FCPA Compliance and Ethics Blog

March 31, 2015

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

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

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

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

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

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

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

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

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

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

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

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

© Thomas R. Fox, 2015

March 30, 2015

Compensation Incentives in a Best Practices Compliance Program

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

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

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

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

Simplicity

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

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

Alignment

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

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

Immediacy

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

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

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

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

© Thomas R. Fox, 2015

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

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

October 7, 2014

The Positive Effects of DPAs and NPAs in FCPA Enforcement

JusticeOne of the oft-made criticisms regarding the Department of Justice (DOJ) around its enforcement of the Foreign Corrupt Practices Act (FCPA) is its the use of Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs) somehow pervert the course of justice. Some of the criticisms include: DPAs and NPAs are either too harsh or too lenient; DPAs and NPAs let corporations off too easily or they are too unfair to corporations; DPAs and NPAs are inherently unfair as they give the DOJ too much leverage in any negotiation or that the DOJ uses them as a way to simply seek bigger fines and to not go after the real culprits, i.e. rogue employees; the fines levied under DPAs and NPAs are too great or too small, but whichever it is, there is not appropriate judicial oversight; and my personal favorite, the DOJ needs to ‘trial-lawyer up’ and go to trial against big bad corporations which violate the FCPA to really show ‘em they mean business.

Speaking from the perspective of a former in-house type, I have argued that corporations desire DPAs and NPAs because they bring certainty. Not only in ending an enforcement action but also in knowing your obligations going forward; and they bring certainty in setting the fines and penalties to be paid for a FCPA violation. And, of course, if you enter into a DPA or NPA you bring your corporate client the certainty that you will not ‘Arthur Anderson’ your organization out of existence.

However there are other reasons why the use of DPAs and NPAs has been positive and that is the effect on companies. In a recent paper, entitled, “The Effect of Deferred and Non-Prosecution Agreements on Corporate Governance: Evidence from 1993-2013 ”, authors Wulf A. Kaal and Timothy Lacine looked precisely at that issue. In an exhaustive study they reviewed all publicly available DPAs and NPAs from 1993 to 2013. The authors found that in a wide variety of categories 97.41% of the publicly available DPAs and NPAs “mandated substantive governance improvements” in the corporations that entered into them. Any time you have 97% improvement in anything, I would say someone must have been doing something right, somewhere, somehow. From the thesis of their article, it would appear that what the DOJ is doing right is using DPAs and NPAs to positively impact corporate governance.

What were some of the changes brought about through the use of DPAs and NPAs? In the area of Board governance there were provisions including mandating changes requiring additional reporting obligations for the Board; required changes to existing Board committee structure of the entity, often creating new board committees. Other changes included increased Board monitoring obligations, the addition of independent director(s) and changes pertaining to management of the entity. In addition to more Board involvement, under a number of DPAs and NPAs, a settling company’s senior management was required to provide additional oversight and involvement with the compliance function. Similarly monitoring obligations have generally increased with many DPAs and NPAs containing specific provisions that related to ongoing monitoring requirements.

Both the Chief Compliance Officer (CCO) position and the compliance function were significantly impacted by many of the DPAs and NPAs. Many contained provisions relating to a new, improved or expanded compliance program. Additionally, many DPAs and NPAs contained provisions pertaining to improved compliance communications and training requirements in the compliance function. Internal controls and required improvements pertaining to books and records were also noted. Of course, if a company did not have a Code of Conduct or CCO, they were required.

The authors have also identified additional and continuing oversight factors. They note that DOJ “involvement suggest that prosecutors can promote an ethical corporate culture through enhanced compliance measures in N/DPAs. Under this theory, the DOJ’s expansionary tendencies in N/DPAs are a mere extension of legally mandated compliance requirements. In fact, corporate governance of the respective entity plays a major role in federal prosecutors’ charging decisions. The increased role of independent private sector oversight may help address the increased complexity of corporate crime and dwindling public funds. Given their education and experience as well as their ability to fill a void left by the system, prosecutors may be uniquely qualified to institute corporate governance changes.”

I think this ongoing DOJ oversight is not to be underestimated as a positive effect for compliance. Clearly if an external monitor is required there will be at least annual reporting to the DOJ on the company’s implementation of the terms and conditions of its settlement. But even if the DOJ does not require an external monitor there is always a requirement that the settling company report to the DOJ on the extent of its compliance efforts. The best practice would suggest that an independent third party make this assessment but even if it is not accomplished in such a manner, there is still DOJ oversight.

While the DOJ has pronounced that they are not involved in industry sweeps, the reality is that some industries have been hit with more FCPA enforcement actions than others. If there are a large number of FCPA settlements using DPAs and NPAs in one industry, it can have the effect of increasing both the knowledge of compliance and sophistication of compliance programs within that industry. I have personally witnessed this in the energy industry in Houston where compliance is now driven as a business solution to the legal problem of FCPA compliance. Scott Killingsworth calls this Private-to-Private compliance solutions. I call it business solutions to legal problems. Whatever you might wish to name it, these FCPA enforcement actions have increased the prevalence of compliance programs in the energy industry.

The authors also believe that through the use of DPAs and NPAs, the DOJ is better able to communicate its expectations of what it expects in the way of a best practices compliance program. They state that Boards, “management and corporate counsel may see these preexisting measures as a roadmap for preparing for future investigations and handling the eventual investigation.”

Finally, the authors provide a very interesting insight as to the power of DPAs and NPAs, which is not often discussed in the FCPA context. They contend that use of DPAs and NPAs, as corporate governance tools, “may be preferable to changes to federal law.” They explain, “Compared with more meaningful congressional governance reform, N/DPA-related governance reform is relatively “cheap” for corporations because comparatively few board and management positions are adversely affected. Furthermore, N/DPA-related governance reform is a measure supported by most corporate insiders as it is seen as beneficial for investors. Until regulators belatedly realize the threat posed by particular industry practices, as identified in N/DPAs, and consider acting upon it, N/DPA-related governance reform is entity specific and increases the availability of relevant, decentralized, and institution specific information for regulatory action. Preemptive remedial measures preceding the execution of N/DPAs and associated N/DPA feedback effects can create the framework for anticipatory dynamic regulation as a regulatory supplement.”

This last concept speaks to the transactional cost of changing not only laws surrounding corporate governance but the reform of a corporation for itself. The key stakeholder unit of investors certainly profits by having more and better corporate governance, as does the corporation itself. I found the authors’ work to be a welcome addition to the ongoing debate on DPAs and NPAs.

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 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.

 

April 15, 2014

Implementing Compliance Incentives In Your Company

IncentiveSeveral readers have asked why I have not written anything about the Houston Astros this year. The answer is two-fold. The first is that I really do not care. However, the more I thought about it, the real reason is that they are not relevant. Just how not relevant are the bumbling hometown (former) loveables? Last week they achieved the noteworthy accomplishment of obtaining a Nielson rating of 0.00 for a second consecutive season. I am not aware of any other major league team, which has been on television for a game where no one was recorded as watching for the entire game, for two straight seasons. Pretty amazing when you think about it.

However, one thing that is relevant in the context of any best practices anti-bribery compliance program is incentives. The Department Of Justice (DOJ) and Securities Exchange Commission (SEC) could not have been clearer in the FCPA Guidance about their views on the need for incentives to help drive behavior that is ethical and in compliance with the Foreign Corrupt Practices Act (FCPA) when they stated “DOJ and SEC recognize that positive incentives can also drive compliant behavior.” In the Guidance, the SEC cited to 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 winloss record.

A recent article in the Spring 2014 issue of the MIT Sloan Management Review, entitled “Combing Purpose with Profits”, by authors Julian Birkinshaw, Nicolai J. Foss and Siegwart Lindenberg, presents some interesting steps on how a company might work towards achieving the goals articulated by the DOJ and SEC. The key thesis of the authors is if you want to motivate employees you have to have purpose. In their article they presented case studies from three entities: the Tata Group, Handelsbanken and HCL Technologies. From these three cases studies they came up with six core principles, which I will adapt for the compliance function in an anti-corruption compliance program.

  1. Compliance incentives don’t have to be elaborate or novel. The first point is that there are only a limited number of compliance incentives that a company can meaningfully target. Evidence suggests the successful companies are the ones that were able to translate pedestrian-sounding compliance incentive goals into consistent and committed action.
  2. Compliance incentives need supporting systems if they are to stick. People take cues from those around them, but people are fickle and easily confused, and gain and hedonic goals can quickly drive out compliance incentives. This means that you will need to construct a compliance function that provides a support system to help them operationalize their pro-incentives at different levels, and thereby make them stick. The specific systems which support incentives can be created specifically to your company but the key point is that they are delivered consistently because it signals that management is sincere.
  3. Support systems are needed to reinforce compliance incentives. One important form of a supporting system for compliance incentives “Is to incorporate tangible manifestations of the company’s pro-social goals into the day-to-day work of employees.” Make the rewards visible. As stated in the FCPA Guidance, “Beyond financial incentives, some companies have highlighted compliance within their organizations by recognizing compliance professionals and internal audit staff. Others have made working in the company’s compliance organization a way to advance an employee’s career.”
  4. Compliance incentives need a “counterweight” to endure. Goal-framing theory shows how easy it is for compliance incentives to be driven out by gain or hedonic goals, so even with the types of supporting systems it is quite common to see executives bowing to short-term financial pressures. Thus, a key factor in creating enduring compliance incentives is a “counterweight,” by which we mean any institutional mechanism that exists to enforce a continued focus on a nonfinancial goal. This means that in any financial downturn compliance incentives are not the first thing that gets thrown out the window and if my oft-cited hypothetical foreign Regional Manager misses his number for two quarters, he does not get fired. So the key is that the counterweight has real influence; it must hold the leader to account.
  5. Compliance incentive alignment works in an oblique, not linear, way. The authors believe that “In most companies, there is an implicit belief that all activities should be aligned in a linear and logical way, from a clear end point back to the starting point. The language used — from cascading goals to key performance indicators — is designed to reinforce this notion of alignment. But goal-framing theory suggests that the most successful companies are balancing multiple objectives (pro-social goals, gain goals, hedonic goals) that are not entirely compatible with one another, which makes a simple linear approach very hard to sustain.” What does this mean in practical terms for your compliance program? If you want your employees to align around compliance incentives, your company will have to “eschew narrow, linear thinking, and instead provide more scope for them to choose their own oblique pathway.” This means emphasizing compliance as part of your company’s DNA on a consistent basis — “the intention being that by encouraging individuals to do “good,” their collective effort leads, seemingly as a side-effect, to better financial results. The logic of “[compliance first], profitability second” needs to find its way deeply into the collective psyche of the company.”
  1. Compliance incentive initiatives can be implemented at all levels. Who at your company is responsible for pursuing compliance incentives? If you head up a division or business unit, it is clearly your job to define what your pro-social goals are and to put in place the supporting structures and systems described here. But what if you are lower in the corporate hierarchy? It is tempting to think this is “someone else’s problem,” but actually there is no reason why you cannot follow your own version of the same process. We have seen quite a few mid-level managers make a real difference, and often quite quickly, using the principles outlined here.

The author’s have set out several steps that you can implement into your compliance program to enhance incentives to facilitate anti-corruption. There have been many who have criticized the FCPA Guidance. While I am certainly not one of them, I do not think there can be any argument that it does not present the DOJ and SEC views on a minimum best practices compliance program. So if the DOJ and SEC think incentives in your compliance program are important, I suggest to you, they are important. The article, which is the basis of this blog post, provides an excellent start for the exploration of some ways to inculcate anti-bribery and anti-corruption incentives into not only your compliance regime but also, more importantly, the DNA of your company.

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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