthinkable scoreline: Brazil 1, Germany 7” by Jeremy Wilson. It was a quote from Mats Hummels, German World Cup starter, who participated in the single most memorable soccer game that I have witnessed, Germany’s win over Brazil in last year’s World Cup. As Wilson wrote, “It was the game for which the 2014 World Cup will be forever remembered but even now, almost six months on, just the scoreline retains its capacity to shock.” I would only add that the game will most probably be remembered for as long as soccer is played. Wilson ended his piece with “It was a sporting earthquake, and the aftershocks are still being felt.”

Somehow Wilson’s article seemed also an appropriate reflection on the Alstom Foreign Corrupt Practices Act (FCPA) enforcement action. While it is more recent in the minds of many Chief Compliance Officers (CCOs) and compliance practitioners, it is still reverberating and will continue to do so for the foreseeable future. I am in the middle of a three part blog post series exploring facets of the Alstom matter. In my first blog post, I explored the specifics of the settlement documents, the stunning criminal fine of over $772MM and the over 10 year bribery scheme involving multiple countries. Today I want to look at the ongoing obligations which Alstom has agreed to in the Deferred Prosecutions Agreements (DPAs) for the entities involved; Alstom Network Schweiz AG, Alstom Power Inc. and Alstom Grid Inc. (collectively herein “Alstom”). All the DPAs are identical in their Attachment C’s and all quotes below are from the DPAs.

For the CCO or compliance practitioner, one of the first stops in reviewing any DPA is always Attachment C, which lays out the Corporate Compliance Program that each settling party agrees to in any FCPA enforcement action. It provides the Department of Justice’s (DOJ) most current thinking on what constitutes a minimum best practices compliance program which is generally described as “(a) a system of internal accounting controls designed to ensure that the Company makes and keeps fair and accurate books, records and accounts; and (b) a rigorous anti-corruption compliance program that includes policies and procedures designed to detect and deter violations of the FCPA and other relevant anti-corruption laws.” The Alstom DPAs set the following requirements:

  1. High-level commitment. A company must ensure that its directors and senior management provide strong, explicit, and visible commitment to its corporate compliance policy. Stated differently, and again, “tone from the top.”
  2. Code of Conduct, Policies and Procedures and Internal Controls. A company should have a clearly articulated and visible corporate compliance policy memorialized in a written compliance code. The policies and procedures will address the following areas; (a) gifts, (b) hospitality, entertainment and expenses, (c) customer travel, (d) political contributions, (e) charitable donations and sponsorships, (f) facilitation payments and (g) solicitation and extortion payments. Finally, there should be a system of financial and accounting procedures, “designed to provide reasonable assurance: (a) transactions are executed with management’s general or specific authorization”; (b) transactions are “recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principals” and to maintain accountability for the assets; (c) access to company assets is permitted only with management general or specific authorization; and (d) there is testing of assets at regular intervals.
  3. Periodic Risk-Based Review. The company should periodically evaluate no less than annually, these compliance codes on the basis of a risk assessment addressing the individual circumstances of the company, including “geographic organization, interactions with various types and levels of government officials, industrial sectors of operation, involvement in joint venture arrangements, importance of licenses and permits in the Company’s operations, degree of government oversight and inspection and volume and importance of goods and personnel clearing through customs and immigration. It also requires the company to update its compliance program “taking into account relevant developments in the field and evolving international and industry standards.”
  4. Proper Oversight and Independence. The company should assign responsibility to senior executives for the implementation and oversight of the compliance program. Those executives should have the authority to report directly to independent monitoring bodies, including internal audit and the Board of Directors, and should have autonomy from management. Compliance programs needed to be funded; they need to have an appropriate level of resources.
  5. Training and Guidance. The company should implement mechanisms designed to ensure that its compliance code is effectively communicated to all directors, officers and employees. This means repeated communication, frequent and effective training, and an ability to provide guidance when issues arise.
  6. Internal Reporting and Investigation. Alstom should have an effective system for confidential, internal reporting of compliance violations. It must also establish an effective process with sufficient resources for responding to, investigating, and documenting allegations of violations.
  7. Enforcement and Discipline. The company should implement mechanisms designed to enforce its compliance code, including appropriately incentivizing compliance and disciplining violations. The prong also includes the requirement that Alstom remedy the misconduct and take steps to ensure no recidivism.
  8. Third-Party Relationships. Alstom should institute compliance requirements pertaining to the oversight of all agents and business partners. This includes the full five steps in the lifecycle management of third parties going forward.
  9. Mergers and Acquisitions. Under this requirement, Alstom must perform pre-acquisition due diligence on any target companies it is looking at and engage in an appropriate risk assessment and due diligence by its legal, compliance and accounting functions. If an acquisition is made, the company integrate its compliance program into the newly acquired entity as soon as is practicable, put on an appropriate level of training and “when-warranted, conduct an FCPA-specific audit of newly acquired or merged businesses.”
  10. Monitoring and Testing. A company should conduct periodic reviews and testing of its compliance code to improve its effectiveness in preventing and detecting violations. Kick the tires regularly. As I said, compliance programs must evolve with changes in the law, business practices, technology and culture.

The company also has an ongoing reporting requirement that it promptly report to the DOJ any “possible corrupt payments or possible corrupt transfers of property or interests…for any person or entity working directly for the Company (including its affiliates and any agent) or that related false books and records have been maintained”.

Finally, Alstom will report to the DOJ annually and for a period of three years “regarding the remediation and implementation of the compliance program and internal controls, policies and procedures”. However, in a twist we have not seen previously, as long as Alstom “satisfies the monitoring requirements contained in the Negotiated Resolution Agreement between the Company and the World Bank Group”, it will not be required to sustain an external monitor. If Alstom fails to meet this burden, then “it will be required to retain an Independent Monitor.”

What does this mean for the compliance practitioner? I think the key is to do as Mats Hummels suggested and play your game for the full match. The DOJ has laid out what it expects to see in a best practices compliance program going forward. Although clearly related to the Ten Hallmarks of an Effective Compliance Program, found in the FPCA Guidance, there are some subtle differences and perhaps even shifts in emphasis. I think the two keys ones are found in No. 3 where the DOJ lays out not only the specific areas you need to assess your risk around but also mandates that evolving technological and industry standards be taken into account when upgrading or enhancing your compliance regime. Finally in No. 7, I think the DOJ comes as close as it can to mandating that the CCO position and compliance function be separate and apart from the General Counsel (GC) and company’s legal function.

Tomorrow some concluding thought on Alstom.

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

December 18, 2014

Ty Cobb and the Compliance Performance Appraisal Review

Ty CobbToday we celebrate greatness, in the form of one of the greatest baseball players ever, with the anniversary of the birthday of Ty Cobb. Coming up to the majors as a center fielder for the Detroit Tigers in 1905, he emerged in 1907 to hit .350 and win the first of nine consecutive league batting titles. He also led the league that year with 212 hits, 49 steals and 116 RBIs. In 1909 he won the league’s Triple Crown for the most home runs (9), most runs batted in (107), and best batting average (.377). In 1911, he led the league in eight offensive categories, including batting (.420), slugging percentage (.621), hits (248), doubles (47), triples (24), runs (147), RBI (144) and steals (83), and won the first American League MVP award. He batted .410 the following season, becoming the first player in the history of baseball to bat better than .400 in two consecutive seasons.

Cobb set a record for stolen bases (96) and won his ninth straight batting title in the 1915 season. He faltered the next year, but came back to win another three straight titles from 1917 to 1919. He left the team in 1926 and signed with the Oakland Athletics, hitting .357 and becoming the first-ever player to reach 4,000 total career hits before retiring after the 1928 season. His record of nine consecutive batting titles as well as his overall number of 12 will never be succeeded.

While Cobb certainly had quite a bit of natural ability, he was also a very dedicated baseball player, forever working to improve his craft. He might not have taken well to criticism but he did work to improve all aspects of his game. One of the modern ways to improve employee performance is through an annual employee performance review. Recently I read an article in the Houston Business Journal entitled “6 Ways To Make Performance Reviews More Productive” by Janet Flewelling. I found her article provided some interesting perspectives on some of the ‘nuts and bolts’ work that you can put into your Foreign Corrupt Practices Act (FCPA) or UK Bribery Act anti-corruption program that can be relatively low-cost but can add potentially high benefits.

One of the ways to drive compliance into the DNA of an organization is through incentives such as making it a component of a year-end discretionary bonus payment. Indeed the FCPA Guidance states, “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. Some organizations, for example, have made adherence to compliance a significant metric for management’s bonuses so that compliance becomes an integral part of management’s everyday concern.”

Most Human Resources (HR) experts will opine that properly executed performance appraisals are crucial to organizational productivity as well as the development of employee skills and employee morale. Moreover, they can serve a couple of different functions for a best practices compliance program. First, and foremost, they communicate to each employee their job performance from a compliance perspective. However, one key is not to approach the performance appraisal review as an isolated event but rather a continual process. This means that instead of trying to play catch-up at the last minute, supervisors should provide feedback and assess job performance throughout the year so annual reviews are grounded in a year’s worth of experience. This includes the compliance component of each job. The second area performance appraisals impact is compensation. As noted above, the DOJ and SEC expect that your compliance program will have both discipline and incentives. But those incentives need to be based upon something. The score or other performance appraisal metrics will provide to you a standard which you can measure and use to evaluate for other purposes such as employee promotion or advancement to senior management going forward.

In her article Flewelling provides six points you should consider which I have adapted for the compliance component of an annual employee performance appraisal. 

  1. Prioritize reviews in your schedule – You should schedule the employee performance appraisal at least several days in advance, rather than when a time slot suddenly opens up. You would make sure that you allot sufficient time for unhurried give and take between the reviewer and the employee.
  2. Review the entire year’s performance – You should resist the attempt to focus the discussion on the latest compliance experience. This is called recency bias. If a compliance issue arose in the past month or so, you need to keep it in perspective for the entire review period. Moreover, by focusing a review on a recent problem you may obscure prior accomplishments and make an employee feel demoralized. Take care not to go too much in the opposite direction as recency bias can work both ways, and one should not let a favorable recent compliance event overshadow the full review period.
  3. Do not hesitate to critique – Be generous with praise where it is warranted, but do not hesitate to discuss improvements needed in the compliance arena. Many supervisors are reluctant to confront and indeed desire to avoid confrontation. However remaining silent about an employee’s compliance shortcomings is a disservice to both the company and the employee.
  4. Do not dominate the conversation – Remember that you must give the employee time for self-appraisal and to ask questions or to comment about the feedback received from the compliance perspective. If there are specific questions or concerns raised by the employee you need to be prepared to address them as appropriate.
  5. Understand the employee’s role – You need to understand and appreciate that if the recent economy has resulted in many employees assuming the responsibilities of more than one position. If relevant to the employee, acknowledge that fact and take it into account in the review. This is certainly true from the compliance perspective as many non-Compliance Department employees have cross-functional responsibilities. If they claim not to have the time to handle their compliance responsibilities you will need to address this with the employee and perhaps structurally as well.
  6. Anticipate reprisal – Although it is rare, you can face the situation where an employee who is very dissatisfied with a review may refuse to sign it. The employee may be offered the opportunity to add a statement to the review. Also point out that the employee signature is an acknowledgement of receiving the review and does not signify agreement. If the employee still refuses to sign, have a second supervisor come in to witness the refusal. This may be particularly important from the compliance perspective.

Flewelling ends her piece by noting, “A proper annual review requires considerable effort from employee supervisors. It should be a full-year process involving regular guidance and feedback and perhaps several mini-reviews along the way. But rather than viewing it as onerous, supervisors should keep in mind that it is a tool for making their departments work more efficiently and yields better results for everyone involved.” I would add this is doubled from the compliance perspective. Nonetheless the potential upside can be significant from your overall compliance program perspective.

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, 2014

December 15, 2014

Hiring and Promotion in Compliance – Wait for Great

7K0A0597The role of Human Resources (HR) in anti-corruption programs, based upon the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act, is often underestimated. I come from a HR background and practiced labor law early in my career so I have an understanding of the skills HR can bring to any business system which deals with legal issues; which is not only required of all businesses but certainly is true of FCPA or UK Bribery Act compliance. If your company has a culture where compliance is perceived to be in competition or worse yet antithetical to HR, the company certainly is not hitting on all cylinders and maybe moving towards dysfunction.

One of the Ten Hallmarks of an Effective Compliance program relates to the key role HR plays in incentives and discipline. However, another key area that is not given as much attention is in hiring and promotion. The FCPA Guidance states, “[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. Conversely, if employees are led to believe that, when it comes to compensation and career advancement, all that counts is short-term profitability, and that cu tting ethical corners is an ac­ceptable way of getting there, they’ll perform to that measure. To cite an example from a different walk of life: a college football coach can be told that the graduation rates of his players are what matters, but he’ll know differently if the sole focus of his contract extension talks or the decision to fire him is his win-loss record.” In other words make compliance significant for professional growth in your organization and it will help to drive the message of doing business in compliance.

I thought about these concepts when I read an article in the Corner Office column of the Sunday New York Times (NYT), entitled “Sally Smith of Buffalo Wild Wings, on patience in hiring” where columnist Adam Bryant interviewed Sally Smith, the Chief Executive of Buffalo Wild Wings, the restaurant chain. She had some interesting concepts not only around leadership but thoughts on the hiring and promotion functions, which are useful for any Chief Compliance Officer (CCO) or compliance practitioner striving to drive compliance into the DNA of a company.

Leadership – Get Feedback

One of the early lessons which Smith learned about leadership is to set clear expectations. Bryant wrote that Smith told him, “You have to be really clear about what you want and what your expectations are. When you’re clear and everybody understands them, you have a much better chance of success than if you say, “Just do it.” It’s a great slogan, but you’ve got to know what it is that you’re just doing.” This is a constant battle for the compliance practitioner when senior management also makes clear that you must make your numbers as well. However this dynamic tension can be met and one of the best ways is to require business-types to make their numbers but doing so in a way that is in compliance with a company’s Code of Conduct and compliance regime.

A second leadership lesson that Smith has learned is around feedback. As you might guess from a Chief Executive, Smith has found that obtaining honest critiques about her management style from those who work under her is difficult to acquire. To overcome this reluctance she set up a program where her leadership can give anonymous reviews of her performance annually to the company’s Board of Directors. Bryant said, “My leadership team does a performance review on me each year for the board. It’s anonymous. They can talk about my management style or things I need to work on. If you want to continue growing, you have to be willing to say, “What do I need to get better at?”” This type of insight is absolutely mandatory for any best practices compliance program as anonymous reporting is also one of the Ten Hallmarks of an Effective Compliance program. But more than simply an anonymous reporting line for FCPA violations, how does your company consider feedback to determine how all levels of the company is doing compliance going forward or as the FCPA Guidance states, “From the boardroom to the shop floor.”

Hiring and Promotion – Waiting for Great

Here Smith had some thoughts put in a manner not often articulated. One of her cornerstones when hiring is to search out the best person for any open position, whether through an external hire or internal promotion. Bryant stated that Smith said “We use the phrase “wait for great” in hiring. When you have an open position, don’t settle for someone who doesn’t quite have the cultural match or skill set you want. It’s better to wait for the right person.”

Smith articulated some different skills that she uses to help make such a determination. Once a potential hire or promotion gets to her level for an interview, she will assume that person is technically competent but “I assume that you’re competent, but I’ll probe a bit to make sure you know what you’re talking about. And then I’ll say, “If I asked the person in the office next to you about you, what would they say?””

Passion and curiosity are other areas that Smith believes is important to probe during the hiring or promotion process. In the area of passion, Smith will “Often ask, “What do you do in your free time?” If they’re passionate about something, I know they’re going to bring that passion to the workplace.” Smith believes curiosity is important because it helps to determine whether a prospective hire will fit into the Buffalo Wild Wings culture. Bryant wrote, “I look for curiosity too, because if you’re curious and thinking about how things work, you’ll fit well in our culture. So I’ll ask about the last book they read, or the book that had the greatest impact on them.” Smith also inquires about jobs or assignments that went well and “ones that went off the tracks. You ask enough questions around those and you can determine whether they’re going to need a huge support team.”

I found these insights by Smith very useful for a compliance practitioner and the hiring and promotion functions in a compliance program. By asking questions about compliance you can not only find out the candidates thoughts on compliance but you will also begin to communicate the importance of such precepts to them in this process. Now further imagine how powerful such a technique could be if a Chief Executive asked such questions around compliance when they were involved in the hiring or promotion process. Talk about setting a tone at the top from the start of someone’s career at that company. But the most important single item I gleaned from Bryant’s interview of Smith was the “Wait for great” phrase. If this were a part of the compliance discussion during promotion or hiring that could lead to having a workforce committed to doing business in the right way.

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, 2014

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