Mercifully, the season is over for the Houston Astros. To say that the 2013 Astros will become the poster child for abysmal-ness would be to insult poster children. After all, the owner designed the team to lose so that he could make more money. By cutting the payroll down to almost $10MM, he guaranteed the Astros would be one of the worst teams of all-time. Congratulations Astros management, you succeeded. The Astros assured their place in glory by breaking the record for the most strikeouts by one team in one season; breaking previous the mark of 1,529 in 2010 set by the Arizona Diamondbacks with a total of 1,530 this year. Congratulations Astros owner, Jim Crane on continuing to use the backs of the former Astros fan base to be the most profitable team of all-time!
I thought about the opposite of Jim Crane and his dive to the bottom when I read an article in the Harvard Business Review (HBR), entitled “Innovating for Shareholder Value”, where authors Marc Pfitzer, Valerie Bockstette and Mike Stamp looked at businesses which innovated to meet their stakeholders needs and build a profitable enterprise. While the authors focused more clearly on businesses that design and implement initiatives which deliver both social and business benefits, it became clear to me that the solutions which the authors proposed would be very useful to the compliance practitioner in both designing and implementing a compliance program. So, adapting the authors five mutually reinforcing elements to create a more profitable enterprise from social issues to ethics and compliance, I present the following approach.
Embedding the Purpose
While it may be difficult for a company to define a social purpose that it wishes in engage in, it should not be difficult for a company to define its goals in the compliance arena. Simply put, a company needs to do business in compliance with anti-corruption legislations such as the Foreign Corrupt Practices Act (FCPA) or anti-bribery laws such as the UK Bribery Act through a best practices compliance program. I believe that by doing so a company will move towards the pursuit of the shared value of doing business ethically and in compliance with such laws. Ultimately it all starts at the top of an organization because resources, both human and financial, will be required to channel the purposes of compliance throughout an organization. This means that compliance begins with the board of directors and senior executives setting the proper tone for the rest of the company. As managers and employees take their cues from these corporate leaders, it is imperative that companies demonstrate their commitment from such senior management and their leaders.
Defining the Need
The need to do business ethically and in compliance is well-known. However, the key is that each company assesses and manages its risks. The FCPA Guidance makes clear that a risk assessment is the cornerstone of any FCPA compliance program. The Guidance states, “One-size-fits-all compliance programs are generally ill-conceived and ineffective because resources inevitably are spread too thin, with too much focus on low risk markets and transactions to the detriment of high-risk areas. Devoting a disproportionate amount of time policing modest entertainment and gift-giving instead of focusing on large government bids, questionable payments to third-party consultants, or excessive discounts to resellers and distributors may indicate that a company’s compliance program is ineffective.” The authors also posit that you may wish to achieve an equally comprehensive view of the problem by looking at the people affected and the barriers to setting up and implementing such a program in your company. They go on to state that “Such knowledge provides the basis for anticipating resource requirements, developing the business case, and identifying the necessary execution capabilities inside and outside the company.”
How Do You Manage Your Risk?
One of the blight’s of a Chief Compliance Officer’s (CCO’s) existence is the perception that there is no measurable Return on Investment (ROI) for a compliance program. The same is often enquired of a corporate legal department, which handles the contracts for all of a company’s business. But I believe that for compliance the perception is wrong. The view should be – how does compliance help a company manage its risk? Every transaction has commercial risk. But dealings with foreign government officials and state owned enterprises bring the additional risk of the FCPA. Moreover, every country has its set of anti-corruption and anti-bribery laws which must be followed. I cannot emphasis this final point too much, particularly after what has happened over the past three months in China. Over 20 western companies have announced they are internally investigating bribery and corruption or have been ‘shocked’ to hear their company’s name announced by Chinese regulatory authorities.
Create the Optimal Innovative Structure
Here the message is that compliance needs to work with its business units to help to integrate the compliance function into the decision making process. The authors suggest the three following components: (1) that compliance has a clear purpose; (2) that there are mutual understandings as to the rights and obligations of both the compliance function and the business unit; and (3) this leads to a strong inter-relationship between the two. This requires the compliance function to understand the business unit function and structure. I believe that risk assessment is a key tool here to help compliance understand not only the product and service offerings but the market as well. However a risk assessment still requires you to create an appropriate compliance program for your company. You need to manage your risks going forward.
Co-Creating with External Stakeholders
This is certainly one area that my Astros completely fail to consider – external stakeholders. Apparently the Astros are only concerned about being the most profitable team of all time by out losing every other team in Major League Baseball (MLB). But fortunately most corporations understand they do not function in a vacuum but in conjunction with others. Those include shareholders, employees, third parties, customers and, I would add, a world of existing regulations. But for the compliance practitioner, I believe that this means working with all such groups can help to build a stronger compliance regime. Clearly, a strong ethical and compliance culture directly supports a strong compliance program. As stated in the FCPA Guidance, “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.” But more than just employees are stakeholders in moving forward within compliance, in today’s world, third parties are also a part of a company’s ongoing compliance solution. Shareholders expect that, at a minimum, the companies which they invest in will follow the rules and design and implement an appropriate compliance system. If one is not in place shareholders can help to create one through the mechanism of a shareholder derivative action. Just as a baseball team has multiple stakeholders, so does a modern, multi-national corporation.
The authors present a lengthy study of several companies which used the five steps discussed above to help create profitable social enterprises. I believe this framework presents a calculus for the compliance practitioner to not only think through the design and implementation of a compliance regime but to pitch such an enterprise to management.
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 firstname.lastname@example.org. © Thomas R. Fox, 2013