FCPA Compliance and Ethics Blog

November 3, 2014

Giants Join Pantheon of Greats Through the Confluence of Culture and Strategy

Giants Win WSLast week the San Francisco Giants won their third World Series championship in five years. This elevates them into the conversation of the Pantheon of elite teams over the past 50 years. Only the New York Yankees (1998-2000) and the Oakland Athletics (1972-1974) can top the Giants for Worlds Series won in such a time frame. Sorry Red Sox nation, 3 titles in 10 years does not elevate you to the Pantheon, only to the very good. So congratulations to Series MVP Madison Bumgarner, most especially former Astro Hunter Pence, the rest of the team and Giants fans everywhere for having a team for the ages.

One of the things that I love about sports is when a player has a streak, game or season for the ages. We had one from Giants pitcher Madison Bumgarner this Series. Initially it appeared that he would have three wins to his credit, with one earned run. That record would have put him in the company of fellow Giant (albeit New York Giant) Christy Mathewson, who in the 1905 World Series pitched three complete shut-out games in six days. I say it appeared that Bumgarner had nearly equaled Mathewson’s record after his relief appearance in Game 7 where he shut down the Kansas City Royals. However after the game the Official Scorer changed Bumgarner’s Win to a Save. This change dropped Bumgarner into a two with Cincinnati Reds reliever Rawley Eastwick who won two games and saved one in the 1975 World Series. While he did not equal Mathewson’s 0.00 ERA with 3 wins and no losses, he did have a 0.25 ERA with 2 wins and 1 save.

How is it that Bumgarner went from having a Win to being credited with a Save? In an article in the New York Times (NYT), entitled “Win or Save” A Rule with Room for Judgment”, Benjamin Hoffman reported that “In general, if a starting pitcher does not complete five innings, and the score is tied, a victory is assigned to the pitcher of record when the lead changed hands. The exception is when the scorer determines the reliever of record was ineffective. While guidance is given that an ineffective outing would involve a pitcher going less than one inning and giving up two or more runs, Rule 10.17(c) states that it is up to the scorer to determine ineffectiveness.” The Giants relief pitcher immediately before Bumgarner was Jeremy Affeldt, who came into the game with “with runners on base, and pitched well for two and a third innings”. The original Scorer’s ruling was overturned and Affeldt was credited with the Win.

I thought about the Giants win and Bumgarner’s near mythic World Series run as I read a couple of articles in the Houston Business Journal (HBJ) dealing with culture and strategy and their implications for the compliance practitioner. The first was on CEO leadership and it featured Ryan Lance, the Chief Executive Officer (CEO) of ConocoPhillips. He detailed a leadership style that is relatively straightforward. He called it DAM, which he defined as Direction, Align and Motivate. This is a good way for any compliance practitioner to not only think through the implementation of a compliance enhancement or task but equally it should give a manner to use with senior executives to help them to understand their role in the compliance function in your company. Interestingly in the same article, Keith Mosing, CEO of Frank’s International, was quoted for the following, “No. 1 is integrity. I just can’t stress that enough. There are guys who are smarter, but if you don’t have morals and ethics, it’ll backfire on you.”

I considered these two approaches as I read the second article, which dealt more directly with execution of strategies, often the bane for a Chief Compliance Officer (CCO) or compliance practitioner. Why a bane? Because at least since Peter Drucker it has been observed that “Culture eats strategy” where it is the company culture which dictates how and when something might get done. This second article was by Connie Barnaba, entitled “Don’t let company culture eat you”, where she stated “Many brilliant strategies have fallen prey to culture because they fail to recognize that persuading people to accept a new way of doing things is…complicated.”

Company culture is what gives employees clues to what is important and how to act. Business strategy usually means something to change that culture. In the compliance arena this can mean changing the cultural imperative in a country or region that may have existed far before the US Company, subject to the Foreign Corrupt Practices Act (FCPA), came to exist in that location. A big part of any best practices compliance program is to recognize that changes in a business environment will lead to changes in the compliance risk. This change can be in products or services that are offered; locations where they are delivered or a new client base which might include foreign governments or state-owned enterprises. To meet these new compliance risks, there may need to be changes or enhancements to a compliance regime. However, such changes could fail because “they fail to recognize that persuading people to accept a new way of doing things over what is familiar is complicated.” To effectively execute a business strategy change to accommodate a new compliance initiative, a CCO or compliance practitioner should have a clear understanding of not only your company’s culture but also the cultures of the specific business units or geographic areas where you are making the enhancements. You will also need to understand the expectations of the key talent who will assist the compliance department in making the changes.

Finally Barnaba cautions against surprise, about the most detested thing I ever saw in a company. She wrote, “The element of surprise and little or no enemy resistance are the two weapons that make culture a formidable adversary. A business strategy that understands culture and has a well-considered battle plan is likely to overcome the attack and achieve the strategic goal. At the end of her piece, Barnaba provided seven best practices for effective strategy execution, which I have adapted for the compliance function.

  • Identify the changes that are critical to the execution of the compliance strategy.
  • Determine the people, processes and technology that will be impacted by the compliance enhancements.
  • Predetermine how the compliance enhancements will be received by the people who will be impacted by the changes.
  • Manage the business units’ expectations by giving clear reasons for the changes.
  • Provide compliance support to those in the business unit who will be most heavily impacted by the changes.
  • Share your timeline for implementation, including any transition period and the clear expectation of when the business unit will be measured on any change in performance standards.
  • Establish the transitional goal and then exceed it.

I think the Giants showed that compliance and strategy can not only exist together but together they can lead you to succeed at the highest levels. The message is that you have to work to integrate both but if you do, the results can be nothing short of spectacular.

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

May 11, 2012

Achieving Compliance in the Post Acquisition Context – The Key to Which is Building Trust

In a recent article in the Houston Business Journal (HBJ), entitled “Building strong relationships critical to building strong companies”, HBJ Mergers and Acquisitions Columnist Connie Barnaba focused on the nature of trust within a company to posit that “strong businesses are built on strong relationships between the business, its leaders, employees, customers, suppliers, lenders and advisors.” Trust cascades down each level of a company; beginning from the Board of Directors down to employees and then out the door to customers. She believes that this issue of trust is equally important in the Mergers and Acquisition (M&A) context. I believe her ideas are very useful for the compliance practitioner, when integrating a new acquisition into an existing compliance culture.

Barnaba writes that “trusting relationships are developed person to person as individuals in a company gradually develop a network of contacts, associates and advisors inside and outside the company.” But more than this it is “the by-product of responsiveness, reliability and candor or those we reach out to.” Successful companies work to focus on “sustaining and developing new relationships” as a key to the continued growth and successful performance of a business.

I.                   Trust in the M&A Context

In the M&A context, this trust relationship begins with the Letter of Intent (LOI), which should include warranties, representations, covenants and any penalties which might occur if one side pulls out of the transaction. The pre-acquisition due diligence process is designed to “confirm the accuracy of the representations and viability of commitments.” This should lead to a successful merger agreement between the parties and now the work to continue to build trust really begins.

Barnaba notes that the biggest roadblock initially is the element of surprise. Most merger deals are done with some amount of confidentiality. However, one of the hardest issues to manage is the lack of time. There is never enough time to perform all the due diligence that you desire. This is always true in the compliance arena as well. Further Securities and Exchange Commission (SEC) regulations prohibit certain unauthorized disclosures about such transactions and there is usually great sensitivity to timing around any public disclosure regarding the transaction.

This not only impedes the ability to fully vet during the due diligence process but it may impeded company leaders from announcing to their own stakeholders that the company is in such negotiations. This can certainly negatively affect an employee base as top leaders may be confronted with “managing the impact of the (M&A) surprise on stakeholders.” This can also damage the efforts going forward as it can appear as a “top-down imposition of change.”

II.                Compliance in the Post-Acquisition Context

Given the two Department of Justice (DOJ) pronouncements on Foreign Corrupt Practices Act (FCPA) compliance in the M&A context, Opinion 08-02 (the Halliburton Opinion Release) and the Johnson and Johnson (J&J) Deferred Prosecution Agreement (DPA), all of the factors that Barnaba listed may be significantly acerbated and accelerated.

A.     The Halliburton Opinion Release

In this Opinion Release, the DOJ approved Halliburton’s commitment to the following post acquisition conditions to a proposed transaction:

1)      Within ten business days of the closing. Halliburton would present to the DOJ a comprehensive, risk-based FCPA and anti-corruption due diligence work plan which would address, among other things, the use of agents and other third parties; commercial dealings with state-owned customers; any joint venture, teaming or consortium arrangements; customs and immigration matters; tax matters; and any government licenses and permits. The Halliburton work plan committed to organizing the due diligence effort into high risk, medium risk, and lowest risk elements.

a)      Within 90 days of Closing. Halliburton would report to the DOJ the results of its high risk due diligence.

b)      Within 120 days of Closing. Halliburton would report to the DOJ the results to date of its medium risk due diligence.

c)      Within 180 days of Closing. Halliburton would report to the DOJ the results to date of its lowest risk due diligence.

d)     Within One Year of Closing. Halliburton committed to full remediation of any issues which it discovered within one year of the closing of the transaction.

B.    Johnson & Johnson Deferred Prosecution Agreement and Enhanced Compliance Obligations

In the April 2011 released J&J DPA there is a list of compliance obligations J&J agreed to take on in the acquisition context:

7.        J&J will ensure that new business entities are only acquired after thorough FCPA and anti-corruption due diligence by legal, accounting, and compliance personnel. Where such anti-corruption due diligence is not practicable prior to acquisition of a new business for reasons beyond J&J’s control, or due to any applicable law, rule, or regulation, J&J will conduct FCPA and anti-corruption due diligence subsequent to the acquisition and report to the Department any corrupt payments, falsified books and records, or inadequate internal controls as required by … the Deferred Prosecution Agreement.

8.        J&J will ensure that J&J’s policies and procedures regarding the anti-corruption laws and regulations apply as quickly as is practicable, but in any event no less than one year post-closing, to newly-acquired businesses, and will promptly: For those operating companies that are determined not to pose corruption risk, J&J will conduct periodic FCPA Audits, or will incorporate FCPA components into financial audits.

  1. Train directors, officers, employees, agents, consultants, representatives, distributors, joint venture partners, and relevant employees thereof, who present corruption risk to J&J, on the anti-corruption laws and regulations and J&J’s related policies and procedures; and
  2. Conduct an FCPA-specific audit of all newly-acquired businesses within 18 months of acquisition.

In the J&J DPA, the company agreed to following time frames:

  1. 18 Month – conduct a full FCPA audit of the acquired company.
  2. 12 Month – introduce full anti-corruption compliance policies and procedures into the acquired company and train those persons and business representatives which “present corruption risk to J&J.”

These very tight time frames, even with the expanded one in the J&J DPA, may well test trust issues in any newly acquired organization. Similarly, the acquiring organization may be under great pressure to uncover and report anything which may even whiff of a FCPA violation. Barnaba concludes her article by warning that if the short term disruption in trust will undermine the long-term changes to the organization; it may not be in either party’s interest to go forward with the merger. Business mergers require linkages at all levels within an organization and this is particularly true with compliance.

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

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