Today I return to the original Star Wars movie entry, Episode IV – A New Hope. I do not think I can say too much about the movie, which has not been already said or written, but it is still one of my all time favorites. It still resonates with me and I still watch it more than occasionally. When it came out in 1977, my father remarked, with great prescience, that it would change the way movies are made and seen. In short, it would change everything about the Hollywood movie-making business model. I think he was referring to the use of special effects but his statement had more than a ring of Carnac the Magnificent. Jay Rosen explains these changes in our first chapter of May the Podcast Be With You, posted on Tuesday, December 15. So check out Episode 220 of the FCPA Compliance and Ethics Report for Jay’s Hollywood insider look at the original Star Wars movie.
It is this disruptive nature of the Star Wars franchise that I will focus on today as it relates to Foreign Corrupt Practices Act (FCPA) compliance. One of the key things the Department of Justice (DOJ) has communicated over the past few months is the importance of doing compliance rather than having a paper compliance program in place. In remarks last month from Assistant Attorney General Leslie Caldwell and DOJ Compliance Counsel Hui Chen, they both emphasized some of the factors they will consider to help determine if a company has a best practices compliance program in place in the context of a FCPA enforcement action.
All of this was driven home to me in an article I read in the Harvard Business Review (HBR), entitled “What Is Disruptive Innovation?”, by Clayton M. Christensen, Michael E. Raynor and Rory McDonald. The authors were concerned that many of the commentary around the phrase ‘disruptive innovation’ were “in danger of losing their usefulness because they’ve become misunderstood and misapplied.” To answer this critique, the authors revisited the central tenets to the theory and how it had developed over the past 20 years. In doing so they detailed three key elements of disruption theory, which I have adapted to the compliance context.
The first is that compliance is a process. While this may seem as about the most self-evident statement one can make, as late as last week, I was contacted by someone who wanted an ‘off the shelf’ compliance package. They wanted me to do a couple of interviews of senior management and they put in some canned software program so they could claim they had a compliance program.
This attitude demonstrates the continuing battle the DOJ and Securities and Exchange Commission (SEC) face when communicating their expectations around compliance programs. Compliance programs should evolve as business risks change. Just as disruptive innovation tends to focus on process, your compliance program should focus on your overall business process to be successful.
The second key point is that Compliance 3.0 is very different from compliance programs of the past decade. As compliance programs have matured and the structural changes brought about in the Compliance 2.0 model, as articulated by Donna Boehme and others, we have now moved on to Compliance 3.0 where compliance is put into the fabric of an organization. The compliance function is moving from a solutions shop where all compliance functions are centered in the legal or compliance department to a process function where the front line business team can use technology and other tools to operationalize compliance. DOJ Compliance Counsel spoke to this concept in her recent remarks around how well a company would operationalize compliance by incorporating the business functions inputting to compliance around appropriate internal controls. The authors point to new business models as disruptive and I think this concept translates into how compliance can be burned into the DNA of an organization rather than simply sitting in the corporate office in the US.
The third point is that not all disruptive innovations succeed. Here the authors write that disruption is only one step in both the creative and growth process. Throughout their article, they discuss Uber in the context of a disruptive business. However, Uber uses the smart phone platform, coupled with a superior rider experience as a part of its business model. For the compliance practitioner, I think the key concept is what SCCE President Roy Snell says are the three goals of any compliance program; to prevent, find and fix issues. You could also plug in here McNulty’s Maxims (What did you do to prevent it? What did you do to detect it? What did you do after you found out about it?).
This is why any successful compliance program should have multiple levels of oversight built into it. If something does slip through, a level of oversight should be in place to review it and hopefully prevent it. Consider the BHP Billiton’s FCPA enforcement action. It involved gifts, travel and entertainment around the 2008 Beijing Olympics. The issue was not that foreign officials were feted at the event. The issue that got the company into trouble was that they did not perform proper oversight over their carefully crafted program. A similar issue was seen in the Lily FCPA enforcement action where charitable donations were approved by an oversight committee without any substantive review and distributor commission rates were approved outside the standard range without appropriate review.
Disruption innovation has come to the compliance arena. One of the best examples is Louis Sapirman, the Chief Compliance Officer (CCO) at Dun & Bradstreet, who has incorporated not only social media tools but also the concepts of two-way communications into his company’s compliance program. Another that springs to mind is Scott Lane, Chief Executive Officer (CEO) of the Red Flag Group who was one of the first and certainly most consistent commentators on the use of your own company’s data to facilitate a straight line of sight by a CCO or compliance practitioner into transactions needing more detailed reviews.
As many compliance practitioners are lawyers, we are naturally reticent to embrace such change, however I think the pronouncements of the DOJ this year have made it even clearer the need for continued evolution of anti-corruption compliance going forward.
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© Thomas R. Fox, 2015