Corporate Culture 1I once worked in a law firm that was headquartered in another city. We fondly referred to ourselves as “in the provinces” since we worked apart from the mothership. In my corporate life I have worked in the corporate headquarters, domiciled in the US, and in a corporate subsidiary a continent and an ocean way from the home office. These postings have given me some understanding of the different perspectives one can have, depending on where one might be working and looking to or from the corporate headquarters.

Stephen Dockery, writing in the Wall Street Journal’s (WSJ) Risk & Compliance Journal, has been exploring the issue of ‘culture’ in organizations as it relates to compliance. He considered such issues as how to measure it, to regulators assessment of it, to pushing it out ‘into the field’. His pieces got me to thinking about the ongoing issue of the transmission of a culture of compliance from a corporate home office out into territories where a company does work overseas. It is certainly one thing for a Chief Executive to espouse that the company is going to do business in compliance with anti-corruption laws such as the Foreign Corrupt Practices Act (FCPA) but when it comes to making your numbers in (you name the high risk geographic location); it may not be the reality on the ground.

One of the evolutions I have observed in anti-corruption compliance is to get compliance out of the corporate headquarters and move it into the DNA of a business. When I began in this field in 2007, compliance was largely lawyer-driven, meaning lots of rules and regulations dictated from the home office down the chain. Being a lawyer, I thought this was appropriate as I just assumed everyone would follow both laws and company rules and regulations. My views on this have evolved. Today, I will take a look at this issue in a two post series.

Based on the above I was therefore intrigued by a recent article in the MIT Sloan Management Review, entitled “Fighting the “Headquarters Knows Best” Syndrome” jointly written by Cyril Bouquet, Julian Birkinshaw and Jean-Louis Barsoux. The thesis of their piece is “When subsidiary managers at global organizations are ignored or constrained by a parochial mindset at headquarters, the whole company can suffer.” The authors found “Many managers have no trouble ticking off the symptoms, including unrealistic demands from headquarters, misguided advice or directives, micromanagement, and a lack of receptiveness to subsidiary contributions and ideas. At subsidiaries, these behaviors lead to a loss of confidence or initiative, defensiveness, reluctance to share information, rivalry for headquarters attention, and careful impression management during visits from headquarters executives.”

Their research has led them to identify several issues in this dynamic, which they call “vertical relations”. Most generally they include lack of attention to emerging regions. Unfortunately those at the top in the US headquarters tend to suffer “from tunnel vision, focusing disproportionately on opportunities, talent, and best practices in established markets. They have a limited understanding of emerging markets and difficulty providing the right quantity or quality of support. Too many visits and over-monitoring can prove as damaging as neglect.” The downward looking foundering is compounded because there are equally detrimental issues when looking back to the corporate HQ because of limited influence in the provinces. Indeed, executives in outside US markets often feel they are at the end of very long and not very straight chain of events and decisions. Such provincially located employees often feel, “Their requests and ideas are unheeded and their ways of operating aren’t considered. Feeling neither involved nor trusted, many subsidiary executives lack the motivation and self-confidence needed to pursue independent initiatives.”

Some of the examples the authors found in their research included that the head office shows a strong bias to investments closer to home, so the money is pumped into the corporate office or at least in the US only. An age-old complaint from anyone who has ever worked in a bureaucracy is that the corporate office is unresponsive to requests, sales leads, or opportunities from the periphery. Another complaint is that there is inevitably a wide gap between the composition of the top leadership team and the global reach of the group as there is usually no one from outside the home continent of the corporate headquarters. When it comes to talented folks from the provinces, often such talent from is not brought to the US or even promoted beyond their regions. Compounding this problem is that the ebb and flow of visits and secondments is exclusively from HQ to subsidiary. Rarely does a company look to the provinces for innovation or new practices because they are assumed to have local relevance only. Finally, and if you have ever been on the receiving end of this one, visits from the US headquarters are always more about HQ demands than subsidiary needs.

Yet a company needs to look more than simply up and down the chain as the authors believe there are horizontal dynamics that can bedevil the situation. It centers around the same technique used by airlines in the US, the hub and spoke system. Regarding this corporate model the authors write, “While the satellites compete for attention from headquarters, they maintain little contact with each other unless it’s orchestrated by the center. There isn’t much discussion of, or support for, efforts in other parts of the world, particularly between core subsidiaries and those on the periphery.” The final point is that “executives at local operations lack the autonomy or status to engage meaningfully with senior local decision makers.”

The authors gave several examples of the lack of appropriate horizontal relations. One is where the subsidiaries have little contact with each other that is not mediated by corporate headquarters. Another is where there are only a “few third-country nationals as subsidiary heads.” There tends to be little awareness of what is going on in non-core subsidiaries and no regular contact with colleagues in other subsidiaries. Finally, if a company finds it difficult to recruit locally, that can be a clear sign in the lack of horizontal relations.

All of these factors are symptoms of too much control by the US corporate headquarters. In the compliance world, this translates into a rules based compliance program that does not emphasize the values based nature of culture. The emphasis on such a top-down rules based approach can clearly get lost in the translation, but, more importantly, it could well appear as a thumb on the back of any employee outside the US region.

Tomorrow, I will review some of the authors’ proscriptions and how they might translate into your spreading your culture of compliance outside the corporate office in the US.

 

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, 2016

Sam SpenceSam Spence died last week. His was not a name that many folks were aware of generally and even in the sports world where he made his greatest mark. Yet he was a prime mover in the explosion of growth by the National Football League (NFL) from the 1960s up to today. What was his role in this? Spence was the composer for the soundtracks to NFL Films. Together with the pioneer and founder of NFL Films, Ed Sabol, his 35-time Emmy decorated son, Steve Sabol, and narrator John Facenda, a/k/a “the Voice of God”, they formed the core of the NFL Films team who worked to put together the story of professional football in America.

As Bruce Weber wrote in his New York Times (NYT) obituary, “Spence and his music helped fashion an identity for the game that made it seem more dramatic and inspiring.” Why was Spence so important to me? It was not the driving beats of today that he selected for his soundtracks but the wide variety of symphonic tunes that were both dramatic and inspiring. I watched NFL Films mostly in the 1970s and years later when I became a symphony aficionado I recognized music I had first heard in the NFL Films presentations. The one that struck me the most was Dvorak’s New World Symphony, which I first heard courtesy of Sam Spence.

The original quartet who started NFL Films is now in the great beyond. I am sure they are all creating some great films and videos for us all.

While Spence’s contributions to NFL Films were not as well known as the others mentioned above, they were a part of the fabric, DNA and what made the presentations so powerful. Indeed his music was so intertwined with the Films it became seamless with the visual presentations. I found this an interesting way to consider the difference in management and leadership.

In the NYT Corner Office section, Adam Bryant interviewed Walt Bettinger, Chief Executive Officer (CEO) of Charles Schwab Corporation, for an article entitled “You’ve Got to Open Up to Move Up”. In this article Bettinger talked about an idea rarely considered by a Chief Compliance Officer (CCO), which is the difference in leadership from management. Most CCOs are technically competent in the Foreign Corrupt Practices Act (FCPA) or other anti-corruption law. Put another way, they are technically competent at the management of a best practices compliance program. Yet they struggle not only to be seen as leaders but also to engage in leadership rather than simply managing.

Bettinger draws a sharp distinction between the two roles. He states the following: “There’s a contractual relationship with your manager. And you can do your job and fulfill the terms of that contract and never really have your heart in it.” He contrasted this with leadership, which he view as “something completely different.” He went on to note, “With leadership, you make a decision every day about whether you choose to follow someone. And you make it in your heart, not your head. The ability to inspire followership is so different than management, and it requires transparency, authenticity, vulnerability and all things that are completely unnatural to you when you are trying to build and achieve and accomplish.” Which does your employee base see you as, in your role as CCO?

As a perquisite for leadership, as opposed management, Bettinger had some interesting thoughts. He said that to be a leader, you have to open up. Moreover, you have to be vulnerable and be ready to share with people. Finally he indicated, “it was more important than anything to share with people the great failures in my life as opposed to the successes.” In other words, you have to get people to trust you.

Channeling his inner Dale Carnegie, Bettinger also spoke about the importance of learning about everyone. He gave a great example of a final exam he took in his final year of college, in a business strategies class. He was trying to maintain a 4.0 grade average and dutifully prepare for the final exam. When he got the test paper, it had one question, “What was the name of the lady who cleans this building?” Of course, Bettinger had no idea and failed the exam. It may seem harsh but it taught him a life-long lesson to know the name of that person in every position he has held since that time. Yet another difference between management and leadership.

As a final note about the difference between management and leadership, Bettinger has what can only be called an unorthodox approach regarding his approach to hiring. He said that one of the things to do is meet a candidate over breakfast. However, he gets there early and will “pull the manager of the restaurant aside, and say, “I want you to mess up the order of the person who’s going to be joining me. It’ll be O.K., and I’ll give a good tip, but mess up their order.”

He does this because he wants to see how the candidate will respond to that simple adversity. He wants to know if they will become upset, frustrated or simply deal with it in the course of the breakfast. Bettinger believes, “It’s just another way to get a look inside their heart rather than their head” because “We’re all going to make mistakes. The question is how are we going to recover when we make them, and are we going to be respectful to others when they make them?”

As a CCO you will be called on for several different roles in an organization. Certainly technical competence as a subject matter expert (SME) in your compliance program is a minimum. Yet never forget that the consumers of compliance are the company employees. The more leadership you show them, using some of the technics subscribed to by Bettinger, can be very useful to help foster that position for you going forward.

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, 2016

Blood on the TracksOn this week in 1975, Bob Dylan’s 15th studio album, Blood on the Tracks, reached the Number 1 album slot on the Billboard charts. This was in spite of no song rising above the 31st slot on the single charts. It came out in the final semester of my senior year in high school so its personal nature was very poignant to me. Two interesting facts were that Phil Ramone was an engineer on the recording sessions and Buddy Cage played steel guitar (shout out to Chris Bauer). While I probably enjoyed it because I found it to be the most accessible Dylan album to that point, the critics most generally praised it as well, finding it to be his most reflective. Indeed his son Jakob has been quoted as saying, “When I’m listening to Blood On The Tracks, that’s about my parents.”

Last week we had a second Foreign Corrupt Practices Enforcement Action (FCPA) from the Securities and Exchange Commission (SEC). This one involved the California based entity SciClone Pharmaceuticals, Inc. (SCLN) which was assessed a penalty of $2.5MM, profit disgorgement of $9.42MM and prejudgment interest of $900K for a total penalty of $12.8MM to settle SEC charges that it violated the FCPA when employees in China pumped up sales for five years by making improper payments to professionals employed at state health institutions. The penalty was for the conduct of its Chinese subsidiary, SciClone Pharmaceuticals International Ltd.

Many of the allegations reached back over 10 years, to 2005, when the Chinese subsidiary created a special VIP program for high volume customers called health care professionals (HCPs). According to the SEC Cease and Desist Order, this special program provided “weekend trips, vacations, gifts, expensive meals, foreign language classes and entertainment” to selected VIPs. It was described internally as “luring them with the promise of profit.” Clearly not the tone a Chief Compliance Officer (CCO) would want to see from his or her top salespersons. Oops, SCLN did not have a Chinese compliance officer at the time of the incidents in question because it did not have a compliance function at the company, so I guess that tone issue never came up.

Clearly the VIP program went beyond the pale as it provided for vacations for both the VIPs and their family members. But this program also had less egregious activities such as golf tournaments followed by beer drinking. However, the subsidiary’s conduct became more nefarious in 2007 when it hired “well-connected regulatory affairs specialist (Specialist) to facilitate” the application of certain licenses the company needed to distribute a new product in China.

This Specialist originally intended to send two foreign officials who were responsible for approving this license to Greece for an academic conference related to this new medical product. However visas could not be obtained in time so “the Specialist instead provided them at least $8,600 in lavish gifts.” In addition to the foregoing, the company sent many other Chinese government officials to in the US, Japan and the Chinese resort island of Hainan where “significant sightseeing was involved” in addition to an educational component.

The company even managed to fall prey to the well known Chinese bribery conduit of travel agencies by failing to conduct any due diligence on a number of travel vendors who were used to funnel bribes and improper gifts and trips involving improper sightseeing and tourist expenditures. Then again this may have been intentional given the overall posture of the subsidiary and its parent. Nevertheless it was another compliance program failure.

Finally, as part of SCLN’s internal investigation, after the discovery of all of the above, an “internal review of promotion expenses of employees from 2011 to early 2013. This review found high exception rates indicating violations of corporate policy that ranged from fake fapiao, inconsistent amounts or dates with fapiao, excessive gift or meal amounts, unverified events, doctored honoraria agreements, and duplicative meetings. A portion of the funds generated through the reimbursements were used as part of the sales practices described above that continued through at least 2012.”

Noting the foregoing conduct, the SEC Order held that SCLN did not have the appropriate internal controls in place for any type of FCPA compliance program. Both the subsidiary and parent engaged in false accounting entries by “recording the payments to health care providers as sales, marketing, and promotional expenses.” So SCLN violated both prongs of the Accounting Provisions of the FCPA , those being the accounting and internal controls provisions.

However, SCLN did make a come back which led to the relatively low fine and penalty. As noted in the Order, the company took steps, “to improve its internal accounting controls and to create a dedicated compliance function. These include the following: (1) hiring a compliance officer for its China operations; (2) undertaking an extensive review of the policies and procedures surrounding employee travel and entertainment reimbursements; (3) substantially reducing the number of suppliers providing third-party travel and event planning services; (4) improving its policies and procedures around third-party due diligence and payments; (5) incorporating anti-corruption provisions in its third-party contracts; (6) providing anti-corruption training to its third-party travel and event planning vendors; (7) disciplining employees (and their managers) who violate SciClone’s policies; and (8) creating an internal audit department and compliance department.”

Lessons Learned

Mike Volkov has called the SCLN enforcement action, “A Textbook Case of FCPA Violations for Gifts, Meals, Entertainment and Travel”. I would add that it is the textbook case for CCOs and compliance practitioners to study for lessons learned. The first thing is to review your own compliance program to see if any of these anomalies that SCLN engaged in appear in your Chinese operations or any other high risk areas. Beyond these general reviews, I would suggest a more detailed transaction monitoring and data analytics approach, which would involve:

  • Tracking not only the expenses paid for gifts, travel and entertainment by employees but tying this information back to the foreign government officials who received these benefits;
  • Look to any third parties who may have been involved in any of the foregoing, such as the ubiquitous Chinese travel agencies or the more iniquitous ‘Specialist’ who might be involved in facilitating license approvals;
  • Consider the positions which were lavished with such gifts, entertainment or travel. Did any of these persons make any approvals or decisions which allowed your company to obtain or retain business immediately before or after such treatment?

Finally, consider the thoughts of Scott Lane, Executive Chairman of the Red Flag Group, where he described the line of sight a compliance practitioner needed. Lane described the data points that a CCO or compliance practitioner should have visibility into going forward. By looking down a straight line at all of this information derived from the SCLN enforcement matter, the compliance function can identify measures to improve any high risk issues before they move to FCPA violations. While gifts, travel and entertainment expenses might be on your company’s radar for compliance department pre-approval, if they are spent on one or two government officials who may influence deal making authority regarding your company’s business it may well merit a more detailed analysis.

 

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, 2016