FCPA Compliance and Ethics Blog

November 12, 2014

John Doar and the Bio-Rad FCPA Enforcement Action – Part II

John DoarJohn Doar died yesterday. He was perhaps most famously known for his role as the House Judiciary Committee Chief Counsel during the investigation of and impeachment proceedings against then President Nixon. However, it was his role in the civil rights movement in the South that in large part inspired me to become a lawyer. He rode with the Freedom Riders in Alabama; walked with James Meredith so that he could register to attend the University of Mississippi, then stayed in the same dorm room with Meredith while the campus rioted; prosecuted the KKK in Mississippi after the murder of three civil rights workers in 1964; and marched for voting rights with Dr. King in Selma. My favorite John Doar story was retold in his obituary in the New York Times (NYT), where he stopped a riot in its tracks with the following ““My name is John Doar — D-O-A-R,” he shouted to the crowd. “I’m from the Justice Department, and anybody here knows what I stand for is right.” That qualified as a full-length speech from the laconic Mr. Doar. At his continued urging, the crowd slowly melted away.”” In my book, he is right up there with Atticus Finch.

In an earlier post, I reviewed the Bio-Rad Laboratories, Inc. (Bio-Rad) Foreign Corrupt Practices Act (FCPA) enforcement action from the perspective of the Non-Prosecution Agreement (NPA) the company was able to secure with the Department of Justice (DOJ). Today I want to review the bribery schemes that the company used to either internally fund the bribes or attempt to evade internal detection. Both the NPA and the Securities and Exchange Commission’s (SEC) Order Instituting Cease-and-Desist Proceedings (Order). The compliance practitioner can use these bribery schemes not only for FCPA training but also to see if any such schemes or their indicia may be present in your company.

Initially I need to discuss the corporate structure. It was apparently quite decentralized. According to the Order, “Bio-Rad’s international sales organization (“ISO”) oversees the company’s international sales operations; this includes all locations outside the United States and Canada. In 2009, the ISO consisted of four sub-divisions: (1) Western Europe; (2) Asia Pacific; (3) Japan; and (4) Emerging Markets. Each sub-division had a general manager, reporting to the vice-president of ISO. The Asia Pacific sub-division included Vietnam and Thailand. The Emerging Markets sub-division included Russia and other eastern European countries. Some countries within the sub-divisions had a country manager who reported to the ISO sub-division general manager.” Emerging markets is clearly a high-risk area for pharmaceutical companies. If your business development or sales organization has such a designation, I would suggest that you check and see if there are sufficient protections in place to at least raise any red flags, which might need further investigation.

However, it was more than the management structure of the business operations that was decentralized, the compliance function was similarly structured. The NPA stated, “BIO-RAD also decentralized its compliance program such that its international offices were responsible for ensuring adequate compliance with its business ethics policy and code of conduct.” This decentralization so defanged the company’s compliance program that it could not perform even the most basic functions of a compliance organization; no due diligence on third parties, indeed no management of third parties at all from the compliance perspective; no risk assessments were performed and, finally, the most damning was that the compliance function could not even ensure compliance with the company’s own business ethics policy.

The Russia Scheme

However the company used third party representatives to facilitate the bribery scheme. In addition to the lack of due diligence or usual steps that a compliance practitioner might put in place to manage third parties under the FCPA there were several other items of note which constitute lessons learned by the compliance practitioner. First and foremost was the commission rate paid to these third parties, that being between 15%-30%. This alone may well have been enough to demonstrate “a conscious disregard for the high probability that the Russian Agents were passing along at least a portion of their commissions to Russian government officials to obtain profitable public contracts for the sale of medical diagnostic equipment.” Further, the payments made to these agents were sent to countries outside Russia, where neither the alleged services were delivered nor where the agents were legally domiciled. Moreover, not only did these agents have no offices in Russia, they had no employees in Russia either.

Apparently there were contracts in place with these agents. The services these agents were specified to deliver included, “acquiring new business, creating and disseminating promotional materials to prospective customers, distributing and installing products and related equipment, and training customers.” But it really is hard to deliver services if you have no employees. Apparently there were times these agents did deliver something identified as “distribution services” for the commission rates between 15%-30%. However the estimated value of these services for the company was between 2%-2.5% of the total sales.

Another area of obvious concern should have been the pre-payment of commissions to these agents. Any time you pre-pay before a service is delivered (other than a retainer into a lawyer’s trust account) you can potentially run into trouble. But Bio-Rad took it a step further by making pre-payments before contracts with the ultimate buyer were negotiated. Any ideas where those pre-paid commissions might have gone? Another area was the amount of the commissions. They were just less than $200,000, which happened to be the authority level of the head of Bio-Rad’s Emerging Markets business unit. So there was no oversight or second set of eyes on these pre-payments because it was within the manager’s authority level. Finally, these pre-payments were actually forbidden under the contracts but they were made anyway.

The Vietnam Scheme 

The Vietnam Country Manager had contracting authority up to $100,000 and sales commissions up to $20,000. From 2005-2009 Bio-Rad apparently paid bribes directly to health care workers so they would purchase the company’s products. When it was pointed out to the Country Manager this was illegal, he simply moved to a distributor “at a deep discount, which the distributor would then resell to government customers at full price, and pass through a portion of it as bribes…Between 2005 and the end of 2009, the Vietnam office made improper payments of $2.2 million to agents or distributors, which was funneled to Vietnamese government officials. These bribes, recorded as “commissions,” “advertising fees,” and “training fees,” generated gross sales revenues of $23.7 million to Bio-Rad Singapore.” 

The Thailand Scheme

In Thailand, it was an almost mundane bribery scheme involved compared to Russia and Vietnam. Bio-Rad acquired an interest in a Thai Joint Venture (JV) through an acquisition where it performed “very little due diligence” on the JV. Bio-Rad acquired a minority interest in the JV and it did not communicate directly with the JV’s distributors but only through the majority owners of the JV. The bribery scheme was funded through “an inflated 13% commission, of which it retained 4%, and paid 9% to Thai government officials in exchange for profitable business contracts.” The due diligence was so poor that Bio-Rad did not know that the prime third party sales representative for the JV were the same majority owners of the JV.

Tomorrow, I will discuss some of the internal controls that a company might employ to help prevent such a compliance failure as occurred at Bio-Rad.

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

October 21, 2014

Carlton Fisk, The Homer and Oversight of a Profitable Subsidiary

Fisk HomerToday we celebrate one of the great moments in World Series history. At approximately at 12:34 AM on this date in 1975, Carlton Fisk came to bat at the bottom of the 12th, in Game 6 of the World Series between the Boston Red Sox and Cincinnati Reds. He hit a pitch down the left field line. He stood at the plate, bouncing up and down and flailing at the ball as though he was helping an airplane land on a dark runway. “I was just wishing and hoping,” he said at a ceremony some years later. “Maybe, by doing it, you know, you ask something of somebody with a higher power. I like to think that if I didn’t wave, it would have gone foul.” Whether or not the waving was responsible, the ball bounced off of the bright-yellow foul pole above the Green Monster for a home run. Fenway’s organist played the Hallelujah Chorus from Handel’s Messiah while Fisk rounded the bases. One for the ages indeed as it appeared the Baseball Gods might finally be smiling on the Red Sox nation. Alas, they lost the next game and it was not to be for another 30 years.

I thought about Fisk’s homer and the ultimate heartbreak of Red Sox nation once again in 1975 when I read about several recent issues involving corruption and corporate responsibility for oversight, or perhaps more appropriately, the lack thereof. The first was an article in the New York Times (NYT), entitled “Another Scandal Hits Citigroup’s Moneymaking Mexican Division”, by Michael Corkery and Jessica Silver-Greenberg. Their article spoke about the continuing travails of Citigroup’s Mexican subsidiary Banamex. Back in February, the company revealed “a $400 million fraud involving the politically connected, but financially troubled, oil services firm Oceanografía.”

However, company investigators have unearthed another problem at the Mexico unit. The article reported “An internal investigation, begun by Citigroup in July, found evidence that the security unit was overcharging vendors and may have been taking kickbacks, a person briefed on the investigation said. The internal inquiry also found shell companies that had been set up to look like vendors and receive payments from the Banamex unit.” In a statement reported in the piece, Citigroup’s Chief Executive Officer (CEO) Michael L. Corbat “called the conduct of the individuals in the security unit ‘appalling’”.

What I found most interesting in the article was the response of Citigroup and what its implications might mean for the compliance practitioner, particularly one whose company is under scrutiny for a Foreign Corrupt Practices Act (FCPA) violation by the Department of Justice (DOJ) and Securities and Exchange Commission (SEC). The NYT piece made clear that the Mexico unit is so profitable that it figuratively “mints money” for the company. Moreover, “despite the latest headline-grabbing turmoil at Banamex, Citigroup does not want to cede any ground in Mexico where it dominates a large portion of the retail market.”

What is the responsibility for a US corporate parent when a foreign subsidiary ‘mints money’ for the company? Should the corporate parent pay closer attention to make sure the subsidiary is doing business in compliance with the FCPA and other relevant laws? In the past few posts, I have discussed some of the specific internal controls a compliance practitioner might consider for a company’s international operations. One of the problems Citigroup is facing with the conduct of its Mexico subsidiary is the company’s concern of “lax controls and oversight”. Moreover, there is concern that some part of the ongoing troubles in the Mexico unit relates to its head, Manuel Medina-Mora. Citigroup Chairman Michael O’Neill, was said to have “privately expressed concerns to board members that Mr. Medina-Mora, who is also co-president of the parent company, has not always relayed problems in the region to executives at the bank’s headquarters on Park Avenue, according to the people briefed on the matter. Instead of looping in executives in New York, Mr. Medina-Mora has at times chosen to handle the issues himself.”

How much oversight should a parent corporation have over a subsidiary? At a basic level it would seem that oversight should be enough to prevent and detect illegal conduct. Clearly, a Chief Compliance Officer (CCO) should be considering the entity-wide internal controls for a company. Under the FCPA accounting provisions, issuers can be held liable for the conduct of their foreign subsidiaries, even though the improper conduct occurred outside of the US. The scope of liability is based on the issuer’s incorporation of the subsidiary’s financial statements in its own records and SEC filings.

While a CCO should expect (and the DOJ & SEC for that matter) that internal controls at locations outside the US are of the same effectiveness as internal controls in US business units and at the US corporate office; unfortunately, that might not always be the case. It is often the case that corporate level internal controls are stronger than those in foreign business units. The Citigroup situation with its Mexican subsidiary would seem to be a clear example of the oft-cited reason that many companies were built through acquisitions, resulting in many business units (both in and outside the US) having completely different accounting and internal control systems than US corporate office. There is often a tendency to leave acquired companies in the state in which they were acquired, rather than trying to integrate their controls and conform them to those of current business units. After all, the reason for the acquisition was the profitability of the acquired company and nobody wants to be accused of negatively impacting profitability, especially one that ‘mints money’.

The second example is one a bit closer to home and it is that of the General Motors (GM) legal department. In an article in the Wall Street Journal (WSJ) entitled “GM Says Top Lawyer to Step Down”, John D. Stroll and Joseph B. White, with contributions from Christopher Matthews and Joann S. Lublin, reported that GM General Counsel (GC) Michael Millikin will retire early next year. Millikin was criticized after the GM internal investigation found that he ran the GM legal department in such a hands off manner that he did not know about his legal department’s own settlements for product liability claims involving faulty ignition switches until February of this year. His defense was that his own lawyers “left him in the dark” even though there was evidence that he had been repeatedly warned, “GM could face punitive damage awards related to its failure to address the safety defect.” Missouri Senator Claire McCaskill summed up sentiment about Milliken with her statement “This is either gross negligence or gross incompetence.” In other words if you are a GC or CCO you had better know what is going on in your own department. What would it say about a CCO who did not know that compliance department members were dealing with violations of the FCPA without informing him or her? It would say that the CCO failed to exercise leadership and oversight.

And while you are watching things closely, you may want to check out a clip of Carlton Fisk’s famous homer by clicking 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, 2014

September 14, 2014

To the NFL – Show More Than Ethics, Show Some Humanity

IMG_1230Just a short ten days ago I wrote about how thrilled I was that the National Football League’s (NFL) 95th season was upon us and pro football was about to begin. But in the intervening 10 days, it is if the very football gods from Mount Olympus have arisen and unleashed their Furies on the NFL. In those short 10 days, we have seen the release of a video of Ray Rice knocking out his then fiancé (and now wife) and the arrest of a Adrian Peterson for spanking (a ‘whoopin’ in Peterson’s Texan parlance) a four year-old child so severely that the doctors who treated the disciplined child were instrumental in having charges brought against Peterson. This is in addition to two other players, one convicted of domestic abuse and one arrested for domestic abuse, being allowed by their respective teams, to continue to play football. To say that the NFL’s response to all of these events as pathetic would be to insult all of the pathetic people and things in the world and raise the word pathetic to a paragon of performance.

For those who might not know, late last year, Baltimore Raven running back Ray Rice hit his then fiancé so hard in an elevator that he knocked her unconscious with one punch. When the elevator reached its floor, he proceeded to drag the unconscious woman out of the elevator out by her arms, shoulder and hair. How do we know all of this? It was filmed by the cameras both inside the elevator and outside it, all in the Casino Revel. Since at least February tapes of the events outside the elevator were available publicly, largely through TMZ. But the tape of the actual assault inside the elevator was provided to local police and AP has reported that it was also provided to the NFL.

In August, the NFL Commissioner Roger Goodell gave Rice a two-game suspension. This is in contrast to a league that levied a four-game suspension on one player who took recreational drugs back at the Kentucky Derby and a full season suspension to another player for a second offense of smoking marijuana. The public howling was so vociferous that Goodell had to admit that he made a mistake in under-penalizing Rice and announced a new league wide policy regarding players who engage in domestic violence. But all of this was before TMZ managed to get its hands on the video recording from inside the elevator, which showed the punch Rice threw. If you have seen it, you know how horrific it was and if you have not seen, do not take my word on it, but go to youtube.com and watch it.

The same day that TMZ released the video, Rice’s team, the Baltimore Ravens, released him and later that day the NFL indefinitely suspended him. Both the Ravens and the NFL claim that they had not previously been provided with or had seen the video, which many people, including myself, found disingenuous at best or an outright lie at worst.

As noted above, AP reported that the video had been provided to the NFL. However, Bill Simmons spoke for many when he severely chastised the NFL for failing to obtain the video when TMZ was able to do so. In his Goodell-Must-Go Mailbag Column, Simmons gave three reasons why TMZ is doing a better investigation into the Rice domestic matter than the NFL; “First, they actually cared about finding the secret elevator tape … unlike the NFL, which clearly didn’t care even though every inch of a casino is being filmed by a camera at all times… Second, TMZ probably realized that Revel Casino was going out of business over Labor Day weekend, which meant its about-to-be-unemployed workers had nothing to lose by selling the tape. Why didn’t the NFL anticipate the same thing? Because it’s obviously Jackass Central over there… Which leads me to my third reason why TMZ outdid Goodell’s league: Either the NFL is run by an overmatched commish who orders around a slew of lackeys and buffoons and never saw that day coming; they saw the tape but never expected it to come out; they watched the tape and then buried it (the most nefarious of all the scenarios, by far); they underestimated the impact of the tape (and then some); and/or they were outwitted by the one and only Harvey Levin.”

To attempt to gain some credibility, the league hired former FBI Director Robert Mueller to lead an investigation into the question of when the league received the video of events inside the elevator. However the investigation was going to be overseen by two league owners and the law firm at which Mueller works is regular counsel to the NFL. Simmons summed up the obvious conflicts of interest with the following, “So you don’t have a ton of confidence in an “independent” investigation led by owners from two of the team’s oldest-run families (the Maras and Rooneys) and conducted by someone who works for a law firm (WilmerHale) that just helped the NFL negotiate a 10-figure deal with DirecTV? And you think maybe it doesn’t look great that the current Ravens president (Dick Cass) spent 30 years working for that same law firm? Hold on, what’s that smell?” Here you might want to consider the General Motors (GM) investigation into its handling of the ignition switch issue, performed by its regular counsel, which only managed to find nefarious conduct by lower level GM employees. Anything beginning to sound familiar?

So at this point, it is not clear if the NFL is incompetent or something worse. But whatever it is, it is certainly a public relations nightmare of the highest order. Cindy Boren, writing in the Washington Post, in an article entitled “NFL has a credibility crisis in wake of Adrian Peterson child-abuse case, Ray Rice domestic-violence incident”, said “It’s a nasty image for the NFL and the problem is that the guy who is skilled at PR, the guy who has explained away Spygate, Bountygate, the lockout of the referees and the Rice matter (initially) is now the Invisible Man. Goodell, he of the $44-million paycheck in 2013, is nowhere to be seen. No one is putting out the NFL’s side of the story as anger grows. Owners, like Daniel Snyder of the Washington Redskins, may be in Goodell’s corner, but fans increasingly may not be, according to an ESPN poll. There’s a big disconnect and one that owners are not addressing, even as more horrific images come out.”

As to the Peterson indictment, I grew up in a very different era where corporal punishment was administered as a regular part of growing up, both at home and at school. As a parent, I certainly think a parent has the responsibility to discipline their children. But times have changed and what was acceptable when I grew up, or even when Adrian Peterson was a child, is no longer acceptable and those times are long gone. Moreover, even if you still believe that spanking is a legitimate form of discipline, it is NEVER, NEVER acceptable to beat a child so hard that they require professional medical care.

This week I am attending the SCCE’s 2014 National Compliance and Ethics Institute. I am sure that many of aspects will be discussed in the context of a best practices compliance program. But sometimes, it does not take a compliance program, protocol and procedures to know what the right thing to do is. For the NFL to stand behind the excuse of an incomplete investigation, whether done so negligently or intentionally, misses the entire point. Even if the league is now corporate and all about the almighty power, prestige and profit of the NFL; it is still made up of humans and sometimes even corporations have to show some humanity.

Just how bad is it for the NFL these days? I cannot think of a better way to end this piece than be citing to Boren’s article for the following quote from ESPN commentator Tom Jackson, ““We started the week with players beating up women and we ended it with players beating up children. We are in a very serious state here in the National Football League.””

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

September 12, 2014

The FCPA Compliance and Ethics Report

If you have not done so, I hope that you might go over to my podcast site, the FCPA Compliance and Ethics Report,  to check out some of my recent podcasts. The episodes are between 20-30 minutes long and they are available for download on iTunes so you can listen to them on your commute to work or when working out at the gym.

Internal Controls

I have begun a series on internal controls in a best practices FCPA compliance program with noted internal controls expert Henry Mixon. In Parts I & II, Mixon and I discuss the basics of what are internal controls. These podcasts supplement some of my recent blogs on internal controls.

Episode 85-What Are Internal Controls, Part I

Episode 87-What Are Internal Controls, Part II

HR and Compliance

One of the best allies for the compliance function in any company is the Human Resources department. I explore how HR can assist compliance in a myriad of components of any best practices compliance program.

Episode 86-Use of HR in a Compliance Program

Continuous Improvement of a Compliance Program

In the FCPA Guidance and in almost every speech I have heard by a Department of Justice official, they talk about how your compliance program should evolve to meet new compliance risks, changes in best practices, geographic markets where your company does business and new product/service offerings. You can do this by continuous improvement of your compliance program.

Episode 84-Continuous Improvement of Your Compliance Program

The Compliance EcoSystem

Jon Rydberg is the Founder and CEO of Orchid Advisors. He is also the former CCO of Smith & Wesson and was at the company when it navigated it way through a FCPA investigation and enforcement proceeding. From these experiences, Rydberg has developed a holistic approach to compliance which he has trademarked as the “Compliance EcoSystem”. I explore his ideas on an fully integrated approach to compliance

Episode 83-Interview with Jon Rydberg

Use of Interviews in Your Compliance Program

Brian Ching is the most famous player in the history of the Houston Dynamos soccer club. Ching recently retired and moved into the front office as the General Manager of the Houston Dash, the Houston professional women’s soccer club. I interviewed Ching on his transition to management and how the Dash use the face-to-face interview process to not only assess the non-soccer skills that the team requires of its players but also to communicate the team’s expectations. There are some very significant insights about how a company can communicate its expectations regarding ethical business practices.

Episode 79-Interview with Brian Ching

The FCPA Professor

Finally and last but certainly not least, I bring back the FCPA Professor for a two-part podcast on his new book The Foreign Corrupt Practices Act In a New Era.

Episode 80, Interview with the FCPA Professor, Part I

Episode 81-Interview with the FCPA Professor, Part II

A good weekend to all.

September 11, 2014

King Arthur’s Roundtable – The CCO as Chief Collaboration Officer

RoundtableMany commentators such as Donna Boehme and Mike Volkov often talk about what is required for the position of Chief Compliance Officer (CCO), both in terms of corporate support and skills as a leader of a company’s compliance function. But in many ways a CCO can be seen as a collaborator because so much of the job is working with and interfacing with various functions within a business. I thought about that concept when I read an article in the Corner Office section of the New York Times (NYT) entitled “Titles Don’t Matter. Teamwork Does.” by Adam Bryant where he interviewed and profiled Girish Navani, Chief Executive Officer (CEO) of eClinincalWorks, a provider of clinical information systems.

I found Navani’s leadership style focusing on collaboration to be a good model for a CCO or compliance practitioner because what the compliance function needs to bring is a partnership to help the business and other units do business in compliance with the relevant legal and regulatory scheme. In the world of anti-bribery and anti-corruption that means compliance with the Foreign Corrupt Practices Act (FCPA), UK Bribery Act and similar laws. Navani said that his leadership style is to be as open as possible. One of the techniques that he uses is to have an oval table for meetings. No doubt channeling his inner King Arthur (or perhaps Richard Harris playing King Arthur), the configuration of the table actually seems to facilitate conversation and learning.

Another interesting insight was that Navani structures his company around teams. I thought this could be something that the compliance function could use in its dealings with business units because compliance is really a partnership with the business units and compliance spans multiple functions within any company. I also found another leadership insight from Navani’s leadership style. Navani said he continues “to learn every day. Leadership to me is many different qualities. Some are very basic. You’ve go to be approachable, humble and hard-working. Then there are ones regarding how you treat people. I listen more now. Before, I’d speak all the time. I will still do a lot of talking in meetings, but I absorb others opinions more. And I’m completely open to being told “no”. Questioning my own decision-making with others in the room is fine.”

I found that last point quite useful to consider. Coming out of the legal department and into compliance, I did not always take kindly to being told ‘no’ by someone from the business unit. I thought every pushback was some type of pressure test looking for weakness or tension. However, Navani’s style brings up the useful reminder that often the business function can assist compliance in learning how to perform the function more quickly or more efficiently. Certainly the business can assist the compliance function in understanding the highest risks that a company should focus on managing. In such a partnership role, compliance and the business unit can compliment each other to stop wasting time on immaterial risks so that resources can be delivered to the company’s highest risks.

Navani also stressed accountability. At his company “You’ve got to be accountable to yourself first, and you’ve got to be accountable to your team.” This certainly has application to the compliance function as well. One of the battles that compliance can fight is to be ‘The Land of No’ and the CCO is the head of it, or ‘Dr. No’. However by stressing accountability and creating transparency in the compliance process, I believe that a CCO can go a long way towards ameliorating that misperception.

I also found Navani’s techniques for hiring instructive for compliance. He said, “I look for the heart first. I don’t ask for direct experience.” He expects a modicum of professional expertise by the questions he asks most often are “Do you want to win? What drives you every day? Why health care IT? Can you spend 10 years of your career here? What do you want to do in those 10 years?” Navani went on to say that if he received satisfactory responses to those queries the technical aspects of a position can be taught. But he strives to see if a candidate’s heart is in the right place.

In addition to using these questions to ferret out candidates who will not work with his company, Navani uses these questions to set both a tone and expectation. The message he sends is “We’re not going to stifle you. If you can think out of the box, you will.” Navani believes that by hiring such employees they have the opportunity to become game changers at his company. Now imagine if you could have your Human Resource function use the hiring process to ask questions around attitudes around business ethics or other compliance issues. It would have the dual effect of allowing your company to have a front line inquiry that might weed out those who might be prone to cutting corners through bribery and corruption. But equally important would be the expectation set on the high value your company has on compliance and business ethics. The message would begin pre-hire, set again during employee orientation training and continued throughout the employment tenure.

Through migrating some of these leadership techniques that Navani espoused into your compliance tool-kit; a CCO or compliance professional can help to shift a company’s conversation around compliance. You can move from simply being seen as a safety backstop to one of developing and implementing solutions. Some of the other insights that I drew from Navani include setting out your core function of compliance. A compliance function should be able to offer expertise and insight into solutions. One part of that may be delivering data and other information to the business function to help them make better economic decisions for the company. But another way might be through compliance coaching advocacy.

Navani’s leadership once again demonstrates that if your compliance function shows integrity and responsibility, it can lead to greater teamwork between departments. Many business units fear that the compliance function will take away control of the business process from them. However by demonstrating that compliance is really in partnership, this can move a long way to alleviating this concern.

And do not forget the Round Table.

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

September 9, 2014

Management of Corruption Risks – Business Lessons from GSK

IMG_0891The Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have made it abundantly clear over the past several years that companies should assess their risk and then manage their own risks. In the anti-corruption space, simply putting in a Check-the-Box paper compliance program does not help to prevent, detect or remediate under laws such as the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. In their joint FCPA Guidance, the DOJ and SEC make clear there are a variety of steps a company can take to manage anti-corruption risks.

One of the tired excuses for cutting back on FCPA enforcement is that it costs US companies business overseas because they cannot engage in bribery and corruption, while the commercial enterprises of countries which do not have robust anti-corruption laws essentially bribe at will. However, there are many business solutions available in the management of risk, which companies can profitably use to help ameliorate bribery and corruption risk.

I was interested to read recently about some of the responses that one of the world’s current poster children for bribery and corruption are considering. In an article in the Financial Times (FT), entitled “Witty comes out fighting for GSK”, Andrew Ward reviewed some of the business responses that GlaxoSmithKline PLC (GSK) has contemplated over the past year since the revelations about allegations of bribery in China. Ward reported that in addition to the uncertainty of the ongoing corruption investigation by Chinese authorities, the UK Serious Fraud Office (SFO) for violations of the UK Bribery Act and the DOJ for violations of the FCPA; the company “issued a profits warning that exposed weakness in the company’s core respiratory medicines business.” These warning turned on “the decline in the company’s best selling drug. Revenues from Advair, an asthma treatment that accounts for a fifth of sales, fell 12 per cent in the second quarter, on top of the 15 per cent drop in the three months before that.” Moreover, the company’s stock is down some 14% in the past year.

I was intrigued by the response of GSK’s chief executive, Sir Andrew Witty. Witty did not bemoan the corruption investigations that his company is going through or somehow try to claim that the company simply could not compete because of the scrutiny it is under. On the business front Ward reported, “GSK’s innovation engine is working” as Witty noted that the company had “six new drugs approved across all therapeutic areas last year and a further 40 in advanced development”.

In addition to the specific response regarding the development of new pharmaceutical products, Witty is looking at other sales products and models that will lessen the company’s corruption risk while providing a strong business base. Ward reported that Witty is “strengthening GSK’s two other businesses: vaccines and healthcare.” This move “was reinforced by a $20bn asset swap with Novartis in April under which GSK traded its subscale oncology business for the Swiss group’s vaccines division, while the pair agreed to set up a joint-venture in consumer products.” This means that when this structuring is completed, “half of GSK’s revenues will come from outside [the sale of] pharmaceuticals.”

Witty has also worked to change internal GSK compensation incentives to help manage corruption risks. Late last year, the company announced that it would “sever the link between sales and pay for drug reps and from 2016, stop payments to doctors for promoting its products.” Ward noted that others in the industry have not followed GSK’s lead in changing the way it compensates its sales team but Witty said, “in the long-run, the company will benefit from being the first-mover towards a new marketing model.”

Finally, and perhaps most interestingly, Witty has attempted to become an industry-wide “standard-bearer for [pharmaceutical] industry ethics.” Ward reported that the ongoing scandal has helped Witty “drive home to employees the need for greater transparency.” Ward even quoted Witty for the following, “It gives me the ammunition to say we are in the public eye and our behaviour counts. It’s not just about generating prescriptions, it’s how you do it.”

In another article on the GSK corruption scandal by Ward, entitled “GSK chief floats break-up option”, Ward quoted said that Witty has “zero tolerance for any form of corruption” and that “he was pleased if wrongdoing had been brought to light so that it could be stamped out.” Witty went on to say that “Any company that doesn’t get whistleblower letters isn’t looking hard enough. If you are not getting any don’t dream. It can’t be perfect 100 per cent of the time.”

Another perspective on business solutions to the management of corruption risks came from Tom Mitchell, also writing in the FT in an article entitled “Expats in China should read GSK potboiler carefully”. Mitchell focused on a book by Joe Studwell called The China Dream, which detailed some of the business failures that had befallen western companies in China. Mitchell drew the lesson from Studwell’s book that “When foreign investors’ interests are aligned with those of their domestic partners – as they generally are today in the auto sector – those investors do very well indeed… However, when interests are not aligned – or when outside operators in sectors where they are not required to have joint ventures – foreigners are vulnerable to sudden reversals of fortune instigated by either a bitter partner or by unsympathetic officials.”

How closely does that sound like what happened to GSK? Mitchell noted that GSK “made money from selling goods in China at prices that were – Chinese police allege – were high by the standards of many markets. At the same time, GSK was not sharing revenue streams with a local partner that could help with damage limitation when local authorities appeared on its doorstep.”

The management of risk is essentially a business exercise. That is because risk is what can cause a company to lose money. Some risk is embodied in statutes such as the FCPA or UK Bribery Act. Sometimes risk is a change in the market circumstance. For that I and others have written about the negative side of GSK; the company may well come out the other side of the Chinese corruption scandal stronger because they seem to understand that there is a market based solution to corruption risks. GSK has changed the way it will compensate its sales force and will delete its compensation to doctors. This may take away incentives to cut corners or engage in bribery and corruption. But think about Witty’s steps to diversify the GSK product base. If you are in an industry that is corrupt and you cannot find a way to do business profitably, your company may have other business lines it can move forward to a more prominent role in your business. Lastly, as with most responses to legal issues by lawyers, business executives are only limited by their imaginations in their response to business issues.

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

July 30, 2014

Bringing It All Home, the Two Tough Cookies Wrap It Up For You, Part III

Tales from the CryptNote-I asked the Two Tough Cookies if they could put together a series of blog posts wrapping up the lessons they have seen and learned and written about in their series of Tales from the Crypt. They graciously put together a series of posts on the seven elements of an effective compliance program from their 10 tales of Business Conduct. Today, Part III of a Three Part Series…

Wrapping it all Up

So, now you’re ready to start your culture audit… Some key questions you want to ask before you start are:

  1. Do I have the support of Executive leadership? If not, go back to your E&C steering committee and work through the objections there first. It should be comprised of empowered executives who can understand the value of what you propose, and give you insight how to get buy-in across the organization. Give yourself MONTHS to get this accomplished, if not years. If they don’t understand the value of what you do, it will take a lot of mini-meetings to get your point across. If you don’t have an E&C steering committee, start by forming one, and include your CEO, CFO, GC, CHRO, IA, and top business line leaders. Also include global representatives if you have a global footprint. If you have an executive management council, they should be on your E&C steering committee, because they are the decision-makers. Be careful not to have overwhelming representation on the administrative side. And make sure the CEO has representation – if he or she doesn’t have time to manage for integrity, then you need to go elsewhere.
  2. Have you clearly articulated the ethical standards of your organization and the procedures to follow in order to meet those standards? If not, or if you’re not sure, start with a small sample survey of some key expectations and do a small focused study on what critical pieces are missing, and work to fix it. That’s your baseline, and you will then have metrics to measure against when you really start to change things for the better!
  3. What are the operational values – the values that define “how things really work around here”?

Your continuum looks like this depending on your ethical climate:

Aethical Compliance Emerging Ethical Integrity
Ego/Profit Rules Based Rules Plus Values Principled Performance

Organizations that are Compliance-oriented typically

  • Have a goal to prevent, detect, and punish legal violations
  • Channel behavior in lawful directions
  • Underlying model is deterrence theory
  • People are rational maximizers of self-interest, responsive to personal costs and benefits of their choices
  • May be seen as a rule-book, a constraint (especially if overemphasis on punishment)

Organizations that operate with Principled Performance (High-Integrity) typically

  • Combine a concern for law with emphasis on managerial responsibility
  • Define companies’ guiding values, aspirations and patterns of thought and conduct
  • Focus on Accountability, leveraging self-governance in accordance with a set of guiding principles and encouraging independence of thought with an introspective view on personal accountability. Each employee = Ethics Officer

Successful integration of Integrity in your organization is hard work. It takes guiding values and commitments that make sense and are clearly communicated. Company leaders are personally committed, creditable, and willing to take action on the values they adopt. The adopted values are integrated into the normal channels of management decision making and are reflected in the organization’s critical activities. It’s not enough to start every meeting talking about integrity, it has to be woven into every word and action of the leadership team, and done so authentically. The company’s systems and structures have to support and reinforce its values. Managers must be developed to ensure they have the skills, knowledge, and competencies needed to make ethically sound decisions, and resources must be made available on a non-discretionary basis to enhance those skills, knowledge and competencies. Continuing effort, investment, and integration is needed. Close enough is not good enough, and the work is never done.

 

Sample Gap Analysis of Culture Crawl Walk Run!
Organization Type Aethical Compliance Emerging Ethical Integrity
Work Climate Type Instrumental, Rules & Procedures Rules & Procedures, Law & Professional Codes Law & Professional Codes, Caring Independence
Policy Type None Code of Conduct Code of Practice Code of Ethics
Policy Control None Use of rules Seek advice, Act then disclose Use of guiding principles
Training Type None Orientation, General courses Seminars, Courses for some managers Courses for most employees, Personal interviews
Training approaches None or General Info Rules and guidelines, Lectures Decision-making frameworks, Case studies Cognitive approaches, Exemplary modeling
Top management commitment None Formal communications of legal aspects Some informal and formal means of communication Various informal and formal mechanisms, partnering
Communication None Orientation, one-time distribution, annual review Periodic distribution, Input into review Frequent distribution, Two-way communication
Enforcement Officer No one, Unimportant role Legal or HR Dept, Compliance Officer Sr. mgmt. committee, Ethics Officer, Supervisors Each employee, High-ranking employee(s)
Sanctions Ignored Arbitrarily enforced Semi-consistently enforced Consistently enforced
Rewards Keep job One-time story, award Special recognition Publicity, bonuses
Help/hot lines None 800 number, limited hours Third-party staff, feedback Follow-up, regular reports
Performance appraisal systems None Idea or suggestion only High-level managers only, Affects pay or bonuses All employees, affects pay, Affects promotions

Many thanks to the Two Tough Cookies for this great series!

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 authors, their affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Authors give their permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the authors.

July 29, 2014

Bringing It All Home, the Two Tough Cookies Wrap It Up For You, Part II

Tales from the CryptNote-I asked the Two Tough Cookies if they could put together a series of blog posts wrapping up the lessons they have seen and learned and written about in their series of Tales from the Crypt. They graciously put together a series of posts on the seven elements of an effective compliance program from their 10 tales of Business Conduct. Today, Part II of a Three Part Series…

3. Exercise Due Diligence to Avoid Delegation of Authority to Unethical Individuals

This one is tough, especially in global organizations. In many countries, you simply cannot run a background check, as criminal records are not public. In others, you can run them, but the criminal offense must be related to the job to exclude the candidate from being hired.   In yet others, you can run them, but you can’t use them due to overly strict privacy rules. Then there’s the matter of cost relating to doing all this due diligence. The best thing you can do is determine the following:

  • First, is your business subject to a potential FCPA violation? If you are not “at risk” of public corruption because you are not engaging at any level with foreign government officials, then half the battle is won. Of course, you still run the risk of commercial corruption (bribes, kick backs, etc. with trading partners), but at least the spectre of government sanctions is not looming so large over you.
  • If you are “at risk” of an FCPA violation (you have interaction with govt. officials, including customs) have you developed a robust due diligence program, based on some corruption index to determine the level of due diligence required for your staff, your trading partners?
  • Have you identified your red flags thoroughly to spot anomalies in your business that would signal a deeper view is recommended?
  • Do you have staff to conduct the due diligence, or a vendor to do it on your behalf?
  • Are background checks run on everyone, or just certain individuals, or certain risk areas?
  • Have you taken a hard look at your gift policies to determine whether or not there are glaring holes that could give rise to inappropriate influence in business dealings?
  • Have you taken cultural considerations under advisement in your gift policies? Are they more stringent, or lax, compared to the US? Are the gift policies in Russia different than the gift policies in the US, because someone convinced someone else that you just can’t get things done without greasing a palm here or there?
  • Do you have a formal committee reviewing all charitable contributions, or, are ‘charitable contributions” acceptable as “facilitation” to get non-discretionary government functions moving along? Does your organization allow “facilitation payments” – if so, you better take a second, third, fourth look….

The point I’d like to emphasize here is that even companies that make it on the “World’s Most Ethical Companies” list also make it to the DOJ’s investigation list for foreign corruption, or violation of embargoes, sanctions, and the like. People interpret rules when the rules change, depending on the country. People then make mistakes in favor of what makes business sense to them, in their country, in their environment. You just have to make sure you’ve done what’s reasonable to prevent those mistakes.

  1. Communicate and Educate Employees on Compliance and Ethics Programs

Here’s where the tone from the top, middle and bottom are key to your culture. This is probably the most important thing you want to measure. I am fond of saying 90% of a good ethics & compliance program is communication, and 10% is actions/deeds. While deeds do speak louder than words, it’s the communications – what you say, how you say it, what you mean by it, your intent – that frames up the actions of others.     So you want to measure

  • Are the messages the same, the deeper you get into the organization? Is the understanding of the messages cascading from above the same the further down you go? Easy enough to measure with post-learning survey tools. Give all top, middle, and lower management the same “meeting in a box” and see if the understanding after delivery is the same. Reminds me of that campfire game, where the story starts at one end of the circle, and is completely different by the time the last person hears the tale. Your objective, of course, is to ensure that every person in the corporate audience hears the same message, and has the same take-aways, no matter who is telling the tale.
  • What kind of audience do you have? Does everyone have access to a computer, or do you have the challenge of manufacturing workers, with multiple languages and facilities to manage, and no technical means of reaching them? Have you done what’s necessary to ensure your training and communications mechanisms address every type of audience, or are pockets left out of the mix?
  • What learning aids do you have to help with understanding the code of conduct? Are the examples you use for harassment appropriate for your audience? Do you have a team of global reviewers who will not only preview your training, but offer suggestions on how to localize it to make it appropriate, meaningful and relevant to the teams they serve? If so, do they look at all communications pieces, or only certain ones? If only certain ones, which ones? And why?
  • Are there any leaders who go above and beyond when you launch your annual or quarterly training? I had an Asian business President who made sure he took the course the first day it was launched, and then sent a message to his leadership team about what he learned from the course, and what he wanted them to take away to their teams after they took the course. All of his team had the course done within the first month. I wanted to clone the guy, I swear!

I’m also reminded of mandatory harassment training I gave in Brazil one year. I relied upon the canned on-line training to help with my meeting amongst management, who all spoke English well. I was planning on asking them to cascade the messages to their teams while I was there, but they pointed out that the training was a farce. Women, they told me, wanted wolf calls lobbed in their direction in Brazil – it was not only culturally acceptable, but encouraged. This was substantiated by the several women in the room. Check. Fortunately, I had other examples at the ready to use for a facilitated session, which I vetted with the women on the team prior to delivery. Lesson learned? Make sure your ethics & compliance steering committee has global membership, and are willing to preview your training and communications prior to launch to ensure cultural relevance. If you don’t do this, your ethics & compliance program will be perceived as a joke. Not a desirable outcome, I would say….

  1. Monitor and Audit Compliance and Ethics Programs for Effectiveness

So, how do you measure a non-event? I often ponder…. The challenge in highly ethical organizations is that you have, at first blush, very little to measure. If everyone’s doing a good job, how do you measure effectiveness. Is it because you have a great program that you have absolutely no calls on the hotline? Or is it that everyone is trembling in fear of retaliation the reason for no calls to the hotline? Hmmm.

Some of the things you can measure include

  • Indicators and ‘yardsticks’ – do you crawl, walk, or run to goals?
  • Do you seek periodic stakeholder feedback (including E&C council input)
  • What kind of documentation do you collect – trend analyses of HelpLine metrics, feedback on program enhancements as they are implemented, feedback on training and communications
  • Do you routinely conduct a “Lessons Learned” exercise after substantiated hotline calls?
  • Does your HR team engage in site assessments when a location, facility, or team seems to have a lot of issues that arise from a single manager or set of team leaders?
  • How often are your Code, policies, procedures updated and reviewed?   Are they tested for readability and understanding? Are they just published, or is training introduced for new policies as they are issued?
  • Do you conduct risk assessments and/or change training or communications based on perceived risk areas?
  1. Ensure Consistent Enforcement and Discipline of Violations

Does your organization allow for mistakes? Many will say they do, but when the rubber meets the road, you will find that they can be unforgiving for some transgressions, and unbelievably forgiving for others…. You will want to measure

  • Whether or not there appears to be wiggle room when folks stray. Deeds in this aspect do speak louder than words.
  • Are roles and responsibilities clearly defined, with escalation clauses when things go wrong?
  • Does your organization communicate when things go wrong as well as when things go right? I know one organization that struggled mightily when I suggested we let everyone know what actions we took for certain code violations. The attorneys were all worried that someone would sue, of course, but in the end, integrity prevailed. We were able to sanitize the situations in such a way to communicate what had been done, and what discipline was taken, without anyone learning personal details. Importantly, it drew a virtual line in the sand by publicizing transgression and discipline, so that people knew boundaries. Of course, this was after years of me observing that discipline seemed to be discretionary within the organization, and as a result, trust in management “doing right” was eroding significantly. It didn’t hurt that my observations were followed by multiple hotline calls saying the same thing… but it should never get to that point, should it?

Also measure whether or not policies and communications:

  • Encourage reporting
  • Identify resources to raise concerns
  • Prohibit retaliation for good faith concerns
  • Identifies management as the primary resource for issues or concerns
  • The average timeline to resolve complaints
  • Whether or not you benchmark reports that express fear of retaliation or unwillingness to consult with management first. This is tough to do, unless you build it in to your hotline reporting mechanism as a “customer service” function at the end of every call or report, actively soliciting this very feedback when a report is made.
  1. Respond Appropriately to Incidents and Take Steps to Prevent Future Incidents

So, you are at the point where you have confidence you have the right policies and procedures in place to keep yourselves honest. But in case someone didn’t get the memo of “expected behavior” you have to make sure you respond appropriately, and take steps to avoid future missteps. One organization I worked at realized the culture of an acquired subsidiary was so awful that it opted to sell it off rather than try to fix it. They had other issues in the larger organization, but they knew a bad deal when they saw it, and took steps to rid themselves of an untenable position. Another organization I worked at kept throwing money at a subsidiary, when it probably would have been better to toss in the towel. Different organization, different results, neither perfect, but it fit them as they saw things.

When gauging the culture of your organization, some things you want to look at are the rewards and sanctions for behavior:

Positive rewards:

  • Retention of employment
  • Recognition
  • Appreciation
  • Commendation
  • Monetary or stock reward

Negative sanctions:

  • Termination or Suspension
  • Demotion
  • Probation
  • Appraisal comments/warnings
  • Reduction in compensation or bonus

You also want to measure your Performance Appraisal Systems, and look to see whether or not they include sections on:

  • Demonstrated Ethics and values in workplace conduct
  • Good communication skills
  • Building trust with stakeholders
  • Being fair or equitable
  • Maintaining a high level of quality or integrity in decision-making
  • Reporting Concerns
  • Empowering subordinates to reporting concerns
  • Training and development initiatives for the team

Tomorrow the Two Tough Cookies sum it all up…

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 authors, their affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Authors give their permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the authors.

 

July 28, 2014

Bringing It All Home, the Two Tough Cookies Wrap It Up For You, Part I

Tales from the CryptNote-I asked the Two Tough Cookies if they could put together a series of blog posts wrapping up the lessons they have seen and learned and written about in their series of Tales from the Crypt. They graciously put together a series of posts on the seven elements of an effective compliance program from their 10 tales of Business Conduct. Today, Part I of a Three Part Series…

We’ve talked a lot in our Tales from the Crypt about the signs to watch for that indicate something’s gone wrong, from minor cultural twists to lapses of integrity that are tantamount to criminal activity. We all wish we had a crystal ball we could peer into to predict how various maneuvers will translate into the larger universe of corporate culture. One of the best tools to use to gauge the cultural baseline is an organizational ethics audit, reminding yourself that “what gets reported gets measured.”

Your first hurdle, of course, is getting executive leadership to support the initiative. If they don’t support it, then you have your first cultural indicator. After all, if you have nothing to hide, you have nothing to lose by peering under the covers, now do you? So let’s assume your leadership is supportive of developing, and/or sustaining, a “high integrity” organization. So what do you want to measure? The ‘seven elements of an effective compliance program’ is a good start, but by no means exhaustive. After all, many organizations fulfill “ethics oversight” by having a CCO in title (usually, the GC or CFO), but the day-to-day oversight and management of the program is led by staff members who are not empowered to work towards positive change. You know who you are, you know the daily frustration of knowing what should be done, and what leadership will allow. So while “oversight” is met, is it really “effective?”

So let’s remind ourselves of the seven elements once again:

1. Establish Policies, Procedures and Controls

2. Exercise Effective Compliance and Ethics Oversight

3. Exercise Due Diligence to Avoid Delegation of Authority to Unethical Individuals

4. Communicate and Educate Employees on Compliance and Ethics Programs

5. Monitor and Audit Compliance and Ethics Programs for Effectiveness

6. Ensure Consistent Enforcement and Discipline of Violations

7. Respond Appropriately to Incidents and Take Steps to Prevent Future Incidents

How do these elements translate into an organizational ethics audit? And how do our 10 rules of business conduct in the workplace (from our “Tales from the Crypt” series) fit in? Let’s break it down into manageable chunks.

1. Establish Policies, Procedures and Controls

Under this “bucket” include your Code of Conduct, your Vision and Values statements for your organization, and the various policies and procedures you rely upon to get business done. What you want to know, when conducting your audit, is not just do you have these, but

  • Does your Vision statement create an actionable description of the future? If so, what is it, and more importantly, do your people know it, and understand what role they play in achieving that future?
  • Is “Integrity” one of your Values?
  • What’s the purpose and Focus of your Code of Conduct? What kind of tone does it set, is it widely distributed, prominently displayed, easy to read? Does it have learning aids, and examples of not only wrong doing, but “right” doing behaviors? What expectation does it set? Is it universal or have you caved to various constituencies and created multiple versions (not translations, but actual versions) to “meet the needs” of various cultures. If you have, then you are net setting a single standard that all can live by, and you will have people applying their own standard to their behaviors, not yours. Ethics should not be subject to interpretation, nor external pressures such as Worker’s Councils, unions, or special interest groups.
  • Are your policies relevant to your business, or did someone just borrow something from an HR toolkit to get you started? Do you have a formal non-retaliation policy (and not just a nod towards the concept in your Code of Conduct), and formal procedures to deter retaliation. The rules in this area need to be cut and dry to make people know you “have their back” when the you know what hits the fan. You want to encourage people to step up, and the only way you can do that is a rock solid approach to non-retaliation.
  • Last, but not least, are your policies “uniformly enforced?” Much like the sentencing guidelines, organizations, large and small alike, should be dealing with transgressions with an even hand to truly have an ethical culture. People like boundaries, like to know where the line in the sand is drawn. Trust me on this. So do you know exactly where your organization’s boundaries are? Or does the line move from incident to incident?

2. Exercise Effective Compliance and Ethics Oversight

As I mentioned before, many organizations have day-to-day oversight managed by staff, with a titular CECO residing with one of the executive leaders, like the GC or the CFO. Larger organizations have dedicated compliance officers who aren’t forced to wear multiple hats, who truly have teams of dedicated compliance officials reporting up to their organization. This is particularly true in highly regulated industries, such as finance, insurance, healthcare, food and drug manufacturing, where government oversight plays a large role in day to day business.   It is fair to say that smaller organizations don’t need to have a dedicated compliance officer per se, but when you have a staff attorney, for instance, managing the day to day operations of your ethics and compliance program, you have put that person in a Catch 22. Period. You may want an attorney in that spot for attorney client privilege, but if you do that recognize that you’ve also handcuffed the person from being able to independently report wrong doing if something goes drastically wrong, as they are duty bound to keep matters confidential, even within the business.

So you want to measure whether or not the person with day-to-day oversight has the freedom (or mechanisms) to raise concerns.

  • If it’s a staff attorney, is the job description written so that when wearing the compliance hat, the attorney hat comes off? Tough to do, but possible.
  • Are there layers of management between the day-to-day person who is managing the ethics and compliance program, and the person with the “title” CECO?
  • Are there many people with “compliance” in their title, and do they work together, or independently? I have worked in organizations where “compliance” was part of several functions, but the right hand, and the left hand, weren’t speaking to each other. Trade Compliance reported to one division, Environmental Compliance reported to another division, product compliance reported to yet a third division, HIPAA compliance to yet a fourth, and so on. None of these units worked together, some were staffed heavily, some staffed thinly, and the actual “head” of Integrity & Compliance was ineffective at convincing senior leadership that all compliance functions should be at least working towards the same goals in the organization. It all depended on the business leader at the top of the silo and whether or not they were effective in getting the support they needed to run their business. It also depended on whether or not the business unit was a profit center or a cost center, and if a cost center, where it reported up into the business – as a G&A expense, or an administrative cost aligned with operations. Those that were part of operations were well-funded, those reporting in on the administrative side as a pure cost center (including the “head”) were poorly resourced.
  • Do you have an ethics steering committee or working group that represents all functions and business units, and is staffed by executive or senior leaders who are in a position to make decisions for the larger organization? This serves as a checks and balance that is critical if the day-to-day oversight is led by a staffer. The staffer can build consensus with a larger group that has a vested interest in the outcome by holding those critical meetings before the meeting to test run proposals, and receive important feedback on how to effectively present a proposal to the team to ensure acceptance and success. The staffer can also go to a trusted member of the committee if he or she feels that the CECO is not receptive to hearing concerns and serve as a sounding board. Hopefully, that is.

Tomorrow, elements 3-7.

Who are the Two Tough Cookies?

Tough Cookie 1 has spent the more than half of her 20+ legal career working in the Integrity and Compliance field, and has been the architect of award-winning and effective ethics and compliance programs at both publicly traded and privately held companies.  Tough Cookie 2 is a Certified Internal Auditor and CPA who has faced ethical and compliance challenges in a variety of industries and geographies and recently led a global internal audit team. Their series “Tales from the Crypt: Tough Choices for Tough Cookies” are drawn largely from real life experiences on the front line of working in Integrity & Compliance, and personal details have been scrubbed to protect, well, you know, just about everyone…

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 authors, their affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Authors give their permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the authors.

July 24, 2014

Code of Conduct, Compliance Policies and Procedures-Part III

Policies and ProceduresToday, I continue with Part III of my four-part series on the best practices surrounding your Code of Conduct and anti-corruption policies and procedures. In this post, I take a look at drafting policies and procedures. I conclude with some thoughts by well-known policy pundit Michael Rasmussen on management of policies going forward.

One of the key components of any best practices compliance regime under any anti-bribery and anti-corruption program is policies and procedures. Policies and procedures tie together a company, its business environment, the risks it faces and the compliance requirements. Policies procedures are a specific requirement for any anti-corruption/anti-bribery compliance regime. In the FCPA Guidance it stated, “Whether a company has policies and procedures that outline responsibilities for compliance within the company, detail proper internal controls, auditing practices, and documentation policies, and set forth disciplinary procedures will also be considered by DOJ and SEC.” Under the UK Bribery Act, policies are discussed in the Six Principles of an Adequate Procedures compliance program under Principle V – Communication, where it states “The business seeks to ensure that its bribery prevention policies and procedures are embedded and understood throughout the company through internal and external communication, including training, that is proportionate to the risks it faces.”

As further stated in the FCPA Guidance, “Among the risks that a company may need to address include the nature and extent of transactions with foreign governments, including payments to foreign officials; use of third parties; gifts, travel, and entertainment expenses; charitable and political donations; and facilitating and expediting payments.” Policies help form the basis of expectation and conduct in your company and Procedures are the documents that implement these standards of conduct.

Borrowing from an article in the Houston Business Journal (HBJ) by John Allen, entitled “Company policies are source and structure of stability”, I found some interesting and important insights into the role of policies in any anti-corruption compliance program. Allen says that the role of policies is “to protect companies, their employees and consumers, and despite an occasional opposite outcome, that is typically what they do. A company’s policies provide a basic set of guidelines for their employees to follow. They can include general dos and don’ts or more specific safety procedures, work process flows, communication guidelines or dress codes. By establishing what is and isn’t acceptable workplace behavior, a company helps mitigate the risks posed by employees who, if left unchecked, might behave badly or make foolhardy decisions.”

Allen notes that policies “are not a surefire guarantee that things won’t go wrong, they are the first line of defense if things do.” The effective implementation and enforcement of policies demonstrate to regulators and the government that a “company is operating professionally and proactively for the benefit of its stakeholders, its employees and the community it serves.” If it is a company subject to the FCPA, by definition it is an international company so that can be quite a wide community.

Allen believes that there are five key elements to any “well-constructed policy”. They are:

  • identify to whom the policy applies;
  • establish the objective of the policy;
  • explain why the policy is necessary;
  • outline examples of acceptable and unacceptable behavior under the policy; and
  • warn of the consequences if an employee fails to comply with the policy.

Allen notes that for polices to be effective there must be communication. He believes that training is only one type of communication. I think that this is a key element for compliance practitioners because if you have a 30,000+ worldwide work force, simply the logistics of training can appear daunting. Small groups, where detailed questions about policies can be raised and discussed, can be a powerful teaching tool. Allen even suggests posting FAQ’s in common areas as another technique. And please do not forget that one of the reasons Morgan Stanley received a declination to prosecute by the DOJ was that it sent out bi-monthly compliance reminder emails to its employee Garth Peterson for the seven years he was employed by the company.

Interesting, Allen emphasizes, “having policies written out and signed by employees provides what some consider the most vital layer of communication. A signed acknowledgement can serve as evidentiary support if a future issue arises.” I also like it when others recognize my ‘Document, Document and Document’ mantra for FCPA compliance.

While I think that most compliance practitioners understand this need for policies and procedures, one of the things that is not usually emphasized at a company is effective policy management. Michael Rasmussen writing in Compliance Week in an article entitled “Improving Policies Through Metrics” discussed the need for effective policy management. He believes that it requires that a company must periodically review their policies to ensure that they are relevant and aligned with both current laws and corporate objectives. This is because today’s business environment is dynamic and involves both internal and external factors, so, consequently, as a company evolves and changes its policies need to be updated to reflect these changes.

Rasmussen believes that at a minimum, policies must be reviewed annually. He recommends that each policy should go through a yearly review process to determine if it is still appropriate. There should be a “system of accountability and workflow that facilitates” any policy review process. The end product should be a decision to “retire the process, keep the policy as it is, or revise the policy.” Rasmussen lists five items that a policy owner should evaluate as a part of the policy review process.

  • Violations. Here Rasmussen believes that information from reporting systems such as hotlines or other anonymous lines as well as internal or external investigations must be reviewed. Not only would such information indicate if a company policy was violated but the follow-up investigation would help to determine how the policy might have failed, whether it was through “lack of awareness, unauthorized exceptions [or] outright violations.”
  • Understanding. Here Rasmussen writes that there should be an analysis of “training and awareness programs, policy attestations” and attendant metrics to determine an appropriate level of policy understanding. He believes that questions to a helpdesk or compliance department could help to discover any ambiguities in a policy that might need to be corrected.
  • Exceptions. If you have a policy it should be followed. If an exception to a policy was granted the reason for the exception should have been documented. If there are too many exceptions granted for a policy, it might indicate that “the policy is inappropriate and unenforceable” and therefore should be revised.
  • Compliance. A policy should govern and authorize internal controls. These internal controls should be reviewed in conjunction with the policy review to determine overall policy effectiveness. This is because “At the end of the day the policy needs to be complied with.”
  • Environment. All the factors around a policy are in flux. This includes a company’s risk profile, its business strategy, laws and regulations. Since a business’ climate is dynamic, a policy should be reviewed in the context of a company’s overall situation and revised accordingly.

If there is a change in a policy it is important that not only the correct change be made but that any change is documented. An audit trail is a key component for a company to internally understand when a change is made and the reason for that change but also to demonstrate to a regulator effective policy management and to present “a defensible history of policy interactions on communications, training, acknowledgements, assessments and related details needed to show the was enforced and operational.” This audit trail should include “key data points such as the owner, who read it, who was trained, acceptance acknowledgements and dates for specific policy versions”. In addition to an audit trail, policy revisions should be archived for referral back at a later time. So, once again, the key message is document, document and document.

Just as best practices in the FCPA compliance arena evolve, so do business practices, markets and risks. If you throw in the complexities from an inter-connected global business milieu, the task becomes even tougher. Business policies are one of the keystones of a company’s communications to its employees on what it expects and what is required of its employees. To keep policies up-to-date and properly take advantage of this valuable tool, policies need to be evaluated and updated as appropriate. If your company fails to do so this takes away from the value of having policies in the first place. I hope that you will use the techniques which Rasmussen has described to help you effectively manage your policies going forward.

The FCPA Guidance ends its section on policies with the following, “Regardless of the specific policies and procedures implemented, these standards should apply to personnel at all levels of the company.” Allen puts a bit differently in that “it is important that policies are applied fairly and consistently across the organization.” He notes that the issue can be that “If policies are applied inconsistently, there is a greater chance that an employee dismissed for breaching a policy could successfully claim he or she was unfairly terminated.” This last point cannot be over-emphasized. If an employee is going to be terminated for fudging their expense accounts in Brazil, you had best make sure that same conduct lands your top producer in the US with the same quality of discipline.

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

« Previous PageNext Page »

The Rubric Theme. Blog at WordPress.com.

Follow

Get every new post delivered to your Inbox.

Join 5,190 other followers