The All-Star Game and Tone at the Top

Today is the 83^rd anniversary of the initial Major League Baseball (MLB) All-Star Game, which took place on this date in 1933, in Chicago’s Comiskey Park. The brainchild of a determined sports editor, the event was designed to bolster the sport and improve its reputation during the darkest years of the Great Depression. The sports editor of the Chicago Tribune convinced his owner to allow him to lobby for the game with MLB’s Commissioner, Kenesaw Mountain Landis, and the owners. To win over the public, they allowed fan balloting for the Game’s players. The proceeds went to a charity for retired baseball players. The Game was a rousing success and has continued as an institution to this day.

The conception and execution of the first All-Star Game shows what a committed tone from top management can create. Last week I wrote a couple of posts dealing with the tone for an organization around compliance with anti-corruption laws such as the Foreign Corrupt Practices Act (FCPA); one on tone in the middle and one on tone at the bottom. As usual, when I begin writing about a topic, I do not seem to be able to start where I thought I would end. So today, with the anniversary of the first MLB All-Star Game in mind, I decided to round out my triumvirate of posts by concluding with some thoughts on Tone at the Top and the reasons why it is so important to any anti-corruption compliance program.

Quite simply, any compliance program starts at the top and flows down throughout the company. Before you arrive at tone in the middle and bottom, it must start with a commitment at the top. All regulatory schemes for anti-corruption compliance recognize this key hypothesis. The concept of an appropriate tone at the top is in the US Sentencing Guidelines for organizations accused of violating the FCPA; the FCPA Guidance; the UK Bribery Act’s Six Principles of Adequate Procedures; and the OECD Good Practice Guidance on Internal Controls, Ethics and Compliance (OECD Good Practices). The reason all of these guidelines incorporate it into their respective practices is that all employees look to the top of the company to see what is important.

The US Sentencing Guidelines reads:

High-level personnel and substantial authority personnel of the organization shall be knowledgeable about the content and operation of the compliance and ethics program … and shall promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law. 

The OECD Good Practices reads:

1. strong, explicit and visible support and commitment from senior management to the company’s internal controls, ethics and compliance programs or measures for preventing and detecting foreign bribery; 

The UK Bribery Act’s Six Principles of Adequate Procedures reads:

The top-level management of a commercial organisation (be it a board of directors, the owners or any other equivalent body or person) are committed to preventing bribery by persons associated with it. They foster a culture within the organisation in which bribery is never acceptable. 

The FCPA Guidance, under the section entitled “Commitment from Senior Management and a Clearly Articulated Policy Against Corruption”, states, “Within a business organization, compliance begins with the board of directors and senior executives setting the proper tone for the rest of the company. Managers and employees take their cues from these corporate leaders. Thus, DOJ and SEC consider the commitment of corporate leaders to a “culture of compliance” and look to see if this high-level commitment is also reinforced and implemented by middle managers and employees at all levels of a business.” But the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) expect more than simply to have senior management say the right things. They both expect that such message will be pushed down the ranks of an enterprise so that “A strong ethical culture directly supports a strong compliance program. By adhering to ethical standards, senior managers will inspire middle managers to reinforce those standards. Compliant middle managers, in turn, will encourage employees to strive to attain those standards throughout the organizational structure. In short, compliance with the FCPA and ethical rules must start at the top. DOJ and SEC thus evaluate whether senior management has clearly articulated company stan­dards, communicated them in unambiguous terms, adhered to them scrupulously, and disseminated them throughout the organization.”

The FCPA world is riddled with cases where the abject failure of any ethical “Tone at the Top” led to enforcement actions and large monetary settlements. In the two largest monetary settlements of enforcement actions to date, Siemens and Halliburton, for the actions of its former subsidiary KBR, the government specifically noted the companies’ pervasive tolerance for bribery. In the Siemens case, for example, the SEC noted that the company’s culture “had long been at odds with the FCPA” and was one in which bribery “was tolerated and even rewarded at the highest levels”. Likewise, in the Halliburton matter, the government noted that “tolerance of the offense by substantial authority personnel was pervasive” throughout the organization.

So how can a company overcome these employee attitudes and set, or re-set, its “Tone at the Top”? In a 2008 speech to the State Bar of Texas Annual Meeting, reprinted in Ethisphere, Larry Thompson, PepsiCo Executive Vice President (EVP) of Governmental Affairs, General Counsel (GC) and Secretary, discussed the work of Professor Lynn Sharp at Harvard. From Professor Sharp’s writings, Mr. Thompson cited five factors, which are critical in establishing an effective integrity program and to set the right “Tone at the Top”.

1. The guiding values of a company must make sense and be clearly communicated.
2. The company’s leader must be personally committed and willing to take action on the values.
3. A company’s systems and structures must support its guiding principles.
4. A company’s values must be integrated into normal channels of management decision-making and reflected in the company’s critical decisions.
5. Managers must be empowered to make ethically sound decisions on a day-to-day basis.

David Lawler, writing in his book “Frequently Asked Questions in Anti-Bribery and Corruption”, boiled it down as follows “Whatever the size, structure or market of a commercial organization, top-level management’s commitment to bribery prevention is likely to include communication of the organization’s anti-bribery stance and appropriate degree of involvement in developing bribery prevention procedures.” Lawler went on to provide a short list of points that he suggests senior management engage in to communicate the type of tone to follow an anti-corruption regime. I had a Chief Executive Officer (CEO) of a client who, after I described his role in a best practices compliance program, observed, “You want me to be the ambassador for compliance.” I immediately averred in the affirmative. The following is a list of things that a CEO can do as an ‘Ambassador of Compliance’:

• Reject a ‘do as I say, not as I do’ mentality;
• Not just ‘talk-the-talk’ but ‘walk-the-walk’ of compliance;
• Oversee creation of a written statement of a zero tolerance towards bribery and corruption;
• Appoint and fully resource, with money and headcount, a Chief Compliance Officer (CCO);
• Oversee the development of a Code of Conduct and written compliance program implementing it;
• Ensure there are compliance metrics on all key business reports;
• Provide leadership to middle managers to facilitate filtering of the zero tolerance message down throughout the organization;
• Not only have a whistleblowing, reporting or speak up channel but celebrate it;
• Keep talking about doing the right thing;
• Make sure that you are seen providing your CCO with access to yourself and the Board of Directors.

Coming at it from a different perspective, author Martin Biegelman provides some concrete examples in his book, entitled “Building a World Class Compliance Program – Best Practices and Strategies for Success”. He begins the chapter discussed here with the statement “The road to compliance starts at the top.” There is probably no dispute that a company takes on the tone of its top management. Biegelman cites to a list used by Joe Murphy regarding actions a CEO can demonstrate to set the requisite tone from the Captain’s Chair of any business. The list is as follows:

1. Keep a copy of the Constitution on your Desk. Have a dog-eared copy of your company’s Code of Conduct on your desktop and be seen using it.
2. Clout. Make sure your compliance department has authority, influence and budget within the company. Have your Chief Compliance Officer report directly to the Board of Directors.
3. Make them Accountable. At Senior Executive meetings, have each participant report on what they have done to further the compliance function in their business unit.
4. Sticks and Carrots. Have both sanctions for violation of company compliance and ethics policies and incentives for doing business in a compliant manner.
5. Don’t do as I say, Do as I do. Turn down an expensive dinner or trip offered by a vendor. Pass on a gift that you may have received. Turn down a transaction based upon ethical considerations.
6. Be a Student. Be seen at intra-company compliance training. Take a one or two day course or attend a compliance conference outside your organization.
7. Award Compliance. You should recognize outstanding compliance efforts with companywide announcements and awards.
8. The Board. Recruit a nationally known compliance expert to sit on your company’s Board and chair the audit or compliance committee.
9. Independent Review. Obtain an independent, outside review of your company’s compliance program and report the results to the Board’s Audit Committee.
10. Vendors. Mandate that all vendors in your Supply Chain embrace compliance and ethics as a business model. If not, pass on doing business with them.
11. Network. Talk to others in your industry and your peers on how to improve your company’s compliance efforts. 

Many companies struggle with some type of metric that can be used for upper management regarding compliance and communication of a company’s compliance values. One technique might be to require the CEO to post companywide emails or other communications once a quarter on some compliance related topic. The CEO’s direct reports would then also be required to email their senior management staff a minimum of once per quarter on a compliance topic. One can cascade this down the company as far as is practicable. Reminders can be set for each communication so that all personnel know when it is time to send out the message. If these communications are timely made, this metric has been met.

I hope that you can use some of the techniques for setting, creating and moving an appropriate tone for compliance throughout your organization. And, of course, enjoy the 2015 All-Star Game. Although the Astros now play in the American League (AL), my heart is still with the National League (NL).

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

Why Tone at the Top Matters and Join the FCPA Professor in Houston

Over this week I have looked at some issues related to compensation and methods from other disciplines that a compliance practitioner might use to test and then improve a company’s third party management regime. Today, I want to go back to the starting point for any compliance program; that is the Tone at the Top. I was reminded of the absolute necessity of having a management not only committed to following the law but the actual doing of compliance when I read about the guilty verdicts in the Atlanta schools cheating scandal.

In an article in the New York Times (NYT), entitled “Atlanta Educators Are Convicted of Racketeering”, reporter Alan Blinder detailed the guilty verdicts handed down in an Atlanta state Superior Court this week where 11 of 12 defendants were convicted in a lengthy trial. Blinder wrote, “On their eighth day of deliberations, the jurors convicted 11 of the 12 defendants of racketeering, a felony that carries up to 20 years in prison. Many of the defendants — a mixture of Atlanta public school teachers, testing coordinators and administrators — were also convicted of other charges, such as making false statements, that could add years to their sentences.” Most stunningly, the trial judge “ordered most of the educators jailed immediately, and they were led from the courtroom in handcuffs.”

The school district’s top administrator Dr. Beverly Hall, channeling her inner Ken Lay, had the temerity to pass away during the trial so there was no finding as to her conduct. Unrepentant to end she said “she had done nothing wrong and that her approach to education, which emphasized data, was not to blame.” When interviewed back in 2011, Dr. Hall had said, “I can’t accept that there’s a culture of cheating. What these 178 are accused of is horrific, but we have over 3,000 teachers.”

Think about those two statements for a moment. They mimic the same tired excuses used by apologizers in the anti-corruption world. First it was only a small subset of those involved who actually broke the law. In other words, the oldie but goodie rogue employee(s) defense. It did have the notable exception that there were 178 roguies out there lying and cheating. But more than the rogue employee defense, she emphasized that she obtained results, the scores on the State of Georgia’s standardized tests for public schools improved dramatically under her watch. In the Foreign Corrupt Practices Act (FCPA) anti-corruption world that is the same as “we had to do it to compete” argument. It is equally as inane as the rogue employee defense.

Moreover, a State of Georgia investigation “completed in 2011, led to findings that were startling and unsparing: Investigators concluded that cheating had occurred in at least 44 schools and that the district had been troubled by “organized and systemic misconduct.” Nearly 180 employees, including 38 principals, were accused of wrongdoing as part of an effort to inflate test scores and misrepresent the achievement of Atlanta’s students and schools. Investigators wrote in the report that Dr. Hall and her aides had “created a culture of fear, intimidation and retaliation” that had permitted “cheating — at all levels — to go unchecked for years.” How is that for tone from the very top?

I bring you another example from a company I once worked at whose management locked themselves behind bolted doors on a floor in the building not accessible by any employees. And just in case someone did make onto this executive floor, there was an armed police presence as a last ditch security measure. The locked down top floor was after the following security measures were already in place: (1) you had to badge in to get into the parking garage, (2) building access was by card entry, (3) elevator access was by card entry, and (4) floor access was by card entry.

Why would senior executives barricade themselves behind such massive physical protection? Did they do this because crazed competitors were sending in assassins, because the company was so profitable and hence unassailable as a competitor? How about something more nefarious such as international hit squads roaming through international businesses in Houston, picking off key executives? Alas the explanation was not anything so exotic. With all of these security measures in place the reason was to keep mere mortal employees away from senior management. What type of message that does send to employee? Much like the one I had growing up, speak only when spoken to.

The point of all this is that tone does matter. Senior management must be committed and communicate its commitment to not only obeying laws but also complying with laws. In the FCPA world, that means you must have a compliance program in place that meets the Ten Hallmarks of an Effective Compliance Program as set out in the FCPA Guidance.

On a completely different note as a compliance practitioner, if you want to have a shot at some serious professional growth and you are in the Houston area, somewhere else in Texas or anywhere else in the South, I suggest you consider attending the FCPA Professor’s FCPA Institute, which will be held in Houston on Monday, May 4 and Tuesday, May 5. The Professor’s goal in leading this first Texas FCPA Institute is “to develop and enhance fundamental skills relevant to the FCPA and FCPA compliance in a stimulating and professional environment with a focus on learning. Information at the FCPA Institute is presented in an integrated and cohesive way by an expert instructor with FCPA practice and teaching experience.” Some of the topics, which will be covered, include the following:

• An informed understanding of why the FCPA became a law and what it seeks to accomplish;
• A comprehensive understanding of the FCPA’s anti-bribery and books and records and internal controls provisions and related enforcement theories;
• Various realties of the global marketplace which often give rise to FCPA scrutiny;
• The typical origins of FCPA enforcement actions including the prominence of corporate voluntary disclosures;
• The “three buckets” of FCPA financial exposure and how settlement amounts in an actual FCPA enforcement action are typically not the most expensive aspect of FCPA scrutiny and enforcement;
• Facts and figures relevant to corporate and individual FCPA enforcement actions including how corporate settlement amounts are calculated;
• How FCPA scrutiny and enforcement can result in related foreign law enforcement investigations as well as other negative business effects from market capitalization issues, to merger and acquisition activity, to FCPA related civil suits; and
• Practical and provocative reasons for the general increase in FCPA enforcement.

In other words, it is what you have come to expect from the FCPA Professor; well-thought out reasoned analysis, practical knowledge and learning, and provocative thinking and assessment. But this is also your chance to attend a two-day Institute with one of the most original thinkers in the FCPA space. The FCPA Institute will provide insights into the topics more near and dear to my heart as a ‘nuts and bolts guy’. In addition to the above substantive knowledge, FCPA Institute participants will gain in-demand, practical skills to best manage and minimize FCPA risk by:

• Practicing FCPA issue-spotting through video exercises;
• Conducting a FCPA risk assessment;
• Learning FCPA compliance best practices, including as to third parties;
• Learning how to effectively communicate FCPA compliance expectations; and
• Grading a FCPA code of conduct.

In addition, attorneys who complete the FCPA Institute may be eligible to receive those all-important Continuing Legal Education (CLE) credits. The sponsors, King & Spalding, will be seeking CLE credit in CA, GA, NY, TX and if needed in NC and VA. Actual CLE credit will be determined at the end of the program based on actual program time. Attorneys may be eligible to receive CLE credit through reciprocity or attorney self-submission in other states as well.

I hope that you can join the FCPA Professor for this FCPA Institute. I have previously said, “if the FCPA Professor writes about it you need to read it. While you may disagree with him, your FCPA perspective and experience will be enriched by the exercise.” I would now add to this statement that if the FCPA Professor puts on his FCPA Institute you should attend. Not only will you garner a better understanding of the theoretical underpinnings of the law and the plain words of its text; you will also be able to articulate many of the issues which befall companies caught up in a FCPA investigation to your senior management in a way that will help them understand the need for a robust compliance program.

To register for the FCPA Institute, or for more information, click here.

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

© Thomas R. Fox, 2015

Gulliver’s Travels, Truth or Fiction?

There was once a man named Gulliver who traveled widely and wrote a book about his adventures called Gulliver’s Tales. During his first voyage, Gulliver is washed ashore after a shipwreck and finds himself a prisoner of a race of little people, who live in the country of Lilliput. After giving assurances of his good behavior, Gulliver becomes a resident in Lilliput and becomes a favorite of the court. From there, the book follows Gulliver’s observations on the Court of Lilliput. He is also given the permission to roam around the city on a condition that he must not harm their subjects and otherwise engage in illegal, immoral or unethical conduct.

I am continually amazed at how life imitates art because if I told you the following tale you might accuse me of simply making up things to write about. Imagine there is a corporate banking Chief Executive Officer (CEO), whose company signed one of the largest Deferred Prosecution Agreements (DPA) ever a little over two years ago giving assurances of good behavior going forward. Now imagine I tell you that the same CEO has been hiding money for years in a Swiss bank account through a shell corporation for ‘his privacy’ (IE., Hiding money from the Lilliputians of this world). Unfortunately for the real Stuart Gulliver, the CEO at the banking giant HSBC, these facts are true. While his company is in yet another scandal involving its illegal conduct, while under a DPA for its past sins, it turns out the CEO was hiding approximately $7.7MM in a Swiss bank account. To compound this effort to conceal his monies, he did so through a shell Panamanian company.

Yet, just like the fictional Gulliver, the real Gulliver has a very simply explanation for this practice. According to Jenny Anderson, in an article in the New York Times (NYT) entitled “HSBC Chief Defends Swiss Bank Account Worth $7.7 Million”, Gulliver said “This has an everyday explanation to it” and said the explanation was that he was trying to hide the money so his co-workers would not know he much money he made. Or as Anderson wrote, “In an effort to protect his privacy — he was the bank’s top earner — he put the money in Switzerland to hide it from the prying eyes of his Hong Kong colleagues. But he then had to hide it from his curious Swiss colleagues, so he created an anonymous Panamanian company.”

So it turns out that Gulliver was not only trying to hide his money from his co-workers but also from the Swiss by creating a shell corporation to launder the money into before depositing it in Switzerland. Similar to those pesky Lilliputians, who might want to find out something about him that he did not want them to know, as when the fictional Gulliver agreed to not violate the law or engage in otherwise unethical conduct. Of course the real Gulliver has protested that such arrangements were not illegal at the time he engaged in them, side-stepping the question of whether his conduct was unethical (Ethical bankers, does that topic belong in the fiction section?).

Gulliver also went on a charm offensive essentially claiming that not only him but the entire banking industry in general was being picked on. Channeling his inner Mother Theresa, Gulliver was quoted in an article in the Financial Times (FT), entitled “Standards for bankers higher than for bishops, claims HSBC chief Gulliver” by Martin Arnold and George Parker, as saying “It seems to me that we are holding large corporations to higher standards than the military, the church or civil service.” While I am not quite certain as to the pay scale of UK church leaders, I am relatively certain that those in the civil service and military do not have an extra $7.7MM laying around that they need to launder through a Panamanian corporation to hide in a Swiss bank account.

The real Gulliver should have just channeled his fictional Gulliver and said that when in the land of Lilliput, you do not have to tell the Lilliputians the truth, even if you have sworn in a pesky DPA to do so. From the real Gulliver’s statement about bankers being held to higher standards, he obviously thinks that the church, military and civil service (and probably the rest of us mere mortals) have Lilliputian ethical obligations compared to him.

What does all this mean for prosecuting HSBC in the newly erupted money laundering through its Swiss subsidiary scandal? Well it is great to know your CEO has first hand knowledge of the mechanics of such activities. The appropriate UK authorities or even the US Department of Justice (DOJ) could interview the real Gulliver as a subject matter expert (SME) on not only how to hide money from your fellow employees, but also from the Swiss and even gain insight into such machinations to hide money from your own national tax authorities. The real Gulliver may be a real find for the DOJ as an expert witness, at the trial of his company for breach its DPA.

Further, just think of the credibility the real Gulliver would have in negotiations with the DOJ on whether HSBC broke its promises to do business in compliance with US anti-money laundering (AML) laws when it signed its DPA back in 2012. He could go right into the meeting and say, “Lads, let me dispel any misconceptions you might have about Swiss bank accounts. They exist to hide money. At least that is how I use them personally.” He could then walk the lowly civil servants who work in the DOJ Fraud Section and who have lower standards than the whiter-than-white bankers through how the real world of money laundering works, or at least the real world of multi-millionaires who, for some reason, want to protect their own privacy.

The real Gulliver could answer yet another rhetorical question that he posed, and was reported in the FT article, when he asked, “Can I know what every one of 257,000 people is doing? Clearly, I can’t. If you want to ask the question could it ever happen again – that is not reasonable.” The real Gulliver could then go on to respond to this rhetorical flourish along the lines of the following, But I can tell you what is reasonable, to ask me if I know what I am doing and how I am doing it. I am hiding money in my Swiss bank account through a shell Panamanian company. He might even add, How brilliant is that?

Since the fictional Gulliver lived and traveled over 300 years ago, he may be distantly related to the real Gulliver of HSBC today. Nevertheless for a bank CEO to have laundered his own money through a shell corporation into a Swiss bank account ‘for privacy’ is one of those convergences where truth surely is stranger than fiction.

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

Bone-headed Moves on the Football Field and Idiotic Statements About Corruption

“Three things can happen when you throw the football, and two of them are bad.”

That football truism (allegedly) came from former Texas Longhorn head coach Darrell Royal. While he intoned it in a different era, Pete Carroll and his Seattle Seahawks proved it still to be valid in the most recent Super Bowl, Carroll called for a pass play on the one-yard line in the last minute of the game and his quarterback threw an interception. Was it the most idiotic call in Super Bowl history? I will leave that answer to the pundits but I will say that Carroll now has the ignominy of making two of the most bone-headed decisions of all-time in football, one in the Super Bowl and the second in College Football’s 2005 National Championship Game, which cost his team the game. Perhaps not what you might want as your epitaph.

For those of you who may have forgotten Carroll’s NCAA National Championship Game FUBAR, his team, the University of Southern California, needing to make one yard at the University of Texas (UT) 43 yard line to achieve a first down and ice the game, Carroll called a running play after pulling off the field that year’s Heisman Trophy winner Reggie Bush. That left one running back on the field and everyone on the field, everyone in the stands and watching the game knew the remaining running back, Lendale White, would get the ball. He did and was promptly stuffed by the UT defense. Vince Young then led UT down the field, scored and Texas won the National Championship. As a UT alum all I can say is, thanks Pete.

I thought about Carroll and his making not one but two idiotic calls for the ages as I have been studying the ongoing Petrobras bribery scandal. While the GlaxoSmithKline PLC (GSK) corruption enforcement action in China may well presage a new era of countries enforcing their local anti-bribery and anti-corruption laws, the Petrobras case may herald this too. The scandal came to the attention of many American’s in the fall of 2014 during Brazil’s Presidential election in a New York Times (NYT) article, entitled “Scandal Over Brazilian Oil Company Adds Turmoil to the Presidential Race”, where Simon Romero detailed the bribery scandal involving a former official of Petrobras, the Brazilian national oil company, named Paulo Roberto Costa. Mr. Costa was the person who oversaw the company’s refining operations. He has admitted to having engaged in the receipt of bribes for at least a 10 year period “equivalent to 3 percent of the value of the deals from the Brazilian construction companies that obtained the contracts” to build refineries. This amounted to literally millions being “stashed in bank accounts in Switzerland and the Cayman Islands.”

Costa who “was first arrested in March as part of a money laundering investigation by the federal police, has already agreed to surrender the $25 million fortune he hid in offshore accounts, his yacht and his luxury car, in addition to paying a fine of more than $2 million.” He “inflated budgets for new projects” by 3% and then had that amount kicked back to him as bribes. The allegations were verified “through an associate, Alberto Youssef, a black-market money dealer who testified that he helped launder funds in the scheme. Mr. Youssef, who has also accepted a plea deal, testified that more than a dozen of Brazil’s largest construction companies had paid hefty bribes to obtain lucrative Petrobras contracts.”

Further “He testified that a portion of the money was then handed to João Vaccari Neto, the treasurer of the Workers Party. Mr. Costa said that other top political allies of President Rousseff, including the leaders of both houses of Congress, Henrique Eduardo Alves and Renan Calheiros, also benefited from the kickbacks, according to a report by Veja, a Brazilian magazine.” Interestingly, President Rousseff “has also effectively acknowledged the prevalence of corruption inside the executive suites of Petrobras, while denying that she had known about the kickbacks when they were taking place.”

To say things have mushroomed would be almost likely citing Darrell Royal on passing the football to Carroll. Petrobras is in many ways the engine that drives the Brazilian economy. Not only is it directly responsible for the employ of upwards of 80,000 employees. It is also the continent’s largest company by market capitalization so the amount of work that it generates for the Brazilian economy is staggering.

Just as staggering is this bribery scheme in which it finds itself now engulfed. According to an article by Luciana Maglahaes and Rogerio Jelmayer in the Wall Street Journal (WSJ), entitled “Petrobras Ex-CEO Weighs In”, the company has “lost $80 billion, or 65% of its market share over the past five months.” The company has publicly said that it cannot estimate the amount of money it lost or was overcharged by. The WSJ article noted, “Prosecutors estimate that around $732 million may have been skimmed. But former Petrobras Chief Executive Maria das Graças Silva Foster, who resigned under pressure last week, said projects tied to the alleged scheme may be overvalued by as much as $31 billion.” Think about that number $31 billion in overcharges to the company.

So, how does Carroll and his bone-headed passing call work into this story? First of all it was not Carroll who made the call but the team’s Offensive Coordinator. Yet he did so because Carroll told him to call a passing play. In other words, idiotic tone at the top reigned and the employee base simply followed the boss’s wishes.

In the Petrobras corruption scandal, we were treated to remarks by José Sergio Gabrielli, the former Chief Executive Officer (CEO) of the company from 2005 to 2012. This was also one of the company’s most successful periods of financial growth. The former CEO has claimed not to know anything about any corruption issues that may have arisen during his tenure. Moreover, “Mr. Gabrielli said the alleged fraud was the work of a few bad apples inside the company, and not an indication of broader problems with corporate governance or internal controls at Petrobras.” He then added that the business generated by the company surely outweighed any nefarious effects by stating “Even if the numbers are huge…how much has Petrobras invested from 2003 to 2014? Probably it invested an average of $30 billion a year.” He also added it was really all much ado about nothing by noting that the press had blown the “scandal out of proportion”.

So there you have it encapsulated in three lines; the clearest articulation of a defense of bribery and corruption that I have recently seen. First it was the oldie but goodie rogue employee defense. (I mean there were 80,000 plus employees, how could you stop all of them from engaging in illegal conduct.) Second, look at all the money we made, so even if the corruption cost us $31bn we averaged that much per year while he was at the helm. Finally, it is really no big deal anyway and is all “blown out of proportion.”

Is it really any wonder Petrobras now finds itself in one of the world’s largest corruption scandals? If that is the attitude of the former CEO, do you think he communicated this laissez-faire attitude to his direct reports and that perhaps it cascaded down the organization? As to Carroll, if he gets back to a championship game, either in professional or college football, he might want to consider his play calling. As for the former CEO of Petrobras, Brazilian prosecutors are fighting to freeze his assets and his major complaint is that he has to deal with too many lawyers. Enough said.

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

The Eve of Destruction and Tone at the Top – You Are Who Say You Are

In 1965 the single Eve of Destruction was released. It was written by an 18 year old named Phil Sloan and was sung by former member of the New Christie Minstrels named Barry McGuire. To top it off, it was produced by Lou Adler. These facts, the story of the song, its recording and release were related in a recent Wall Street Journal (WSJ) article by Steve Dougherty entitled “Still on the ‘Eve of Destruction’”. There are some singles that got under my skin when they were released and have remained there. This song was one of them. For me, the single most powerful line in the song was following:

Think of all the hate there is in Red China; And take a look around to Selma Alabama. 

Even as an eight year old I pondered the import that line. While we were taught that the Soviet Union might have wanted to defeat, conquer, and then enslave us; it was Red China that hated us so much they wanted to wipe us out of existence As we were taught back then that it was the Red Chinese who hated us; I wondered if there was that much hate in Selma Alabama. For if there was as much hate in Selma Alabama as there was in Red China, it had to be quite a lot of it.

I thought about Eve of Destruction and those lyrics about the hate in Selma, Alabama when I read about the conduct of a couple of senior managers recently. While they have both apologized for their conduct and comments that were clearly beyond the pale, I wondered that if you do say and act a certain way, if it really translates into who you really are. For the compliance practitioner, I wondered what such comments or actions might mean about a Chief Executive Officer (CEO) or other senior management’s commitment to doing business in an ethical manner and in compliance with anti-corruption laws such as the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act.

The first has been nicknamed Nut-Rage and involved the (now former) Korean Air executive Cho Hyun-ah (Heather Cho), who threw one of the greatest diva-worthy (or perhaps five year-old worthy) public temper tantrums of all-time. An article in the BBC Online, entitled “Former Korean Air executive apologises for ‘nut rage‘” ,reported that “Ms Cho was onboard a Korean Airlines plane departing from New York for Incheon last week when she demanded a crew member to be removed, after she was served nuts in a bag, instead of on a plate.” Also according an article in Slate, entitled “Flight Attendant Forced to Kneel for Serving Nuts in a Bag (Instead of a Dish) to Korean Air Executive” by Daniel Politi, Ms. Cho was not simply content to disrupt the plane’s service, air traffic control and airport scheduling, he wrote “Just when you thought the whole story about the Korean Air executive who went nuts over some nuts couldn’t get more ridiculous, the head of the cabin crew said he was forced to kneel to apologize about how a flight attendant served some macadamia nuts. Just in case you haven’t been following the case, Heather Cho, the daughter of the airline’s chairman and the executive in charge of in-flight service, forced a plane to return back to the gate at New York’s JFK airport last week after a flight attendant dared to bring her macadamia nuts in a bag and not a dish. Cho forced the head of the cabin crew to get off the plane.”

But the story did not end there. In another BBC article, entitled “Korean Air executive ‘made steward kneel over nut rage”, the head of the cabin crew also reported that “Once home, officials from the airline came to his home to ask him to say that Ms Cho did not use abusive language and that he had voluntarily got off the plane.” Not to be outdone in this attempt to obstruct the truth and intimidate the witness, the BBC article also reported “Korean Air initially defended Ms Cho, noting that she was responsible for overseeing flight service in her role as vice-president, but the company later apologised.”

Unfortunately the second event is much closer to home here in the US and involves the Sony hacking scandal, which has been an unmitigated disaster for the company. In addition to all of the salary information, personal social security numbers and corporate intellectual properties that have been released, Sony’s Entertainment Chairman Amy Pascal sent some emails that can only at best be characterized as racially insensitive in nature. Jason L. Riley, in a WSJ entitled article “What Do You Call A Black President”, wrote that Pascal and Producer Scott Rudin engaged in the following email colloquy “Last year, Ms. Pascal and Mr. Rudin were invited to a fundraiser for Mr. Obama by Jeffrey Katzenberg, a DreamWorks Animation bigwig and major Democratic donor. Before the event, Ms. Pascal and Mr. Rubin joked about having to attend and what to say to the president. “What should I ask the president at this stupid Jeffrey breakfast,” wrote Ms. Pascal. “Should I ask him if he liked Django”, a 2012 film about slavery. Mr. Rudin responds with his own suggestion, “12 Years a Slave.” The two go back and forth naming movies they imagine the president enjoying—“The Butler,” “Think Like a Man,” “Ride Along”—all of which feature black actors or racial themes.” While Riley opines that this ­tete-a-tete is political in nature, my Southern upbringing reminds me of the line from Eve of Destruction to Think of all the hate there is in Red China; And take a look around to Selma Alabama. Maybe if McGuire were singing the song today, he would expand his geographic horizons.

While both Ms. Cho and Ms. Pascal have apologized for their actions and as noted, Korean Airlines has terminated Ms. Cho from her position. If you are what you say and show to others; what does all that mean when such people get into senior management positions? What does it say about Korean Airlines that it (1) fostered such a culture where the daughter of the President is given a job she clearly knows nothing about, (2) the same person humiliates an employee in public, (3) the Company tries to cover-up the incident by intimidating the employee, and (4) defends the actions of the daughter? Think that company has a culture of compliance? How about if a compliance incident is reported – would the company try to cover it up or thoroughly investigate it? Would the company try to intimidate witnesses to get them to change their recollections of events? How would you answer these questions if the incident in question were not over some nuts being served but over a safety issue?

As to Sony, how do you imagine minority employees might feel, given Pascal’s comments about the President of the United States? What about employees that might complain about discrimination in employment practices? If the head of the studio communicates in the manner about the President, what can a regular employee expect; similar sensitivity? Maybe the lesson for Sony and Pascal is simpler and much more direct, Don’t put stupid stuff in email. For even if your company is not hacked like Sony; in today’s world such emails uncovered in the context of a FCPA investigation might indicate a tone at the top which is not something you wish a regulator to see. But at the end of the day, you are you claim you are.

For a YouTube video clip of Barry McGuire singing Eve of Destruction, click here.

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

© Thomas R. Fox, 2014

On Compliance Leadership: From Edward VIII to LeBron James

On this day in 1936 King Edward VIII became the first English monarch to voluntarily abdicate the throne. He chose to abdicate after the British government, public and the Church of England condemned his decision to marry the American divorcée Wallis Warfield Simpson. On the evening of December 11, he gave a radio address in which he explained, “I have found it impossible to carry on the heavy burden of responsibility and to discharge the duties of king, as I would wish to do, without the help and support of the woman I love.” Despite these protestations of love requiring his abdication, recent scholarship has suggested the King was forced out because of his sympathy to Hitler’s Germany. Indeed I recently saw a documentary, which went so far as to say that the King had agreed to re-assume the monarch’s throne if Germany had successfully invaded England. Whatever the reason or reasons, on December 12, 1936 his younger brother, the Duke of York, was proclaimed King George VI. England was certainly better off for it.

I thought about this excellent example of extremely poor leadership and what a Chief Compliance Officer (CCO) or compliance practitioner might be able to learn from it in the context of a couple of articles I recently came across in the Financial Times (FT). The first was by Andrew Hill in his ‘On Management’ column and was entitled “The dangers of a rising C-level for the business environment”. While the focus of the article was on chief executives, I found some of Hill insights also applicable to a CCO. Hill expressed concern about how chief executives embody “the fallacy of infallibility.” He decried that “The corporate world is similarly deluded in thinking that individual chief executives are a wonder drug that can be injected into ailing businesses. It is better to think of companies as systems. They may not work at all without some sort of hierarchy. But they work much better if managers and leaders recognise that they are merely a single, if important, component and that effective procedures and clear designation of individuals’ roles and responsibilities help the whole work smoothly.”

He cited to the example of one un-named chief executive who “said he had just two ways to influence the company: by setting the tone and culture and by “building the machine”.” I would translate this into process. Hill recognized that “Reliance on mechanical process alone is clearly dangerous. It could “induce mindlessness.” Rigorous procedures and training should instead free innovators to take the necessary risks and leaders to react in the right way to inevitable challenges.”

This means that training employees and giving them the tools to succeed should be a more important skill than simply following orders. If you train your business team in the basics of compliance and then provide the right support to them, it can help bake compliance into the DNA of a company. Simply put a top-down compliance program dictated from the corporate office in the US or UK will not be as effective as a CCO or compliance practitioner getting out into the field and getting the business team to view themselves as compliance colleagues and assume responsibility for doing compliance in everyday transactions.

The second article was by psychologist Naomi Shragai and was entitled “Bloated and shrunken egos both prove bad for business”. Shragai began her article with the following observation, “We are rarely the best judge of our own skills and achievements. Even with the best intentions, we tend to overrate or underrate our abilities. Deluding ourselves that we are better than we are boosts our confidence and helps us to recover from setbacks. Identifying faults in others, the company or circumstances is easier on the ego than believing any deficiency lies within. The problem with this attitude is that it is rooted in a misguided belief that there is nothing to learn or correct.” She also described the contradictory when she wrote, “At the opposite end of the continuum are people who underplay their abilities and tend to see the fault in themselves rather than in others. They might overcompensate for what they perceive as deficiencies in themselves by working hard, but, stuck in a cycle of negativity, they generally fail to take responsibility for their own development.”

Shragai suggests dealing with the former is important because in the long run “their behaviour needs to be managed early before it becomes self-reinforcing and harms the business…Let him or her know that you are not judging the person but the work.” For the latter behavior, she suggests, “The underconfident need to take more responsibility for listening to what others are saying by consciously tuning into reality rather than slipping into negative thoughts…Help them to recognise their skills by presenting them with concrete evidence of their accomplishments.”

From these two articles, I synthesized the importance of the process of compliance. The more that you can make compliance about process, the more you can take out the egos, the over-confident and under-confident out of the equation. But it is much more than a process, as it requires training and providing tools to the employee base and those employees on the front lines in high risk countries, areas, products and services so that they can deal with the situations which they might confront.

As a CCO or compliance practitioner, that means you have to get out of the corporate headquarters, put boots on the ground and learn what your business team’s challenges might be going forward. It also means to instruct them specifically on how to deal with situations where they may be faced with requests to pay bribes and the difference between bribes and extortion. If an employee is faced with a danger to his or her health, safety or liberty it is encumbent on you not only explain the difference but also absolutely support them to remedy or rectify the situation. As Hill said in his article, “building the machine” is a key way to influence a company. But once you build that machine, you have to support it and keep it running.

So today I would ask you to reflect on what the abdication of Edward VIII meant for the UK and even up until today with the current monarch, Queen Elizabeth II. You might even consider Prince William and Princess Kate hanging out with LeBron James.

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

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

Many 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

How A Failure to Set Tone-at-the-Top Led to a Fractured Vertebra

What does ‘Tone-at-the-Top’ mean to any anti-bribery or anti-corruption program? Conversely, what if management says to do the right thing but only judges employees on their sales; what is the message that only ‘Talking The Talk’ sends; if a company fails to ‘Walk-the-Walk’ of doing business in compliance with anti-corruption laws such as the Foreign Corrupt Practices Act (FCPA)? Finally, how long does it take for the dissonance of telling people do to the right thing without training, communicating and then following up with them? Unfortunately these questions were answered in a very real and very ugly way in last week’s World Cup quarterfinal match between Brazil and Colombia.

For those of you who did not watch the match, Brazil lost its top player, Neymar, to a fractured vertebra, after Colombian player Juan Camilo Zúñiga kneed him in the back. As reported in the New York Times (NYT), in an article entitled “Brazil Takes a Painful Step Forward”, Andrew Keh wrote “With about five minutes left to play, the Colombian defender Juan Camilo Zúñiga went airborne on a loose ball and ended up driving his knee into the lower back of Neymar, who immediately crumpled to the turf in pain. Neymar’s teammates could be seen signaling to the bench for a substitution as a stretcher was brought onto to the field. He was taken to a nearby hospital, where a crowd of fans soon formed.” After the match was completed, “the team doctor Rodrigo Lasmar said that Neymar had sustained a fractured vertebra in his lower back. Lasmar said the injury would not require surgery, but would take three to four weeks to heal. It was a huge blow to the team, the country and the tournament. Neymar, 22, who plays for Barcelona, has had his face plastered on billboards and shown in television commercials since well before the tournament. For such a young player, he was shouldering a huge amount of responsibility.”

But this hard foul did not come out of nowhere nor did it appear that the Colombian team had targeted Brazil’s star player. This hard foul was a direct result of the failure of referee to set the proper tone against hard fouls throughout the match. Keh wrote, “There were 54 fouls called in the game, the highest total of any match in the tournament. Scolari [the Brazilian coach] acknowledged that both teams probably played with too much physicality, but he said the referee, Velasco Carballo, did not do enough to control the tenor of the game.” The Colombian coach was also critical of the referee and was quoted as saying, “We lost fluidity to the game because of that friction and intensity.”

Sam Borden, in another NYT article entitled “For Bellicose Brazil, Payback Carries Heavy Price: Loss of Neymar”, seemed to believe that it was Brazil and its tactics which may have reaped what they had sown with hard fouls against Colombian players. Nevertheless, “Soccer referees will often show yellow cards to players for “persistent infringement” of the rules, a phrase tha t generally means committing three or four serious fouls. Fernandinho [Brazilian midfielder] was called for four fouls in just the first half of the game, three of them significant hacks at Rodríguez. But Velasco Carballo gave him no penalty.”

After halftime, the referee still did not take control of the game. Borden wrote, “It was in the 57th minute, though, when the match began to boil over. The Colombians had continued to mostly sit back and take the punishment, but they were clearly infuriated when Silva crushed Ramos from behind as he went toward a ball. Velasco Carballo, again, declined to whistle a foul. The Colombians’ ire was raised even more 10 minutes later when the referee showed a yellow card to Rodríguez — who was apoplectic at the decision — for an innocuous trip that was, as Rodríguez vociferously pointed out with multiple hand gestures, a first offense compared with Fernandinho’s harrying.”

Borden leveled his most direct criticism at Carballo when he wrote the following “Velasco Carballo’s role in the ugliness cannot be minimized. A Spaniard, he is known as a high-level official, but it seemed clear that he was determined to avoid using cards to control the players. That decision backfired, particularly as it related to Fernandinho; instead of giving the players a comfort level to play more freely early on, his lenience served as an elastic band on the game, encouraging the players, especially the Brazilians, to try to see just how much contact they could get away with on Rodríguez without being punished. It was a poor miscalculation from Velasco Carballo, and one he compounded by neglecting to adjust as the game progressed. His culpability is impossible to ignore.”

Rarely do you see such a course of action or perhaps more aptly put, failure to engage in a course of action, as leading to such a catastrophic result. In any competitive match, for almost any sport, it is up to the referee to keep things from getting out of control. If they start to get to physical and play outside the rules, then it is the job of the referee to enforce penalties against the offending party or parties. Of the 54 fouls called against Brazil in its match with Colombia, 31 were against the host nation. It was only a matter of time before things got out of hand. If players are told by a referee’s action that there will be no sanctions for hard fouls that cross over the line, they will certainly get that message.

For the compliance practitioner, I do not think the lesson learned could be any clearer. Companies which continue to reward, through promotion and compensation, high producing sales people, while turning a blind eye towards their sales techniques which may be in violation of company policy or even the FCPA; will communicate that playing by the rules is not in your interest if you want to get ahead in this company. Correspondingly, if a company’s first action when an anonymous whistleblower raises an allegation is to try and find out the identity of the whistleblower, that also sends a strong message that the company will get you, one way or another.

For Brazil, the loss of its star player can certainly not help its chances going forward. For the rest of us, we will lose the sight of seeing one of the world’s greatest footballers on its greatest stage. And let’s not forget Neymar, who is the one with the fractured back.

===============================================================================================================================================================================================================================================

The FCPA Compliance and Ethics Report, Episode 73-World Cup Report Part V, is now up. In this episode Mike Brown and I continue our discussion of the World Cup, FIFA, compliance and ethics, including a review of the topic of this blog. To view the episode, click here.

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

© Thomas R. Fox, 2014

Mickey Rooney and The 90 Cent Solution

We begin today with a word on the death of Mickey Rooney. Rooney’s career, spanning nearly 90 years was certainly was from a different era. He was short of stature and long in his number of marriages but as Bob Lefsetz noted in his blog post tribute to Rooney, “But they stood in front of us twenty feet tall. At the drive-in. Even when the pictures truly got small on the tiny old screens of yore they emerged triumphant, because they were so good-looking, so charismatic. And if you were big enough, a bright enough star, your legacy lived on, even if your present day circumstances bore no resemblance to fame.” But here’s why there is always a place in my heart for Mickey Rooney. When I was very young I lived with my grandparents and one night I watched the 1935 movie version of Shakespeare’s A Mid Summer Night’s Dream on television with my grandmother. Rooney’s so over the top performance of Puck began for me a life long love affair with the Bard. So here’s to the grandmother that started me off on a lifelong love affair of Shakespeare’s works and here’s to the Mickster—you did it your way.

I have often considered the role of senior management is to set a proper ‘Tone-At-The-Top” to do business ethically and in compliance with anti-corruption laws like the Foreign Corrupt Practices Act (FCPA) or the UK Bribery Act. Incentives to do business ethically and in compliance are also recognized as an important part of any best practices compliance program. The flip side of incentives is disincentives, such as discipline or financial penalties for affirmatively engaging in misconduct. But how far should such disincentives go and how strong should they be? Should there be penalties for not only affirmatively engaging in misconduct but also failing to monitor risk-taking that allows misconduct to occur? If the latter becomes prevalent, how close do we come to criminalizing conduct, which is arguably negligent and not simply intentional?

I have thought about several of these questions and many others over the past few days when reading about the ongoing struggles of General Motors (GM) over its Cobalt recall issues and Citigroup in regards to its Mexican banking operations. In an article by Gretchen Morgenson in the New York Times (NYT), entitled “The Wallet as Ethics Enforcer”, where she asked “Who decided—and who agreed—that 90 cents was too much to pay for each switch that would have fixed the problem that apparently led to 13 deaths? How much did that decision add to the bottom line and add to executives’ compensation over the years? What will the company have to pay in possible regulatory penalties and legal settlements?” One of her own answers to these questions reads, “While the shareholders of G.M. will shoulder the cost of the fines, the settlements and loss of trust arising from the mess, the executives responsible for monitoring internal risks like these are unlikely to be held accountable by returning past pay.”

Citigroup, which had previously indicated that it had been the victim of a huge fraud perpetrated by one of its customers in Mexico, Oceanografía. However, now Citigroup now faces both federal criminal and civil investigations over the affair. As reported in a Wall Street Journal (WSJ) article, entitled “Crime Inquiry Said to Open On Citigroup”, Ben Protess and Michael Corkery reported that both the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have opened investigations “focusing in part on whether holes in the bank’s internal controls contributed to the fraud in Mexico. The question for the investigators is whether Citigroup—as other banks have been accused of doing in the context of money laundering—ignored warning signs.” For a bank to be criminally liable, “prosecutors would typically need to show that the bank willfully ignored warning signs of the fraud.” However, to show a civil violation, the threshold is lower and there may only need to be a showing that the bank lacked the proper internal controls or internal oversight.

In her article, Morgenson spoke with Scott M. Stringer, the New York City Comptroller, who is a strong advocate of corporate requirements which “make sure that insiders who engage in questionable conduct are required to pay the piper” in the form of clawback provisions. Stringer has worked with companies to expand clawback provisions beyond those mandated by Sarbanes-Oxley (SOX), which required “boards to recover some incentive pay from a chief executive and chief financial officer if a company did not comply with financial reporting requirements.” Now, clawbacks have expanded to require executives to return compensation “even if they did not commit the misconduct themselves; they run afoul of the rules by failing to monitor conduct or risk-taking by subordinates.” Stringer believes that such clawback provisions not only “speak to the issue of financial accountability but also to setting a tone at the top.”

Morgenson ends her article by noting that unless GM makes public its internal investigation, “we may never know how many G.M. executives knew about the Cobalt problems and looked the other way.” In the meantime though, this debacle shows the importance of policies that hold high-level employees accountable for conduct that, even if not illegal, can do serious damage to their companies. Directors creating such policies would be sending a clear signal that they take their duties to the company’s owners seriously.”

At this point, we do not know high up the decision went in GM not to install the 90 cent solution. But I would argue it really does not matter. Somewhere in the company, some engineer figured out a solution and indeed one was implemented without changing the part number. I am sure the GM Board would have been sufficiently shocked, just shocked, to find out that such decisions as monetary over safety were going on inside the company. What does all of the information released so far tell us about the culture inside GM when these decisions were made? While I am certainly willing to give current GM Chief Mary Barra the benefit of the doubt about her intentions for the company going forward, particularly after a grueling couple of days before Congress, what do you think the financial incentives were in the company when the 90 cent solution was rejected?

It initially appeared that Citigroup was the victim of a massive fraud perpetrated by one of its customers. However, even initially it was reported that Citigroup let its Mexican operation, Banamex run its own show with very little oversight from the corporate office in New York. Now Citigroup is not only under a civil investigation for lack of proper internal controls but also a criminal investigation for willful ignorance of Banamex’s operations. Does any of this sound far-fetched or perhaps familiar? Think about Frederick Bourke and ‘conscious indifference’. Even the judge in Burke’s criminal trial mused that she did not know if he was a perpetrator or a victim. Perhaps Citigroup is both, but if he was both it certainly did not help Bourke. While I am certainly sure that the Citigroup Board of Directors would also say that it would also simply be shocked, just shocked, to find that there were even insufficient internal controls over Banamex, let alone willful ignorance of criminal actions of its Mexico subsidiary, it does pose the question as to what is the culture at the bank?

As important as clawbacks are, until the message of compliance gets down from the top of an organization, into the middle and then to the bottom, a culture of compliance will not exist. I have worked in an industry where safety is goal number one. But in the same industry I have heard the apocryphal tale of the foreign Regional Manager who is alleged to have said, “If I violate the Code of Conduct, I may or may not get caught. If I violate the Code of Conduct and get caught, I may or may not be punished. If I miss my numbers for two quarters, I will be fired.” Clawbacks for Board members would not have influenced this apocryphal foreign Regional Manager, any more than they would have worked on the psyche of the GM engineers who proposed and then later dropped the 90 cent solution. It was clear to them what their bosses thought was important for them to keep their jobs. As long as management has that message, doing business ethically and in compliance will always take a second seat.

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

 

Sammy Baugh in 1943: Do It the Right Way

2013 is the 70^th anniversary of one of the greatest individual seasons in pro football. In 1943, Sammy Baugh, playing for the Washington professional football team, had what Sports Illustrated said one of the greatest season’s a player has ever sustained. Playing at time when football players played both ways and usually the entire game, Sports Illustrated detailed the following of Baugh’s accomplishments:

• He completed 55.6 percent of his passes, best in the NFL that year.
• He threw 23 touchdowns passes, second in the NFL—and third-highest all-time to that point.
• As a defensive back, he had 11 interceptions, which broke another league record.
• He averaged an NFL-leading 45.9 yards a punt, often flipping the field with a well-timed quick kick.
• Five of his boots were longer than 70 yards.
• He had arguably the greatest single-game performance in history: In a 42-20 win over the Detroit Lions on Nov. 14, Baugh fired four touchdown passes, intercepted four passes and got off an 81-yard punt, the longest of the year in the NFL.

Baugh won and he won doing things the right way. I thought about his accomplishments when I read a recent article, entitled “Decisiveness Is a Double-Edged Sword”, in the Corner Office section of the New York Times (NYT) by Adam Bryant in his interview of David Cote, the Chairman and Chief Executive Officer (CEO) of Honeywell International Inc. In the article Cote explained that “Your job as a leader is to be right at the end of the meeting, not at the beginning.” Cote explained that he had a “reputation for being decisive. Most people would say that being decisive is what you want in a business leader. But it’s possible for decisiveness to be a bad thing. Because if you’re decisive, you want to make decisions — give me what you’ve got, and I’ll make a decision. I’d say that the lower you are in an organization, you can get away with a lot of that and you’ll be applauded for it.”

I found Cote’s approach a good way to explain the role of top corporate leadership in a Foreign Corrupt Practices Act (FCPA) compliance program. When I meet with a new client I explain to the President or CEO what his or her role is in a compliance regime. It is to be a leader and not simply to set the right tone for doing business ethically and in compliance but also ‘walking the walk’ of compliance. In other words, continually reminding the troops to do business the right way.

Further, you have to turn your pride and emotions aside at times because “it’s important to be smart and to think about what’s important.” Cote said that one of the most important behaviors at Honeywell is that you have to get results “and you have to get them the right way.” I thought about the way that Cote phrased it, “and you have to get them the right way.” Cote wants his team to make their quarterly numbers but he wants it done the right way “with the right kind of processes” and those right kinds of processes are financial and compliance controls to help the company to do business the right way going forward.

I once worked for a company where a regional manager was alleged to have said the following: If I violate the Code of Conduct, I may or may not get caught. If I violate the Code of Conduct and get caught, I may or may not be disciplined. If I miss my numbers for two quarters, I will be fired. And guess what – that regional manager never missed his quarterly numbers. Further, he was promoted for his “great” work.

What type of message do you think that this un-named regional manager’s aphorism, his quarterly numbers and, most importantly, the company’s treatment of him going forward sent throughout the region? It was pretty clear that making your numbers is all that top management wanted communicated down through the organization. Conversely, I have heard a compliance professional from another company in the same sector say that it is the business unit’s leader’s responsibility to make the numbers within the structure of the company’s compliance regime. It is not up to the compliance function to figure out how the operations manager should do business but the other way around.

But, equally significant, is the difference in focus between Cote and this un-named regional manager. Cote’s has a long term perspective in place and is thinking long term. He is considering something beyond, weeks, months, the next quarter or even the next two quarters. What Cote said in the NYT piece is that one of the reasons he desires to have the right financial and compliance controls in place is so that “we can make the quarter three years from now and five years from now.” Our un-named regional manager has no such focus; he is only looking at the next sale in front of him because if he does not make his numbers he will be fired. I do not think there can be a stronger message from management than to make your numbers “the right way”.

Just as Slinging Sammy Baugh had a season for the ages some 70 years ago, your compliance program can achieve the goals of doing business the right way if you have a CEO like David Cote. He believes that it is important to get your decisions right and to do business the right way. That is a message that can be translated from senior management down to the middle and the bottom of a company. That is what a compliance practitioner can ask of his or her leaders.

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, 2013