Cartoon caption bubbleI hope everyone had a great 4th of July. One of the small pleasures I take each week is reading the New Yorker’s Cartoon Caption contest. I have entered most weeks for the past 10 years or so when the spirit moved me with a caption to submit. I won once, in the issue dated February 11 & 18, 2008. So you might imagine my surprise and thrill when I received a call from the section Editor, Bob Mankoff, last week to tell me I am a finalist yet again, for the July 25, 2016 issue. My request is that you go over to the contest and, if the spirit so moves, you will vote for me. You do not have to be a subscriber to vote but you do have to vote by Sunday, July 10th. You can go to the Cartoon Caption contest by clicking this link.

As you see from my entry, I was inspired by the long drought of Cleveland in winning a major sports championship, remedied by the Cavaliers in dramatic fashion in June. Having lived in or near Houston most of my life, I certainly understand futility of sports franchises. Yet I was reminded of my entry, the overcoming futility in a dearth of championship banners and their intersection with compliance in a The Atlantic magazine article by Jerry Useem, entitled “What Was Volkswagen Thinking?” Useem reviews the design and implementation of the VW defeat device that led to its emissions-testing scandal. He pointed to the sociologist Diane Vaughan, who coined the term normalization of deviance to explain the “cultural drift in which circumstances classified as ‘not Okay’ are slowly reclassified as ‘okay’.”

It is this type of corporate culture that leads to not only total disaster, such as currently being experienced by VW, but also allows companies to slip into conduct that violates the Foreign Corrupt Practices Act (FCPA). One step is that management does not model the behavior that it alleges to aspire to for its employees. Yet Vaughn goes further to describe the process as a “script” which develops a definition of the situation, which allows the employees to carry on as if nothing was wrong. It is this script about marching to make your numbers that causes many employees to come to grief. For it does not matter what your Code of Conduct says or even what senior management might say, it means if the focus is on making your numbers, employees will get that message.

Consider the recently concluded Analogic Corporation (Analogic) and BK Medical ApS (BK Medical) FCPA enforcement action. Here there were two separate high-level red flags raises over the BK Medical bribery program and neither the subsidiary, BK Medical, nor the parent, Analogic, followed through with an investigation, discovered the rather obvious (and blatant) conduct and ended it. How could this occur? Useem notes that Vaughan’s theory allows employees to move beyond acting as if nothing is wrong. They come to believe, “bringing to mind Orwell’s concept of doublethink, the method by which a bureaucracy conceals evil from not only the public but itself.”

Contrast the VW and Analogic examples of Useem who further wrote about Johnson & Johnson (J&J) who had one of the greatest corporate scares of all-time when there were cyanide-laced capsules sold in Chicago area stores in 1982. J&J set the gold standard for corporate crisis response when it pulled every bottle of Tylenol nationwide, warned consumers not to take the product and sustained a $100MM loss. Yet it turns out the genesis of this crisis response had occurred three years earlier when the company’s Chief Executive Officer (CEO), James Burke, became concerned that the J&J Credo, which included a duty to protect those who used the company’s products “had become something like the Magna Carta: an important historical document, but hardly a tool for modern decision making.” Burke led a reinvigoration of the company’s core values into its business practices.

This reinvigoration led directly to the company’s response to the Tylenol-cyanide poisoning. Indeed, Useem said the company’s actions “flowed more or less automatically from the signal sent three years earlier. Burke, in fact, was on a plane when the news of the poisoning broke. By the time he landed, employees were already ordering Tylenol off the store shelves.”

Useem’s article points towards why tone at the top is so important. The tone to do business in compliance with the FCPA must be set by senior management and that message must be continually communicated. When those communications stop and the message becomes ‘make your numbers’ then the company’s commitment to doing business the right way will also falter. Even disgraced former Chief Financial Officer (CFO) of Enron, Andy Fastow, recognized this when he was quoted in Useem’s article for the following, “A robust ‘code of conduct’ can be emasculated by one action of the CEO or CFO.”

The setting of unrealistic sales goals individually or even by region can lead to the cutting of corners. Consider the illegal actions of GlaxoSmithKline PLC (GSK) in China, which led to a fine of approximately $497MM for the company’s bribery of Chinese government officials in the health care sector. GSK had set sales growth of 20% annually in China. How were the leaders of the Chinese business unit to hit these numbers? Apparently that was not something senior management in the corporate office was too worried about. The setting of such unrealistic sales goals can be the simple message that over-rides all the statements about doing business in concert with the business ethics expressed in your Code of Conduct.

Tone at the top does matter. But it is more than simply saying the right thing. It is setting your goals in a realistic manner that can allow employees to reach them without engaging in bribery and corruption or, in the case of VW, fraud. Useem ends his piece with the following, “Decisions may be the product of culture. But culture is the product of decisions.”

 

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

Battle of the Somme IIIThere have been a plethora of new books about the Battle of the Somme. Daniel Todman reviewed several in an article for the Financial Times (FT), entitled “Stories of the Somme”. One of the books reviewed, Breakdown: The Crisis of Shell Shock on the Somme, 1916, by Taylor Downing, focused on the relatively new condition identified as ‘shell shock’ a term which became ‘combat fatigue’ in World War II (WWII) and today is called ‘post traumatic stress disorder’. Downing thoroughly discussed the range of symptoms experienced by the combatants. Yet his innovation was to consider the mental health of the entire British nation as the causalities mounted and mounted with no end or even result in sight.

I thought about Taylor’s insights when considering the collective mental state of Great Britain after the Brexit vote or, as we would say in Texas Breeee-exit. The topic has certainly dominated both the UK and US news since last Friday, although since Monday, the British press is equally talking about the English exit from the European Football Championship, losing to Iceland 2-1. Many have wondered what Brexit might mean for compliance, the Foreign Corrupt Practices Act (FCPA) and enforcement of the UK Bribery Act. I explored some of the these issues with Jonathan Armstrong, from Cordery Law Firm in London, in a podcast earlier this week, you can listen to Episode 262 The Brexit Edition on the FCPA Compliance and Ethics Report.

Regarding enforcement of the UK Bribery Act, Armstrong believes that there is likely to be little change. The UK Bribery Act 2010 is not a part of any body of European Union (EU) legislation and the UK bribery prosecutors are independent of the EU regime. There may be an effect on some investigations, for example into alleged corruption in EU funds, but as the law will remain the same, there should be no change in how it is enforced. My concern would be that the British government would be so low of funds or required to use its resources in other more politically palatable areas that it could lead to underfunding for the Serious Fraud Office (SFO) to conduct investigations and put on trials for companies that do not settle with the government.

Armstrong did opine that there might well be big changes in areas which do impact FCPA enforcement and those are the areas of data privacy and data transfer. Armstrong noted while there has obviously been much debate in Europe about data transfer issues, what happens with the UK after the exit remains to be seen. He believes that much is likely to depend on whether the UK remains in the European Economic Area (EEA) or not. If the UK does, there may well be little practical change. However if the UK leaves the EEA regime, it would likely have to go through some sort of an adequacy assessment under the EU General Data Protection Regulation (GDPR). He indicated that data transfers could be complicated if the UK does not remain in the EEA as there have been allegations of surveillance by UK Government agencies. He concluded that if a working Privacy Shield deal can be done next month the UK would still be a party to that, at least in the short term. He did conclude with the well-known British admonition to ‘Watch this space”.

I was also interested with Andrew Hill’s FT On management article entitled “Five failures of leadership and one hollow Brexit success”. As usual many of Hill concepts translate well over the role of the Chief Compliance Officer (CCO) so I wanted to use this to reflect on leadership issues for the compliance professional. Hill was merciless that over the course of the referendum campaign and the subsequent events since the vote was tallied on Friday that there has been a complete, total and utter failure of British political leadership.

First is the underlying historical failure of British leadership within the EU. Hill wrote, “A dearth of leadership in the EU itself over recent years exacerbated the economic and political mess that repelled many insular UK voters from the European project. A fatal failure to exercise UK leadership in the EU… further primed the electorate to reject the invitation to remain.” For the CCO or compliance practitioner, I think this means you have to actively engage at all levels of your organization going forward. Never forgot that creating corporate allies is an ongoing process.

The second was the failure of strategy. Presciently, Hill notes that having a strategy is not the same as having a goal. Hill quotes UCLA Professor Richard Rumelt for the obvious, “Winging it is not a strategy.” You need to have both a goal and strategy. Based on the continued comments from the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) over the years, you need to have a roadmap for the design, implementation and continual improvement of your compliance program.

Failure number three is the failure of teamwork. The Brexit referendum campaign certainly embodied the age-old adage that politics makes for strange bedfellows. However in this campaign, Hill said, “The formation of opposing groups drawn from across the political spectrum was always going to pose vast challenges.” Moreover, “Scratch teams can do great work. In business the most diverse groups often come up with the best innovations, but such groups are also the hardest to manage.”

The lesson for the CCO is the management of diverse groups within an organization. Obviously the General Counsel’s (GC’s) office should be a natural ally of compliance. Yet the roles of both disciplines within an organization are very different. These differences will need to be managed throughout the existence of any compliance issue. The same is true, perhaps even more so, for other corporate functions.

As a fourth failure, Hill pointed to “disintegration of the opposition Labour party’s fragile unity after the vote has exposed the inability of Jeremy Corbyn, its leader and a reluctant Remainer, to shape the agenda”. Hill recognizes that political leaders can only get out so far in front of their constituents. Yet being a leader means more than simply talking into an echo chamber but also leaders have “a duty to conduct the sound that the chorus makes rather than simply to sing along.”

Here I think the message for the CCO is that you must continually work to shape the message of compliance throughout your organization. This certainly means more than simply coming from the compliance department. You must also get the C-Suite and senior executives to both talk the talk and to walk the walk of compliance.

Finally, is the failure in the post election phase of this disaster, Hill contends that while “Succession is almost always bloodier in politics than in business” this act by British politicians presents a “scene of near-total disarray”. He intones, “Boards often allude to contingency plans in case their chief executive is “run over by a bus”.” For any CCO, you must prepare for such an exigency. More importantly, you must lead this effort for your company.

The implications of Brexit may well be with us for many years. As a CCO you need to not only begin to prepare for some the issues identified by Jonathan Armstrong but also heed the leadership failures identified by Andrew Hill.

 

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

In this episode Roy and I discuss:

  • Victimization and the value of personal responsibility;
  • Standing up for your principles;
  • The idea that you can make your sales goals without breaking the law;
  • Roy translates wink wink, nod nod, lie, cheat, steal into helpful compliance advice;
  • Seeing ghosts;
  • Tom channels Ronald Reagan;
  • Roy gets on a high horse;
  • What ethics and K-cups have in common;
  • The myth – or not – of the rogue employee; and
  • The universal reason why compliance programs fail.