How Do You Change an Unhealthy Compliance Culture?

What is a healthy culture and how do you change an unhealthy culture? I have always thought that baseball was a simple game: you throw the ball; you hit the ball; you catch the ball. I had also thought that you could measure whether a baseball team had a healthy culture with a fairly easy-to-understand metric; that being wins and losses. For example: the more wins that your team has the better it should be, conversely the more losses your team has the worse it should be viewed. Based upon this fairly straightforward metric, I would have said that the Houston Astros did not play baseball very well in 2011, when they lost 106 games and won 56 games. I would have also said that they are an even worse team this year as they are on track to have an even shoddier season; their current trajectory is for 109 losses vs. 53 wins. All-in-all a pretty unhealthy baseball culture.

However, it turns out that my straightforward analysis of baseball culture is in fact too simple. As reported in the Houston Chronicle, team owner Jim Crane said “he believes sophisticated baseball fans are in tune with the team’s plans.” I would have thought that having not only the worst record in baseball and indeed the worst record in the history of the Houston franchise showed that the culture of baseball is not particularly good right now in Houston. However, it turns out that I simply have an “unsophisticated” view of how to approach the Astros culture and losing for the past three years and up to the next five years is the team’s culture plan. On a more positive note, in the same interview Crane said that the redesign of the Astros uniform that he has been so diligently working on has been submitted to Major League Baseball (MLB) for approval. So, if a winning baseball culture includes redesigned uniforms, it sounds like the Astros are the team for you.

I thought about the Astros culture of losing, my “unsophisticated” view of baseball and the Astros redesigned uniforms when reading a recent article by Andrew Hill in the Financial Times (FT), entitled “Lofty Aspirations”. Hill quoted Roger Steare, an expert on corporate leadership, values and ethics, who said that culture “describes the way human beings behave together – what they value and what they celebrate.” Hill posed the question of whether it is possible for government policy makers or regulators to shift the behaviors and values of scandal hit sectors of the business and if it is even desirable. Hill looked at the ongoing crisis in the financial services sector and found that it is so deep that regulators in the UK have “explored whether to intervene to influence corporate culture.” Hill cited a speech from 2010 by Hector Sants, then head of the Financial Services Authority (FSA) where he said that regulators can ask a Boards of Directors to provide agencies with “evidence of healthy culture, such as functional whistleblowing regimes, positive customer and employee engagement surveys, and a system for challenging “group think” at board level.” However, Sants also cautioned that “I don’t believe the regulator should be enforcing culture because it’s a contradiction in terms: if you enforce culture, you get a police state with compliance on the surface and subversion underneath.”

Hill argues that the best way to effect culture “is to combine strong leadership with the existing internal elements of a healthy corporate culture.” Further, for businesses which are “assailed by allegations of bad behavior is that, while it may take as long to create a good culture as it does to establish a good reputation, a strong set of values is usually harder to destroy unless the company is itself dismantled or taken over.” Hill went on to cite one example where a company Chief Executive Officer (CEO) had a strong “Lutheran philosophy” and the Chairman of the Board had a more creative tone. They certainly had a tension but this tension played out as constructive discussions at the highest levels of the company and did not allow for a shift too much in one direction or the other.

Hill recognizes that many CEOs want to create the type of company at which they wish to work. However, if they desire to make such changes they must communicate “from the start the values staff were expected to follow.” Nevertheless, Hill continued, “the message needs to be constantly reiterated, in person.” He also noted a “that a strong corporate culture will not on its own protect a company that has a bad strategy, poor governance or a weak business idea, let alone one that takes the wrong operational decisions.” Hill cited from the book “In Search of Excellence” where authors Tom Peters and Robert Waterman pointed out that “poorer-performing companies often have strong cultures, too, but dysfunctional ones. They are usually focused on internal politics rather than on the customer, or they focus on ‘the numbers’ rather than on the product and the people who make and sell it.”

All of this would seem to point, again and again, that a company’s values not only starts with tone-at-the-top but those values must be communicated again and again. Hill closed his article with a quote from Roger Steare, who said that he always asks the Directors that he consults with what is the purpose of their entity. “If they respond ‘To make a profit’, I know we’ve got a problem?” So how about the Astros and their culture? Do they have strong culture but are simply dysfunctional? Or do they need an intervention or structural change? Maybe all three…

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, 2012

Breaking the Enigma Code: Creating a Functioning Compliance Culture

Sunday June 23^rd was the 100th anniversary of the birth of Alan Turing, a man regarded as one of the most influential mathematicians of the 20th Century. He is viewed as one of the pioneers of computer technology. However, he is probably best known for leading the British effort at Bletchley Park where the Germans top secret codes were broken during the Second World War (WWII), including the code they believed to be unbreakable, the Enigma Code. His work during WWII was completed before he was 35 years of age.

I thought about Turing and his success at a relatively young age whilst reading a ‘Corner Office’ article in the Sunday New York Times (NYT), entitled “Let Everyone Swim, But Just Make Sure You’re in the Pool”, by reporter Adam Bryant. In the article Bryant profiles Angie Hicks, one of the co-founders of Angie’s List and its current Chief Marketing Officer. Hicks had some interesting observations on leadership that I found applicable to creating a functional compliance effort within an organization, from compliance professionals to ethical leadership.

Make Sure You’re in the Pool

Hicks firmly believes that you have to give people a chance to succeed if you want your organization to grow. But such a focus means that you are going to fail sometimes. To use a football analogy, you usually don’t win by playing not to lose. People will make mistakes. Hicks believes that one of her roles as a leader is to give employees the confidence that if a mistake is made, she is the first to find out because her employees will come in and tell her without fear. Her group will test things and will sometimes make mistakes, but the point is that the mistakes are corrected. It sort of sounds like McNulty Maxim #3, “What did you do to remedy it?” So she lets her employees swim in the pool of new ideas and concepts but she stays within “arm’s length” so she can be there to grab them back if needed.

When in Doubt Talk to People

Hicks believes that you cannot over-communicate with your employees. Not only to praise and give employees feedback; but to develop that sense of trust which will lead to the types of communications outlined above. From the compliance perspective her views give rise to several thoughts. Remember the Morgan Stanley declination received in conjunction with the Garth Peterson Deferred Prosecution Agreement (DPA) for violations of the Foreign Corrupt Practices Act (FCPA) in China? Several of the facts set forth by the Department of Justice (DOJ) were the routine communications by Morgan Stanley’s compliance group to Peterson regarding the FCPA. These were as simple as email reminders and included other techniques such as an annual Acknowledgment by employees that they had not violated the FCPA and were aware of the company’s Code of Conduct.

Create the Right Culture

Bryant ended his piece by discussing with Hicks how she builds an effective culture. Hicks believes that it is important to get not only the right mix of people but that you should start with the right type of person for your company. In other words, if you want to have an ethical culture in a company, you should strive to hire people who begin with a desire to do business ethically. But the step in your company’s evolution is to not only encourage people to get involved but to get them involved. Think about the power of compliance if you involve the business unit folks in the design, implementation and ongoing practice of your company’s compliance program. They should not be by-standers; you need to have them involved in your compliance program.

So how does this relate to Alan Turing and compliance? Remember, he led the team that broke the Enigma Code. It was a team motivated and focused. It seems to me that he put many of the concepts that Angie Hicks uses at Angie’s List into practice. We should all celebrate the code-breakers of Bletchley Park and recognize that by aligning a company towards creating a functioning ethical culture, a company can move forward successfully.

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, 2012

Ethics Matters

The word ‘ethics’ is in the title of this blog. While I rarely write solely on the subject of ethics two recent events caused me to do so today. The first was an article last week by Matt Ellis, writing in his FCPAméricas Blog, who posted an article entitled, “Bad Press is the Worst Sanction”.  The second was an article yesterday, in the Op-Ed page of the New York Times by Greg Smith entitled, “Why I am Leaving Goldman Sachs”.

Ellis began his posting by stating, “In Latin America, a company’s reputation matters.” He based this statement on a recent survey, conducted by Germany’s Humboldt-Viadrina School of Governance, which sought to assess how incentives and sanctions affect a company’s willingness to take seriously ethical behavior. Ellis reported that the survey found that in Latin America, more people than in any other region rated reputational considerations as the most important factor to motivate businesses to counter corruption, which was a higher percentage than any other geographic region reviewed.

Unfortunately this does not appear to be true at Goldman Sachs, at least according to Smith, who as of yesterday, is listed as former “Goldman Sachs Executive Director and head of the firm’s equity derivatives business in Europe, the Middle East and Africa.” In absolutely damning detail, Smith stated that the “decline in the firm’s moral fiber represents the single most serious threat to its long term survival.” What is this “decline in moral fiber” that Smith anguished over? It is that Goldman Sachs, in his opinion, now puts its own monetary interests ahead of its clients.

Smith listed the “three quick ways to become a leader” at Goldman Sachs. They are “a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.”

While averring that he did not “know of any illegal behavior” he bemoaned “It makes me ill how callously people talk about ripping their clients off.” Smith intoned that senior management did not seem to understand what he termed a “basic truth: If clients don’t trust you they will eventually stop doing business with you.”

So how do ethics matter in the United States of America? For Goldman Sachs it may well have something to do with its stock value which went down 4.17 (approximately 3.35%) points yesterday. With approximately 50 million outstanding shares, that is (according to my trial lawyer math) somewhere in the range of $1.5 to $2 billion in shareholder value that went poof yesterday. I guess ethics does matter.

How will Goldman Sachs respond to this article? Its response may well tell the story of its commitment to ethics. Will it attack Greg Smith as a (now) former disgruntled employee out on some type of vendetta? Will it file suit against Smith for libel? Will it issue a strident press release that it is absolutely committed to ethical values? Or will it be as Smith states, “I hope this can be a wake-up call to the board of directors.”

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, 2012