The indictments last week of executives from Takata and Volkswagen roiled many in the business world and ethics and compliance arena. Coming on the heels of the Wells Fargo scandal, one might wonder how corporations can stop the clear ethical lapses which led to these corporate disasters. Let us assume that these corporations were not headed by the type of crooks which led Houston based Enron or WorldCom or any of the other corporations laid low by the accounting scandals of the early 00’s.

Interestingly, there was an article in a recent Harvard Business Journal (HBJ) online publication by Christopher McLaverty and Annie McKee, entitled “What You Can Do to Improve Ethics at Your Company”, which I recommend to every compliance practitioner. The authors surveyed C-suite executives and noted, “More often the dilemmas were the result of competing interests, misaligned incentives, clashing cultures.” Based on this study and their prior work, the authors noted three major obstacles to ethical behavior.

Initially was the issue of corporate change. The authors stated, “Companies can warp their own ethical climate by pushing too much change from the top, too quickly and too frequently. Leaders in the study reported having to implement staff reduction targets, dispose of big businesses in major markets, and lead mergers and acquisitions. Some of these activities included inherent conflicts of interest; others simply caused leaders to have to act counter to their values (loyalty, for example). Many leaders felt poorly prepared for the dilemmas they faced and felt compelled to take decisions they later regretted.”

The second was the age old dilemma of compensation where incentives tended to drive certain behaviors or, as the authors stated, “People do what they are rewarded to do, and most leaders are rewarded for hitting targets.” Of course the most recent example is Wells Fargo where employee compensation was based solely on the number of accounts they opened. Yet such incentive based behavior was not limited to front line employees as the authors stated, “The lure of incentives are a problem in boardrooms too: Bonus payments and executive share schemes are often based on short-term business metrics, which can be counter to long-term success.”

Finally, was an area which may require a Chief Compliance Officer (CCO) or compliance practitioner to think through several different calculi; cross cultural differences. Obviously some countries have gift giving cultures but this is more than simply the value of a gift to give at Christmas, it involves cultures where gift giving may be a part of the overall business relationship. The authors cited examples such as “closing a sales office in Japan, breaking a verbal promise made during after-work drinks in China, or ignoring “sleeping” business partners in a Saudi Arabian deal, all of which have cultural and ethical components.”

An interesting insight was teaching employees how to understand what matters in an organization. This is not simply the written Codes but how things really work. The authors posited three questions: (1) How are employees paid? Obviously a compensation plan is a critical benchmark. If it is solely based on ‘eat what you kill’, focusing on the short term, it may presage problems down the road. (2) Who gets promoted and why? This is not simply whether the high producer gets promoted but how about those who speak up and raise ethical issues. Are they subtly (or not so subtly) discriminated against or held back from promotion? (3) How do employees feel about their organization? Although it seems straight-forward, if your employees are disengaged or worse yet, ashamed about your company, you might be an ethical time bomb waiting to happen.

The authors then turned to initiatives that the interviewees had successfully used in their own organizations to improve the ethical climate. While noting that there is some importance in the corporate governance documents, such as a Code of Conduct and policies and procedures, the authors averred “Companies become ethical one person at a time, one decision at a time.” This means employees need to understand their organizations underlying culture. They stated, “Self-awareness enables you to build and strengthen that inner compass. Organizational awareness enables you to identify the forces in your company’s culture and processes that could drive you and others to do the wrong thing. You also need emotional self-control: it takes courage to step away from the crowd and do the right thing.”

To have such courage, the authors noted many employees who did speak up had a personal network which operates as “an informal sounding board and can highlight options and choices that the leader may not have considered. When making ethical decisions, it’s important to recognize that your way isn’t the only way, and that even mandated choices will have consequences that you must deal with.” This is yet another reason for the breaking down of silos in a corporate organization because “The challenge is that most leaders have networks full of people who think and act like them and many fail to seek out diverse opinions, especially in highly charged situations. Instead, they hunker down with people who have similar beliefs and values. This can lead to particularly dire consequences in cross-cultural environments.”

Finally, and perhaps most intuitively, is speaking up. Here business leaders must encourage not only a speak up culture but also one of no retaliation. But it is more than this as Vanessa Rossi, FCPA Due Diligence Counsel at Baker Hughes Inc. noted in a panel discussion to the Greater Houston Business and Ethics Roundtable, it is more tones at the tops as for many employee’s senior leadership resides in the form of their direct manager. The authors phrase it as “If you find you need to speak up, there will be a number of choices to be made. Do you talk to the boss? Consult with peers? Work with advisory functions such as legal, compliance or human resources? You can draw on your personal network for support and guidance on the right way forward within the context of your unique situation.”

Ethics and compliance blend together in the corporate world. It is not just the responsibility of CCOs and compliance practitioners but of senior managers to support those employees who want to do the right thing. While written protocols are significant in both detection and prevention, one should never lose sight of a corporate culture as a way to positively impact your workforce and company 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, 2017

It is time to give a shout out to one of Houston’s hometown hero’s, the Houston Rockets. Until the Houston Dynamos came along, they were the only professional sports franchise to bring a championship to Houston. They brought two actually, winning the National Basketball League (NBA) crown in 1994 and 1995. Since that time it is has been a dry hole, with the Rockets only once advancing to the Western Conference finals.

However, this year the Rockets have the best record in the NBA since December 1, with a sterling 17-2. This includes road wins over the Spurs, Thunder and Warriors. Not too bad a trifecta. They are led again by a much rejuvenated James Hardin (Fear the Beard) as point guard who is in the conversation for league Most Valuable Player (MVP). This all began with the hiring of offensive guru Mike D’Antoni as coach. While I, like many others, was skeptical, it has turned out so far as an inspired choice by General Manager (GM) Daryl Morey. Morey was one of the first NBA GM’s who focused on saber metrics and is fearless in trying out new concepts, new ideas, new players or coaches who may not seem to fit the traditional NBA profile. Morey keeps the big picture goal of bringing a title back to ‘Clutch City’ yet again.

I thought about Morey, the Rockets and a best practices compliance program when I read a recent article in the New York Times (NYT) Corner Office column by Adam Bryant, where he profiled Mike Tuchen, Chief Executive Officer (CEO) of the software vendor Talend, in a piece entitled “Watch the Road, Not the Wipers. I found the article had some very interesting implications for any Chief Compliance Officer (CCO) or compliance practitioner.

An early lesson for Tuchen was to focus on what he could control, not what he could not. He learned this lesson in college crew, he was undersized both in weight and height from his teammates. He said, “I had to figure out how I could make myself as efficient as possible, pound-for-pound. I had to make sure that every ounce I had was going to be as effective as I could be. So I asked, what could I do to make my diet as effective as possible? What could I do from a training perspective to work harder than the other guys?… That approach, focused on results with incredibly detailed measurement and course correction when needed, is so transferable to a work environment.”

As a CCO you are required to use the tools at hand. If you do not have enough head count or budget (and who does) use what you can more effectively. You may even be able to outsource more mundane compliance tasks to vendors which supply such services at a cost much reduced from your employee cost. As usual, you are only limited by your imagination.

Another key lesson Tuchen learned from crew was to stay focused and stay calm. He said that “When you’re on the water, you’ve got waves, wind and whatever else is going on. You can choose to either focus on that and use it as an excuse later on or ignore it.” His rowing coach phrased it another way, “When you’re driving and rain is pouring down, with the windshield wipers going, you can either watch the windshield wiper or you watch the road. Which is going to be more successful? That was just a fabulous reminder about staying focused and calm.”

Tuchen had an approach to leadership which resonated with me and I think every CCO should consider. He believes there are three basic components to leadership. First “is getting the right team together and having it really be a team, who have shared cultural values and who work together and support each other. It’s not just about having the right people.” For any CCO, this is critical with the disparate elements you need to have in every effective compliance program. These elements can be from Human Resources (HR) to IT to Internal Audit, to Accounting and Finance, to Internal Controls, to Legal and beyond.

The second is to “have a strategy of how you’re going to win. This is the chess match part of being a” business leader. Every CCO should have a one, three and five-year strategic plan going forward, all based upon ongoing risk assessments. As your company matures, grows and expands, your compliance program should do so as well. It also leads to the documentation being ready if or when the regulators coming knocking and a road map in annual budgetary requests.

Finally, is execution. As Baker Hughes Inc. (BHI) CCO Jay Martin says, execution is not only where the rubber meets the road in compliance but it is what distinguishes an effective compliance program from a paper program. Tuchen said it’s “about having a clear set of goals, with everyone aligned around them. And we have a scorecard that we share with the board and the whole company each quarter, and it shows red, green and yellow for our progress on each of the goals.” Execution can tie into your strategic plan but you must execute on that plan for your compliance program to be effective.

As a CCO you will probably be asked to assist in hiring employees for your compliance department or interviewing potential senior management candidates from the compliance perspective. In this regard I thought Tuchen’s thoughts on hiring were pertinent. When he interviews he noted, “The first questions are always going to be about management and leadership style. And I’ll ask a number of open-ended questions about what’s important to get right as a leader. Some people will talk about the people on the team and the best way to motivate them. The answers that kind of scare me are from candidates who talk about people as if they’re something on a spreadsheet. Leadership and management are all about people.” Clearly for Tuchen, leadership is about people and this should be so for any CCO who is interviewing as well.

Next Tuchen said he wants “to make sure that you’re resilient, because things don’t always go the way you want them to. So I’ll ask questions like, what’s the hardest problem you’ve ever solved? Why was it hard? What did you do uniquely well that someone else wouldn’t have been able to do, and why?” This is clearly appropriate for any CCO to inquire into for a new hire.

I found Tuchen’s thoughts on leadership very useful for any CCO to consider and remember to always keep your eyes on the road not the wipers.

 

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, 2017

to-sir-with-loveI continue my tribute to those who have recently passed away and today I leave the world of music to move to the world of literature with a name you will probably not recognize, E. R. Braithwaite. You will, however, recognize his most famous memoir “To Sir, With Love” which was made into a film in 1967 starring Sidney Poitier and who’s soundtrack included the singer Lulu’s hit single of the same name.

As noted in his New York Times (NYT) obituary, “The book chronicled his efforts — as a courtly, Cambridge-educated military veteran who had been denied employment as an engineer because he was black — to motivate a group of unruly adolescents raised in a slum in early-1950s Britain, which was still slowly recovering from the austerity of the war years. The students’ antisocial behavior, casual racism, penchant for violence and, worst of all, self-hatred horrify the new teacher, whose colleagues expect little of the pupils.”

Yet through his unorthodox teaching methods he wins the respect and trust of his students. I was surprised to learn that the title comes from words written on a pack of cigarettes given to Braithwaite as a gift by one student. Braithwaite’s portrayal of both race and the English class system of the 50s was widely praised. Braithwaite’s ability to not only see past the racial and class prejudices of the time resonated with both the book’s readers and the film’s viewers.

I found his story an excellent tie into today’s blog post. In a recent On management column in the Financial Times (FT), entitled “Technology and millennials are out to kill the org chart”, Andrew Hill discusses how the org chart may soon be relegated to a relic of the past. From his description, it might not only be a good thing but from the compliance perspective it might help companies more quickly and efficiently operationalize compliance down in the DNA of their company.

Even though the org chart is one of the most read documents in any organizations, it did not always reflect the reality of the company. Hill noted, “Even when everyone used to pay attention to the pyramid of power, though, the diagram was a poor reflection of corporate reality. Century-old examples are pockmarked with vacancies, indicating that chart makers struggled to keep up with changes. Now staff turnover is more rapid, charts are relics of a command-and-control approach, where information flowed through fixed channels, from your boss’s boss, down to your boss, to you, and back again. It need not be this way. In many such plans, the dreaded “dotted reporting line” already signals that nothing is as neat as the chart may imply.”

Hill even took it a step further, finding that many Human Resources (HR) directors find org charts to be ““uncomfortable straight-jackets, a hindrance to more natural interaction between colleagues” or simply a loathed obligation.” Although some HR professionals felt org charts helped an employee understand the context of an organization’s hierarchy, “they always “come with the caveat that aren’t true.””

Hill recognizes that businesses need structure and that employees need to be able to refer to the structure. But by ossifying structure in an org chart, it could stifle people from making decisions applicable to their area of expertise. This is a long held key that employees must be empowered because if they are, they will execute more efficiently. But more than simply such platitudes, Hill points out that business leaders have a different role than sitting at the top of long list (horizontal and vertical) of employees. In one of the most interesting analogies Hill cited to Professor Lindred Greer of the Stanford Business School for the following insight, “leaders must behave like hippos. They can remain under water, with just their eyes protruding to observe the team, and emerge only if they need to exert their full authority.”

Hill ends by stating, “the fixed org chart is already losing potency.” Moreover, “even those HR executives who favour organigrams point out that younger staff could not care less about the hidebound hierarchy they represent. They will happily take ideas to a senior partner or divisional director, bypassing old-fashioned channels, says one. It is a reminder that the chart, love it or hate it, is not the main impediment to change; the people in it often are.”

The implications for both a Chief Compliance Officer (CCO) and the compliance profession are quite profound. Clearly a CCO wants to have as much input as he or she can receive about the company and whether it is doing business ethically and in compliance. If an org chart communicates siloed behavior is the expected norm in an organization, a CCO may well not receive information needed to prevent or detect inappropriate conduct. These are two of the three negative points that Hill raises; a straight-jacket around communications and a hindrance to natural communications between colleagues. I would add such structure could even stop employees from believing they could have such communications.

This all relates back to Braithwaite and educating his students who were written off by the other teachers. He took them to museums, many for the first time in their lives. He told about his story in rising up from a colonial existence to becoming a World War II, Royal Air Force fighter pilot. In short, he used communications to win their trust. Once he had their trust he could begin his assigned task of teaching them because they were then receptive to his message.

The same is largely true of any CCO or compliance practitioner. You do have to work to win the trust of your employee base. If there is a formal org chart sitting out there commanding communications flow in one method, it could seriously impact your ability to prevent and detect. Moreover, if there are folks in the business unit who could move compliance forward to make it more efficient or even move it more closely into the field, those opportunities may be missed if the org chart is too ossified at your company.

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

herb-hardestyHerb Hardesty died last week. Probably only those who are fans of early rock and roll will recognize the name. But all music fans will recognize his sound, as, according to his obituary in the New York Times (NYT), he was a tenor saxophonist “whose name was synonymous with New Orleans rhythm and blues and early rock ’n’ roll and whose lyrical solos were heard on nearly all of Fats Domino’s hit songs”. He “played on the sessions that created hits like “I’m Walkin’,” “My Blue Heaven,” “Ain’t It a Shame” and “Let the Four Winds Blow.””

Hardesty’s sound was “a big, meaty tone with blues and laughter in it. John Broven, the author of “Rhythm & Blues in New Orleans,” described Mr. Hardesty in a phone interview   as an ideal sideman for Mr. Domino.” He went on to say, “Part of Domino’s success was that his songs were memorable and very hummable, and Hardesty was able to translate the lyrics into a melodic, saxophone sound. One of the things Fats said that he liked about Herb was the tone of his saxophone. When you heard Fats live, with Herb in the band, you were hearing the original studio sound.”” Hardesty also played with Little Richard, Ella Fitzgerald and Frank Sinatra. He was also a member of the greatest generation, having been a Tuskegee Airman.

Adam Bryant, in his Corner Office column, profiled Deirdre Quinn, the chief executive of Lafayette 148 New York, a women’s fashion company, in a piece entitled “If a Meeting Starts at 9, Be There at 8”. Quinn had some interesting leadership lessons for the Chief Compliance Officer (CCO) or compliance practitioner. Quinn is very passionate about the fashion industry. She said that she went to college for fashion and has worked in the fashion industry for a large portion of her professional career. The compliance profession has evolved to the point where we are now seeing college graduates coming directly into the profession. I can only hope this trend will continue and we will have more entrants into our profession who come into it with a passion that Quinn expressed for her profession.

It was the event that led to her professional growth in the fashion industry that I found a key lesson to be learned for an incoming compliance practitioner. She started out in a pattern room and then was moved to become an admin to the head of production. She described her first big break, “I was sitting in a meeting taking notes one day, and they were discussing how short skirts were suddenly in style. So the guys — there were only men sitting around the table — said that someone had to go to Korea tomorrow to shorten about 200,000 skirts. Nobody said a word. So I said, “I’ll go.” The next day, I went to Korea for three months. I got the job done.”

There is nothing like taking initiative to get people to notice you or as Quinn allows, “Don’t be afraid to go the extra mile. Just embrace it every day”.  But it is more than simply taking initiatives to accept more work or responsibility. It is executing on the assigned tasks. As I related yesterday, Baker Hughes Inc. (BHI) CCO Jay Martin says that it is execution which separates successful compliance programs from mere paper programs. The same is true for individual assignments. Quinn took an opportunity, then successfully executed upon it. As she went on to note, “After then, whenever there were problems, people would say, “Send Dee.” I went everywhere — El Salvador, Haiti, Sri Lanka, India. I became vice president of operations when I was 28 and had a whole team.”

Quinn also has some other Interesting thoughts useful for both the CCO or compliance practitioner. She related that many people in the fashion industry believe they are very good at one thing. In the general corporate world, that is called being siloed. She breaks these silos through her management style, which is “to either build around what you’re not good at, or move you to another place where I think you could be better. Finding the best in people is like a chess game for me, rather than saying, “Well that didn’t work — we don’t need you anymore.” And once in a while you’ll find a utility player who is good at every job.”

There are multiple lessons in these remarks. First and foremost is the problem of siloing in corporate America. This concern even reaches into the Department of Justice (DOJ) and its evaluation of compliance programs under its FCPA Pilot Program. In its remediation prong, it notes companies will be evaluated, in part, on whether the CCO and the compliance discipline within an organization have the opportunity to move into other areas of the business. This concern is also reflected in the insight that a compliance practitioner should know how to read a balance sheet and if you do not know how to, you had better learn now.

Quinn also had some interesting thoughts about the mentee role in a mentor relationship. While she (and myself) wish you only work for bosses who you like and are easy to get along with, it does not always work out in that manner. She says, “You can learn from a good boss and a bad boss.” In my professional experience, the three lawyers I learned the most from were the most difficult people I ever worked for; as in very difficult to work under. However, these were the three lawyers who taught me the most.

Whether it was because they pushed me unceasingly or demanded what I considered an unreachable quality of work, I learned more from these two men and one woman than any other myriad of others I worked for. The key is that you can learn from anyone you work under. It is incumbent on you to take away the appropriate lessons. We cannot all play with Fats Domino but we can learn from the Fats Domino sound and one day you may well have your own sound.

 

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

Show Notes for Episode 32, week ending December 9:

  1. United Airlines SEC enforcement action for domestic; the Chairman’s Flight and the US Corrupt Practices Act, for a copy of the Justice Department NPA, click here and for a copy of the SEC Cease and Desist Order, click here.
  2. Monetary Authority of Singapore seeks to suspend former Goldman Sachs trader in 1MDB scandal. Link to Fox blog post on Compliance Week.
  3. FATF report that US weak on beneficial ownership issues, for a copy of the report, click here.
  4. Wal-Mart up to $820MM in pre-settlement FCPA settlement spend, on Radical Compliance.
  5. Release of eBook, Trump on Compliance.
  6. SEC Director of Enforcement, Andrew Ceresny announces he will leave the SEC. See NYT article, here.
  7. GibsonDunn briefing on The Road Ahead: DOJ and Federal Enforcement in the Trump Administration predicts a Southern California centered FCPA matter will be concluded by year end.
  8. 10th Annual SEC & DOJ HOT TOPICS 2017 — Current Developments Materially Affecting Corporations, Financial Institutions, Individuals organized by Sandpiper Partners LLP and program developed by PwC, notes GibsonDunn partner Deb Yang listed as potential SEC Commissioner.
  9. Jay Rosen weekend report update.

Catc