Last year brought several FCPA enforcement actions where the underlying due diligence performed on third parties was insufficient. While many companies have gone to automated due diligence as a part of their compliance program, in many cases that is insufficient. In this episode I visit with Scott Shaffer, Managing Director of the Kreller Group and Tom Engelhart, Director at the Kreller Group. We discuss the need to have a human perform substantive due diligence and perform an adequate evaluation.  In this podcast we discuss:

  1. 2018 saw two FCPA enforcement actions this past year which focused on due diligence, Kinross and Panasonic Avionics. What do these enforcement actions communicate about the need for the human element in due diligence?
  2. How can a compliance professional evaluate when this human element is needed in due diligence?
  3. How does a compliance profession think through a high-risk entity, person or situation where enhanced due diligence is appropriate?
  4. Is due diligence a one-time or an ongoing process?

For additional reading, see Scott Shaffer’s blog post on Due Diligence Will Always be a Human Skill on the FCPA Blog.

See Scott Shaffer’s professional profile here.

See Tom Engelhart’s professional profile here.

For information on the Kreller Group, click here.

Over the past few blog posts, I have been exploring a recent article in Harvard Business Review (HBR)  by Gary P. Pisano, entitled “The Hard Truth About Innovative Cultures”. Today, I will try and wrap it together for the Chief Compliance Officer (CCO) and compliance professional who needs to have innovation in compliance function or lead innovation in a corporate. For the CCO the key will be leadership throughout the process, which, as Pisano intones, is hard.

While there are those who do not believe that a compliance function should be anything other than a paper, check the box compliance program, out in the real world, this is recognized as wholly insufficient to create an effective compliance program. However, even inside a corporation there can be resistance to innovation in compliance as many other corporate functions fear losing influence and power to the compliance function. The sad reality is that many corporations allow such cultures to flourish and those are usually the ones who fall prey to ethical lapses leading to civil lawsuits and criminal charges under anti-corruption laws such as the Foreign Corrupt Practices Act (FCPA).

Pisano phrases it somewhat differently writing, “All cultural changes are difficult. Organizational cultures are like social contracts specifying the rules of membership. When leaders set out to change the culture of an organization, they are in a sense breaking a social contract. It should not be surprising, then, that many people inside an organization—particularly those thriving under the existing rules—resist.” As a CCO, you must overcome this reticence to make such changes. He believes there are three key obstacles you will have to overcome to move forward in this process.

First, because “innovative cultures require a combination of seemingly contradictory behaviors, they risk creating confusion.” If a project fails how should you react? Is this the time to celebrate failure or was there input from the experience that can form the basis of another iteration? Simply put, did you learn from the failure or was it so catastrophic that heads must role? Pisano notes, “Without clarity around these nuances, people can easily get confused and even cynical about leadership’s intentions.”

Second, as we have seen in this blog post series, while some corporate behaviors required for innovative cultures are very likable and easy to embrace; others are viewed with greater skepticism. Many lawyers think of innovation as a free-for-all. However, many others in an organization see the rational legal mind as an unnecessary constraint on creativity. These tensions may lead those who take comfort in the anonymity of consensus not welcoming a move towards personal accountability. While some in your organization will adapt readily to the new rules others will not thrive. As the leader, you must be ready to intercede if required.

Third, like all corporate culture, an innovative culture tends to be systems of interdependent behaviors. This means an innovative change cannot be implemented in a piecemeal fashion. The behaviors which make culture complement and reinforce one another. Pisano believes this means, “Highly competent people will be more comfortable with decision making and accountability—and their “failures” are likely to yield learning rather than waste. Disciplined experimentation will cost less and yield more useful information—so, again, tolerance for failed experiments becomes prudent rather than shortsighted. Accountability makes it much easier to be flat—and flat organizations create a rapid flow of information, which leads to faster, smarter decision making.”

Just because something is difficult does not mean you should forestall doing it. While leading innovation in compliance may not rise to the Jack Kennedy level of “We choose to go to the Moon in this decade and do the other things, not because they are easy, but because they are hard”, there is room for maneuver. US financial regulators recognized this last December when they released the “Joint Statement on Innovative Efforts to Combat Money Laundering and Terrorist Financing”. This document stated, in part, “The Agencies recognize that private sector innovation, including new ways of using existing tools or adopting new technologies, can help banks identify and report money laundering, terrorist financing, and other illicit financial activity by enhancing the effectiveness and efficiency of banks’ BSA/AML compliance programs. To assist banks in this effort, the Agencies are committed to continued engagement with the private sector and other interested parties.”

Clearly the regulators recognize that it is regulatory interest for innovation in compliance to occur. While this statement was on anti-money laundering compliance innovation, I believe the same will hold true from the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) in anti-corruption compliance. Simply put, innovation in compliance is in everyone’s interest, the regulators and businesses. While it may be hard, every CCO needs to be ready, willing and able to lead innovation in their organization.

In addition to Pisano’s article, you should check out his interview on the HBR IdeaCast by clicking here.

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

The Texans stink up their playoff game, the Bears double-doink their way out, the Seahawks lose but have a great backdoor cover, while in the college ranks Clemson absolutely destroys the previously undefeated Crimson Tide; all while the Trump Shutdown continues into its 3rdweek. Tom and Jay are back in the saddle for a look at some of this week’s top compliance and ethics stories.

  1. Nissan and Carlos Ghosn are back in the news. Nissan is investigating other senior execs (Financial Times). Ghosn says the Board approved all his illegal conduct, making it legal. (NYT) His lawyers try to get him bail. (WSJ) Where is the Magna Carta when you need it (Financial Times-Op-Ed)
  2. Will Credit Suisse skate liability in the Tuna Bond scandal? Brooke Masters opines in in the Financial Times.
  3. OFAC goes after Venezuelans for an embezzlement scheme. Jonathan Rusch discusses it his great blog Dipping Through Geomotries. Ian Talley reports in the Wall Street Journal.
  4. What are some of the top elements for a culture assessment? Rebecca Walker writes in the Compliance Program Assessment Blog.
  5. Want to know how to prevent fraud by using effective internal controls. Jonathan Marks gives his secret sauce on Board and Fraud.
  6. What does NAFTA 2 mean for the fight against corruption. Collman Griffin, Marc Alain Bohn and Richard Mojica report in the FCPA Blog.
  7. The DOJ Fraud Section see hike in individual prosecutions. What does it mean? Adam Dobrik considers in GIR.
  8. What will be the impact of the Yates Memo? Kelly Swanson explores in GIR.
  9. New pharma code bans all gifts. Dana Elfin reports in BNA.
  10. Tom is joined by Amii Barnard-Bahn with a 5-part podcast series on the top corporate scandals from the Board perspective on Across the Board. Check out the following: Part 1-CBS and Les Moonves; Part 2-the 1MDB and Goldman Sachs; Part 3– Facebook;Part 4-Tesla and Elon Musk; Part 5-Nissan and Carlos Ghosn. The podcast is available on multiple sites: the FCPA Compliance Report, iTunes, JDSupra, Panoplyand YouTube. Soon to be on Spotify and Corporate Compliane Insights.
  11. Start your new year off with the Compliance Evangelist in the Compliance Master Class training. The first session, hosted by Baker Tilly, will be in San Francisco on January 28 and 29. For information and registration details, click here.

 

For more information on how an independent monitor can help improve your company’s ethics and compliance program, visit our sponsor Affiliated Monitors at www.affiliatedmonitors.com.

Over the past few blog posts, I have been exploring a recent article in Harvard Business Review by Gary P. Pisano, entitled “The Hard Truth About Innovative Cultures”. Pisano says the conventional wisdom is innovative cultures are generally depicted as pretty fun, being psychologically safe, highly collaborative, and nonhierarchical. But his research found that they are hard to create and sustain because the easy-to-like behaviors that get so much attention are only one side of the coin. They must be counterbalanced by some tougher and, frankly, less fun behaviors. In this piece, I finish with the key elements needed to foster success around innovation. Tomorrow, I will try and wrap it together for the Chief Compliance Officer (CCO) and compliance professional who needs to be innovative or lead innovation in a corporate compliance function.

Yesterday, we considered Pisano’s thesis that fostering innovation is very misunderstood. Corporate attributes such as a tolerance for failure and a willingness to experiment must be tempered with “intolerance for incompetence, rigorous discipline, brutal candor, a high level of individual accountability and strong leadership.” As a CCO, your role is to manage these tensions, addressing uncertainty and confusion with decisiveness and transparency. If you do not, the innovation you seek will likely fail.

Psychologically safe but brutally candid

Here the author says that employees must feel safe to speak up. CCOs know having a speak up culture is one of the best ways to have an ethical culture. This point directly ties to correlative findings in Associate Professor Stephen Stubben and Assistant Professor Kyle Welch’s seminal work “Evidence on Use and Efficacy of Internal Whistleblowing Systems”.An employee who trusts their organization enough to raise his or her hand to report unethical conduct will be more likely to raise their hand to make suggestions to make the company run more efficiently and, at the end of the day, more profitably.

Pisano extends this insight to “Psychological safety is an organizational climate in which individuals feel they can speak truthfully and openly about problems without fear of reprisal. Decades of research on this concept by Harvard Business School professor Amy Edmondson indicate that psychologically safe environments not only help organizations avoid catastrophic errors but also support learning and innovation.”

But this point is more than being willing to or even raising your hand. It is being willing to accept the same critiques and criticism that you will dish out in the corporate setting. Pisano writes, “In some organizations, people are very comfortable confronting one another about their ideas, methods, and results. Criticism is sharp. People are expected to be able to defend their proposals with data or logic. In other places, the climate is more polite. Disagreements are restrained. Words are carefully parsed. Critiques are muffled (at least in the open). To challenge too strongly is to risk looking like you’re not a team player.” However, when it comes to innovation, candid wins out every time.

Pisano ends this section with an apt quote about General Dwight D. Eisenhower, from biographer Geoffrey Perret, who wrote that the General said before D-Day, “I consider it the duty of anyone who sees a flaw in this plan not to hesitate to say so. I have no sympathy with anyone, whatever his station, who will not brook criticism. We are here to get the best possible results.”

Collaboration with individual accountability

Here Pisano directly hits at one of the key issues in compliance. Unfortunately collaboration is often a “poison for rapid decision making”. To remedy this, he says the answer is to pair accountability where individuals are not only expected to make decisions but own the consequences of those decisions. Your organization can have both attributes as there can be a committee review but specific individuals are charged with making decisions. Pisano writes, “Accountability and collaboration can be complementary, and accountability can drive collaboration. Consider an organization where you personally will be held accountable for specific decisions. There is no hiding. You own the decisions you make, for better or worse. The last thing you would do is shut yourself off from feedback or from enlisting the cooperation and collaboration of people inside and outside the organization who can help you.”

As a CCO you should facilitate this culture in your organization by publicly holding yourself accountable with your compliance team. It also takes leadership courage because if you point back to specific employees in your compliance department, it could well stifle all risk taking going forward. If that happens the entire compliance function will be worse off and it will more than negatively impact the perception of compliance within your organization.

Flat but strong leadership

Culturally flat organizations provide many opportunities for talented employees to make decisions. Indeed this can form part of the basis for a more fully operationalized compliance program throughout a company, beyond simply the compliance function. This is because “Culturally flat organizations can typically respond more quickly to rapidly changing circumstances because decision making is decentralized and closer to the sources of relevant information. They tend to generate a richer diversity of ideas than hierarchical ones, because they tap the knowledge, expertise, and perspectives of a broader community of contributors.”

Yet the key in flat organizations is strong leadership which provides “clear strategic priorities and directions.” Pisano cautions that this is a balancing act and requires “a deft hand” by leadership. He writes, “Getting the balance right between flatness and strong leadership is hard on top management and on employees throughout the organization. For senior leaders, it requires the capacity to articulate compelling visions and strategies (big-picture stuff) while simultaneously being adept and competent with technical and operational issues. For employees, flatness requires them to develop their own strong leadership capacities and be comfortable with taking action and being accountable for their decisions.”

Tomorrow I will conclude with how the CCO should lead the organization’s journey for innovation in compliance.

In addition to Pisano’s article, you should check out his interview on the HBR IdeaCast by clicking here.

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

I am in the midst of exploring other facets of innovation in compliance and why many claim it is so hard. Yesterday, I paid honor to Southwest Airlines co-founder Herb Kelleher who brought innovation to the formerly staid airline industry. Over the next couple of blog posts, I want to consider an article in the most recent Harvard Business Review by Gary P. Pisano, entitled “The Hard Truth About Innovative Cultures”. Pisano says the conventional wisdom is innovative cultures are generally depicted as pretty fun, being psychologically safe, highly collaborative, and nonhierarchical. But his research found that they are hard to create and sustain because the easy-to-like behaviors that get so much attention are only one side of the coin. They must be counterbalanced by some tougher and, frankly, less fun behaviors… “Unless the tensions created by this paradox are carefully managed, attempts to create an innovative culture will fail.”

In this piece Pisano’s thesis is that fostering innovation is very misunderstood. Many corporate leaders believe it is about having a speak up culture where there is a tolerance for failure and there is collaboration. His research found that these elements are only table stakes to get into the innovation game. Corporate attributes must be tempered with “intolerance for incompetence, rigorous discipline, brutal candor, a high level of individual accountability and strong leadership.” As a Chief Compliance Officer (CCO), your role is to manage these tensions, addressing uncertainty and confusion with decisiveness and transparency. If you do not, the innovation you seek will likely fail.

Tolerance for Failure ≠ Tolerance for Incompetence

As innovation involves the exploration of uncertain and unknown terrains, it is not surprising that a tolerance for failure is an important characteristic of innovative cultures. It would appear that bringing rigor to any project would be deemed mandatory. Yet, as Pisano notes, many organizations fall short on this requirement. The primary reason is that “a tolerance for failure requires having extremely competent people. Attempts to create novel technological or business models are fraught with uncertainty. You often don’t know what you don’t know, and you have to learn as you go. “Failures” under these circumstances provide valuable lessons about paths forward. But failure can also result from poorly thought-out designs, flawed analyses, lack of transparency, and bad management.”

While a badly engineered innovation project can certainly bear a high financial cost, such a failure in the compliance realm can have more catastrophic results. As a project leader, a CCO should be able to “articulate clearly the difference between productive and unproductive failures: Productive failures yield valuable information relative to their cost. A failure should be celebrated only if it results in learning. (The cliché “celebrating failure” misses the point—we should be celebrating learning, not failure.) A simple prototype that fails to perform as expected because of a previously unknown technical issue is a failure worth celebrating if that new knowledge can be applied to future designs.”

This further requires a CCO, as the project leader, to set expectations of performance. While the failures of team members in this area should not necessarily lead to termination, it may warrant reassignment from the innovation project. This can be particularly true of those compliance professionals skilled in qualitative analysis. If the project requires a quantitative bend, they might not be the right person for the project, yet that does not diminish their worth in the compliance function.

Highly disciplined experimentation

Any innovation will require some experimentation but as Pisano writes, “Discipline-oriented cultures select experiments carefully on the basis of their potential learning value, and they design them rigorously to yield as much information as possible relative to the costs. They establish clear criteria at the outset for deciding whether to move forward with, modify, or kill an idea. And they face the facts generated by experiments. This may mean admitting that an initial hypothesis was wrong and that a project that once seemed promising must be killed or significantly redirected. Being more disciplined about killing losing projects makes it less risky to try new things.”

He points to the example of the company Flagship Pioneering for four key insights around experimentation in the innovation process. First, do not run experiments to validate ideas but rather use experiments to uncover flaws in your innovation ideas. Second, take a lean approach both in funding and length of time for experiments so that it is easier to walk away from those which fail. Third, the data derived from the experiment is sacrosanct. Fourth, be disciplined so that if the data derived from the experiment shows the innovation idea will not work, move on.

The author cautions that “experimentation is a balancing act.” You certainly want to encourage employees to test the envelope. Yet even with data, the answer may not always appear as straight black and white. Judgments will be required to determine which ideas to move forward with. As the CCO, you will need to marshal a wide array of factors to decide which ideas you proceed with and which ones you walk away from.

Tune in tomorrow when we continue this exploration.

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