Dr. Henry Randolph died this week. He was a well-known expert in the field of dairy science. He was from a small town in Tennessee, obtained his PhD from the Ohio State University, moved on to teach at the University of Kentucky and, finally, taught for many years at Texas A&M University. His oldest son Ken was my best friend growing up in Bryan, Texas. Dr. Randolph always said that the milk cow was one of nature’s greatest creations and that as long as we humans didn’t mess up the product, milk was about the most perfect food. So I will have a tall glass of cold milk tipped to you, Dr. Randolph.
At his Memorial Service this week, the officiating pastor said something that struck me as key to an effective compliance program. The remark was that Dr. Randolph emphasized that most work in a company is done not during an emergency but is accomplished through the day-to-day tasks that are performed. Yesterday I wrote about the GlaxoSmithKline PLC (GSK) matter as portending the end of claims regarding a formal compliance defense to be enshrined in the Foreign Corrupt Practices Act (FCPA). I received a comment from Wayne Brody, from LRN Corporation, which I quote in full:
I’ll leave it to you distinguished counsel to discuss the questions of liability and defense, but your well-made point about E&C program effectiveness should be the one of even greater concern to in-house compliance professionals. As you’ve shown, GSK/China can be viewed as illustrative of compliance program failure, And, as has been widely discussed, the Morgan Stanley declination (in the Peterson/China matter) can be viewed as program success – the compliance defense par excellence. I think they are two sides of the same coin; that they illustrate the inherent limitations of measuring “effectiveness” in terms of the design and implementation of an ethics and compliance program rather than in terms of its actual impact on employee behavior. Whether there are five, seven, eleven or thirteen “elements of an effective program” (pick your guidance), whether or not there can be such a thing as a “rogue region,” and whether or not you’ve tracked how many email reminders each employee has received per risk factor all tell you very little about the values your people use to actually make decisions or how free they feel or likely they are to speak out should the need arise.
I’d be in the wrong business if I didn’t believe that ethics and compliance education and communication can inspire elevated behavior. But all the built-up, bolted-on, “Exhibit C” lockstep compliance program money can buy won’t make a bit of difference if the “effectiveness” we seek is other than impact. It’s something to keep in mind when conducting that “periodic review” the guidance requires.
Brody’s comment ties in with the remark I heard at Dr. Randolph’s Memorial Service. It is the day-to-day work of a compliance program which makes it effective. Such effectiveness drives not only actual compliance but it gives a company a better chance of overcoming any allegations of a FCPA violation. The Department of Justice (DOJ) and Securities and Exchange Commission (SEC) expressly make this clear in their joint FCPA Guidance. The Guidance states that “Effective compliance programs are tailored to the company’s specific business and to the risks associated with that business. They are dynamic and evolve as the business and the markets change.” The Guidance goes on to state that the DOJ and SEC ask three basic questions.
- Is the company’s compliance program well designed?
- Is it being applied in good faith?
- Does it work?
Another way to phrase it might be:
1) What did you do to prevent it?
2) What did you do to detect it?
3) What did you do to remedy it?
Whichever set of questions you choose to follow, I think it means that a key component depends on the size and structure of your company. It may be appropriate for day-to-day operational responsibility to be delegated to other specific individuals within a company. However, it may be that in a smaller company the compliance function can be handled by one or two individuals. But as the FCPA Guidance states, “the amount of resources devoted to compliance will depend on the company’s size, complexity, industry, geographical reach, and risks associated with the business.” Further, both the DOJ and SEC, in assessing whether a company has reasonable internal controls, “typically consider whether the company devoted adequate staffing and resources to the compliance program given the size, structure, and risk profile of the business.”
If you think back to the Pfizer Inc. Deferred Prosecution Agreement (DPA), under the ‘Enhanced Compliance Obligations’ attachment the company agreed to put in place a tripartite compliance function. The DPA specifies that Pfizer will maintain “significant” resources for the compliance function. These significant resources will be dedicated to several different types of compliance tools, including (a) an international investigations group charged with responding to and investigating anti-corruption compliance issues and ensuring that appropriate remedial measures are undertaken after the completion of an investigation; (b) an anti-corruption program office providing centralized assistance and guidance regarding the implementation, updating and revising of the FCPA Procedure, the establishment of systems to enhance compliance with the FCPA Procedure, and the administration of corporate-level training and annual anti-corruption certifications; and (c) a mergers and acquisitions (M&A) compliance team designed to support early identification of compliance risks associated with complex business transactions and to ensure the integration of Pfizer’s compliance procedures into newly acquired entities.
If there is a formal compliance defense grafted on to the FCPA, the reality is that companies will move towards a ‘Check-the-Box’ paper program. Such a program will not only be ineffective to prevent bribery and corruption but also give companies the false hope that they have an actual defense to allegations of a FCPA violation. This is because it takes work to make any compliance program effective. That was the message I heard in Dr. Randolph’s Memorial Service and the message that Brody communicated with his comment to my blog yesterday.
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© Thomas R. Fox, 2013