The Houston Texans had one heck of a 24-hour period last Saturday. They paid to give away one of their top players, Jadeveon Clowney, to the Seattle Seahawks to save approximately $2.50 as they did not want pay Clowney what he was worth and stubbornly did so by failing to offer him a fair contract. Clowney, an all-star and one of the top edge rushers in the National Football League (NFL) and a former No. 1 pick by the Texans, was traded for a third-round pick and two Seahawk players who were about to be released by the team at final cut-down. But here is the kicker, the Texans agreed to pay over 50% of Clowney’s 2019 salary (now guaranteed) or some $7 million of a total of just over $13 million while Clowney is in a Seattle uniform. The Texans putative General Manager (GM) and head coach Bill O’Brien was no doubt channeling his inner Forrest Gump (stupid is as stupid does) with that move.

Yet as idiotic as the giveaway of Clowney was, it was only the opening move. Later that day, the Texas traded not one No. 1 pick, not two No. 1 picks but two No. 1s and one No. 2 for two players from Miami. The first was Laremy Tunsil, a starting left tackle (i.e. the blind side), a backup receiver, and a fourth and sixth round pick. According to Albert Breer, writing in Sports Illustrated’s MMQB, “barring more big trades, Houston will go through three draft cycles in four years (2018, ’20, ’21) without picks in the first two rounds.”

Why would any self-respecting General Manager (GM) give away at below fire-sale prices and then give away the future? The first thing to note is that Head Coach O’Brien is not a “self-respecting GM” as he engineered the firing of the previous GM Brian Gaine. In June, Gaine was unceremoniously fired, because, according to NFL Network’s Ian Rapoport, “he simply wasn’t good enough.” Yet it took the team’s ownership until June to make this determination, insisting that no one event or decision led to the change; no doubt including successful drafting the few times the Texans had not given draft picks away.

Conor Orr, writing in another edition MMQB, said, “Whose fault is it that we [the Texans] couldn’t protect Deshaun Watson in my only season here—the guy who had no first-round or second-round pick in his first year on the job, or the guy who kept calling designed runs for a quarterback already taking a beating? The team let someone go who didn’t deserve to be fired that way—like a person doing a bad job and not a person who didn’t even have the time and opportunity to build a foundation—seemingly because another person who should be taking equal blame for whatever is wrong believed that a change had to happen.”

Billy Beane (he of Moneyball fame) is once alleged to have said, “If you are in the position you have to do something, you’re screwed.” The Texans certainly put themselves in that position. By failing to sign Clowney, allowing him to refuse to sign the Franchise Tag so they could not trade him to a team that would actually return fair value to the Texans and then giving the King’s Ransom to Miami; the Texans demonstrated that Beane maxim.

What is clear is that the Texans had no strategy. This informs today’s blog post about how a Board of Directors needs to work to incorporate the compliance function into a long-term business strategy of the organization. A Board can do so by engaging with the Chief Compliance Officer (CCO) and compliance function through having a strong Board that is committed to doing business ethically and incompliance with anti-corruption laws.

The first point is to develop a framework for incorporating compliance into your long-term strategy. This framework draws from the State Street Global Advisors’ strategy for sustainability and adapts it to compliance. To set up the framework for evaluation of the compliance function is a three-step process, which you can use to determine how comprehensive your compliance program is as a starting point.

  1. Has the company identified the compliance issues relevant to the Board?
  2. Has the company assessed and incorporated those compliance issues into its long-term strategy?
  3. Has the company communicated its approach to compliance and the influence of those factors on its overall strategy?

From this initial inquiry, you can move into some specific questions that the Board can use to determine the overall state of your company’s compliance program. First, a Board can work to identify compliance issues material to your organization. This can be accomplished with compliance related Key Performance Indicators (KPIs), which a Board should then prioritize to elevate their impact on compliance. A Board should consider these through the lifecycle of a business line or geographic sales area. Next, the Board should work to move compliance into both the long-term strategy for the company and have the CCO detail the long-term strategy for the compliance function.

Drawing from the Department of Justice’s (DOJs) 2019 Guidance, the Board should actively work to incorporate compliance into the long-term capital allocation of the company. Obviously the earlier the investment the better as it brings benefits such as benefits through brand differentiation, lowering the risk profile of the company and improving nimbleness in market responses.

The Board should oversee the incorporate of KPIs into senior management performance evaluations and compensation. Once again building upon the 2019 Guidance, which asks how the company monitors its senior leadership’s behavior and how senior leadership modelled proper behavior to subordinates, the Board should ensure certain systems are in place to quantify or measure performance related to compliance issues, establish performance goals against which they measure compliance achievement and disclose to shareholders the material compliance issues that drive compensation, the specific goals or performance targets that management must achieve and report on the actual performance against established goals to justify compensation payouts.

Finally, the Board should work to communicate the influence of compliance factors on overall corporate strategy by demonstrating how compliance was integrated into the business. Not only is this good from a business perspective and shareholder expectation but it is also, as the 2019 Guidance makes clear, what the government expects is the operationalization of compliance going forward.

The Houston Texans have made clear they have no plan; they are only reacting. No doubt when it all goes horribly wrong Bill O’Brien will be long gone. Yet Billy Beane’s maxim holds true for sports teams as well as commercial businesses. In compliance you need a long-term plan and strategy to implement that plan so that when a regulator comes knocking, you will be ready rather than simply reacting (albeit poorly) like the Houston Texans did over Labor Day weekend.

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, 2019

0 comments