MistakesToday, we conclude our week long exploration of the original Star Wars trilogy, all posted in conjunction with three podcasts, subtitled May The Podcast Be With You, where we use one movie as a staring point to review Foreign Corrupt Practices Act (FCPA) compliance and translations services lessons learned which can be derived from the movies. It certainly has been a ton of fun in watching the movies (yet again), researching George Lucas and his franchise, writing these blog posts and preparing for and then recording the podcasts with former Hollywood insider and now Mr. Translations himself, Jay Rosen.

I hope you have had some fun reading about or listening to some of the compliance lessons that I have put forth this week. Today I want to step back and take a very big picture look at the evil force in the trilogy, the Galactic Empire, run by Emperor Palpatine and his disciple, Darth Vardar. How did the rebels defeat the Empire? One could say the Empire’s own arrogance and actions brought the weight of its actions down upon itself. Recognizing that George Lucas drew inspiration back as far as the Greek myths, this is certain plausible. Of course, you could also say that the good guys had to win for Americans to go see.

It did strike me, however when reading recent comments by the top leaders at Volkswagen (VW) that the company’s downfall was as inevitable as a Greek tragedy. At the very least the mindset of the company was very flawed. In comments by Chairman Hans Dieter Pötsch and Chief Executive Matthias Müller during a two-hour news conference, as reported in the Wall Street Journal (WSJ) in an article by William Boston, Hendrik Varnholt and Sarah Sloat, entitled “VW Says ‘Culture’ Flaw Led to Crisis”, VW leaders blamed the crisis on “a chain of mistakes” and a “culture of tolerance for rule-breaking that allowed the deception to continue for a decade.” Pötsch went on to say, “the roots of the deception were the misconduct and shortcomings of individual employees” coupled with “insufficient internal processes to detect fraud.”

The bottom line is that the company put a ‘win at all costs’ approach first and when it came to its diesel engines, they absolutely, positively had to meet regulatory standards, such as those set by the Environmental Protection Agency (EPA). If the emissions standards were not going to be met, a work around had to be found to meet the stated management goal, as reported by Jack Ewing in the New York Times (NYT) article “Volkswagen Cites ‘Chain of Errors’ in Emission Cheating”, which stated for the company to “overtake Toyota as the largest carmaker in the world”.

VW does still not seem to understand that its culture is responsible and its culture was, is and will be set by senior management. Andrew Hill, writing in the On Management column in the Financial Times (FT) put it with typical English understatement when he posed the following question, “how many psychologists does it take to change a lightbulb?” His answer: “It only takes one psychologist but the bulb has to want to change.” Hill concluded his piece with the following “it is hard to say whether VW will succeed in making the shift. The group needs to change. It says it will. What remains unclear is whether it really wants to.”

If you compare the conduct and language of VW senior executives of those from Wal-Mart or even General Motors (GM) you will see no greater contrast. These words and actions may also speak to whether VW will or even wants to change its corporate culture. As reported in another FT article by Richard Milne, entitled “Volkswagen tries to get a grip after emissions scandal”, at the same recent press conference, VW Chief Executive Matthias Müller, when asked how he would behave on his first trip to the US after the scandal broke said, “I don’t think I will get down on my knees, I will be self-confident. Of course, I will apologize for things that have occurred.” Later he added, “The future at VW belongs to the brave.”

But Müller did not stop there, he “also took an axe to some symbolic elements of luxury: he will sell VW’s Airbus”. If now you are scratching your head about how the sale of a corporate jet can actually facilitate a change in the ethics and compliance culture in the company; consider that the FT article went on to quote Arndt Ellignhorst, an analysis at Evercore ISI, for the following insight into the corporate mindset at VW, “Cutting corporate jets and fancy cars show galas might not sound like much to the outsight world, but in means a lot in terms of culture and attitude.”

So there you have it, getting rid of a corporate jet is a sign that culture has improved at VW. If that is a sign of improvement, I think it gives some serious insight into not only how the problems first arose but also the difficulty the company will have moving forward from this scandal. Not only do the internal controls and processes need to be overhauled but also it would seem the attitude of entitlement should also be addressed. Simply getting rid of the corporate jet had nothing to do with the corporate governance, management or even the need for a “systemic culture review” at the company.

Hill pointed out that by blaming bad culture, senior management does not have to take the responsibility for creating the atmosphere that allowed the conduct to occur and, in VW’s case, flourish for over 10 years. Hill focused on the mindset at VW, which he believed allowed violations of regulatory requirements because if your mindset is fixed it cannot allow you to be seen to be imperfect so you lie about it. Here in Houston, we have plenty of experience with that phenomenon… it is called Enron.

Can VW change? Chairman Pötsch headed in the right direction at the press conference when he began. “We need the courage to be more honest.” However he veered off the message when he, once again, failed to take responsibility when he intoned, “The growing industry-wide discrepancies between official emissions data and real-life levels are no longer acceptable.” I am not sure he understands that VW, beginning with himself, need to change.

Is VW the evil Galactic Empire? I will leave that determination to others. But the lessons foisted upon the Empire might well play out for VW, if it fails to take full responsibility for its actions and work to change them. With the release of Episode VII – The Force Awakens the saga will continue.

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, 2015

John JayToday we celebrate leadership in general and ethical leadership specifically in the person of John Jay. He was not one of the well-known founding fathers; nevertheless he was a key participant in the founding of the American republic, from the days of the Continental Congress up through the passage of the US Constitution and into the first administration of President Washington. On this day in 1778, Jay, was elected president of the Continental Congress. Jay, who graduated from King’s College (now Columbia University) at the age of 19, was a prominent figure in New York state politics from an early age. He served as one of the US representatives who negotiated the Treaty of Paris, ending the Revolutionary War with England.

He served as Foreign Secretary under the Articles of Confederation, was one of the tri-authors of the Federalist Papers with Alexander Hamilton and James Madison. After turning down an offer from George Washington to be the first Secretary of State, he later became the first Chief Justice of the Supreme Court. Jay ended his public service with two-terms as the Governor of New York state. It would certainly seem more than enough for one man but Jay was typical of the character of the founding fathers.

Ethical leadership is absolutely mandatory to have a successful compliance program, whether it is based upon the Foreign Corrupt Practices Act (FCPA) or the UK Bribery Act. Senior management must not only be committed to doing business in compliance with these laws but they must communicate these commitments down to the organization. But leadership is not limited only to senior management within an organization. Tone at the Top begets Tone in the Middle; which begets Tone at the Bottom. At each rung there is the need for compliance leadership. In an article in the Harvard Business Review (HBR), entitled “Leadership is a Conversation”, authors Boris Groysberg and Michael Slind discuss how to improve employee engagement in today’s “flatter, more networked organizations.”

The authors posit that the issue of how leaders handle communications within their organizations is as important as the message. They believe that the process should be more dynamic and more nuanced and is a process that they term “conversational”. Building on this concept they suggest a model of leadership that they call “organizational conversation” which resembles ordinary person-to-person conversations. They believe that this model has several advantages, including that it allows a large company to function like a small one and it can enable leaders to “retain or recapture some of the qualities…that enable start-ups to out-perform better established rivals.” The authors have found four elements of organizational conversation that “reflect the essential attributes of an interpersonal conversation.” They are: intimacy, interactivity, inclusion and intentionality.

 Intimacy: Getting Close

Here the authors appear to focus on two works: listening and authenticity. Recognizing that physical proximity may not always be feasible but emotional or mental proximity is required. They advise leaders to “step down from their corporate perches and then step up to the challenge of communicating personally and transparently with their people.” This technique shifts the focus of change from a top-down hierarchical model to a “bottom-up exchange of ideas.”

Interactivity: Promoting Dialogue

Interactivity should make a conversation open and more fluid. You can obtain this by talking with and not just talking to an employee. The purpose of interactivity builds upon the first prong of intimacy. The authors believe that efforts to close the gap between employees will founder if both tools are not in place along with institutional support that gives employees the freedom and courage to speak up. The authors believe that social media can be a useful tool to help foster such interactivity, but care must be taken to ensure that managers do not simply use social media as another megaphone. The authors suggest that more than just social media is required and that something extra is needed and that is social thinking.

 Inclusion: Expanding Employees Roles

Following on intimacy is inclusion as intimacy should force a leader to get closer to employees while inclusion challenges the employee to play a greater role in the communication process. Inclusion expands on interactivity by enabling employees to put forward their ideas “rather than simply parrying the ideas that others present.” Clearly this is the prong that brings employee engagement into the communication process by calling on employees to “generate the content that makes up a company story.” Employees who become committed to a message can become the best brand ambassadors that a company can ever hope to have on its payroll.

 Intentionality: Pursuing an Agenda

While the first three prongs of the authors’ model focus on opening up the flow of communication, intentionality is designed to bring a measure of closure to the process. The goal here is to have voices merge into a single vision of what the company’s communication stands for. In other words, the conversation should reflect a “shared agenda that aligns with the company’s strategic objectives” that will allow employees to “derive a strategically relevant action from the push and pull of discussion and debate.” The role here for leaders is to “generate consent rather than commanding assent” for a strategic objective. The authors believe that this enables employees at the top, middle and bottom to “gain a big-picture view of where their company stands” on any issue which has gone through the process.

John Jay Scholars at Columbia University honor Jay’s legacy today. I think it also speaks to the work that compliance practitioners play in moving the ball of greater compliance forward. Indeed I find that all involved in the compliance ecosystem have a part in moving the ball forward. So whether you are a vendor with a software product, a lawyer penning a client alert, a Chief Compliance Officer (CCO) or even a humble commentator, we all celebrate your role as well today.

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, 2015

Structural ChangeSometimes corruption is so endemic in an organization that you wonder if the organization should just blow itself up and start over. In a company going through a Foreign Corrupt Practices Act (FCPA) investigation, a Board of Directors can clean house and bring a new senior management. That has happened at least a couple of times in the history of FCPA enforcement and there is at least one successful example here in Houston, that being Pride International Ltd., who later merged into Ensco plc and became Ensco Offshore Company. Pride was so successful that it was able to exit from a Deferred Prosecution Agreement (DPA) early.

But what happens when there is no one not tainted by the corruption of a prior regime? I am beginning to wonder if the Fédération Internationale de Football Association (FIFA) can clean itself up or if the world’s national soccer powers need to blow the whole thing up and start over. Last week there were more arrests based upon warrants issued by the US Department of Justice (DOJ) in its ongoing criminal investigation of senior executives of the organization. According to an article in the Wall Street Journal (WSJ), entitled “U.S. Indicts 16 New Suspects in FIFA Corruption Case” by Aruna Viswanathan, Joshua Robinson and John Revill, last week US “Authorities unveiled a 92-count indictment that included charges against senior FIFA officials Alfredo Hawit and Juan Angel Napout, who were arrested in a predawn sweep by police at a Swiss luxury hotel.” Further, “The new charges expand on the earlier case with more examples of alleged corruption at Central and South American soccer organizations. The new indictment also cites alleged payments related both to previous tournaments and to matches extending through 2022, including World Cup qualifiers.”

In an article in the New York Times (NYT), entitled “Guatemalan Official Arrested Aboard Cruise Ship in Florida”, Matt Apuzzo reported that in Miami, US customs officials boarded a cruise ship and arrested, “Héctor Trujillo, the general secretary of the Guatemalan soccer federation who is also a judge on the Constitutional Court of Guatemala”. The unsealed indictment referred “to multiple bribe negotiations in Miami involving Media World, Mr. Trujillo and other defendants. Those defendants include Brayan Jiménez, president of the Guatemalan soccer federation, and Rafael Salguero, a former president of that federation who rose higher in the ranks of world soccer and assumed a role on FIFA’s executive committee.”

Now it appears that the FBI is investigating disgraced and suspended (yet still current) FIFA President Sepp Blatter. The BBC online reported “The FBI is investigating the role played by Fifa president Sepp Blatter in a $100m (£66.2m) bribes scandal, a BBC investigation has discovered. Sports marketing company ISL paid a total of $100m to officials including former Fifa president Joao Havelange and ex-Fifa executive Ricardo Teixeira. In return, ISL was granted lucrative television and marketing rights throughout the 1990s.”

Last week, and ironically on the same day as the arrests, FIFA publicly announced some of the changes they were proposing. However the messengers had some other issues to try and clear up. An article in the NYT ‘On Soccer’ column, entitled “A Message in the Hands of the Wrong Messengers by Sam Borden, detailed that the FIFA acting President Issa Hayatou, “dismissed inquiries about any personal improprieties and then read an opening speech about governance that was both hollow and clearly scripted by someone else.” Next the acting General Secretary Markus Kattner “dismissed questions about any personal improprieties and clung blindly to PowerPoint slides that seemed to lack specifics.” When the two top people announcing ethical changes have to answer for their own conduct, you create a serious view that your organization is not very interested in changing.

Borden wrote, “To change that, there are generally two approaches. One is a total housecleaning, which essentially acknowledges that an organization in its current form is irreparable. The other is a crafted approach to finding the right people with magnetic personalities, ease of explanation and, of course, believable motivations to bridge the surface relationship that exists between a group like FIFA and an astronomically larger group that is the world’s soccer fans. As it stands, FIFA has taken neither approach.”

But the question remains, who is left that is not tainted by corruption that could run the organization? I am reminded that when Lance Armstrong was stripped of his seven Tour de France titles, none were awarded to any second place finishers because none were cleared of doping charges. Perhaps given the money that was generated by FIFA for television rights, marketing fees and other levies; it was simply too much money not to turn heads. There certainly has never been oversight or transparency. Certainly there was no culture of compliance.

Samuel Rubenfeld, writing in the WSJ Risk & Compliance Journal, in an article entitled “FIFA Reform Plan Requires Culture Change to Work”, focused on this final aspect, the need for culture change at FIFA, to affect any real ethical change. He quoted Alexandra Wrage, the founder of business anti-bribery group TRACE International “who quit an earlier FIFA reform effort due to lack of adoption by FIFA leadership” for the following, “While the reforms are by far the most serious we’ve seen, successful reform still comes down to key personalities and that’s worrying.” Rubenfeld went on to add that “The latest U.S. indictment highlights the challenges in cleaning up soccer; it alleges graft occurred across generations of FIFA leaders, with new ones coming into their roles promising reform but immediately partaking in the corruption that led their predecessors to leave or face charges.”

Can FIFA clean itself up? That is a very open question at this point. Clearly, the US government has signaled, at least at this point, it is not seeking to bring down the entire organization. Can that signal change? Certainly if there is no person left who has the credibility to run the organization and the entity does not bring in any person who has the credibility to run it. Moreover, with all the money at play here, can anything meaningful be done if not with much greater transparency? Unfortunately all I have right now is questions, questions and more questions. But one thing is certain; we are not seeing a lot of answers from FIFA.

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, 2015

Guy LewisGuy V. Lewis died last week. For those uninitiated in college basketball, Lewis was one of the greats, coaching for over 30 years at the University of Houston. He went to the Final Four five times, alas though he did not win any titles during those trips. While he is best remembered for his tenure during the 1980s when he took the Phi Slama Jama (world’s tallest fraternity) to the NCAA championships three straight trips, many thought of Lewis as the guy who rolled the basketballs out to start practice and let his teams run (and run and run).

But the first Guy V. Lewis that I recall was the one who coached the University of Houston to defeating a previously undefeated Lew Alcindor-led UCLA team in the 1968 Game of the Century, held in the Astrodome. I also remember Lewis (along with UH Football Coach Bill Yeoman) as one of the true leaders in desegregating college sports in the South. Lewis brought later NBA Hall of Famer Elvin Hays and later NBA Coach Don Chaney to play for the Houston Cougars. For myself, and a generation of Southerners, Lewis was one of the leaders in the fight against hate, prejudice and segregation.

I thought about Lewis when I read an article in the New York Times (NYT) Corner Office Column by Adam Bryant where he profiled Margaret Keane, the Chief Executive Officer (CEO) of Synchrony Financial in an article entitled “When Hardship Informs Leadership”. I found the article had some excellent points for the Chief Compliance Officer (CCO) to consider in not only the role as a leader but also the role of a colleague to others in senior management.

When leading the compliance function or otherwise acting as a leader in any organization Keane pointed to the need to respect others in an organization. While many lawyers certainly do not take this into account in their role in a corporate legal department, it is a requirement in the compliance function. Keane said, “The biggest thing I learned when I first started managing people is that you really have to respect the people who were there before you showed up. So you could come in with all these great ideas, but if you come in acting like you know it all and you don’t get the buy-in, then they will reject you.”

Another key ingredient Keane talked about was how you interact with your subordinates, but not with the normal platitudes you associate with a CEO. She talked about working with talented and smart people under you. She said, “Another important lesson was getting comfortable with the idea of having people work for you who are smarter than you. When you’re young, there’s an insecurity that you have to do and know everything. There are leaders who never learn that lesson, even later on in life.”

When it came to leading with your peers at the senior management level I found her next thoughts insightful. Keane believes that “A leader has to be decisive. The most frustrating thing for any organization is when you’re just waffling around and no one knows what to do. You’re going to make mistakes, but you’re better off moving the organization forward than having them waffle. And then you have to be very clear with the organization about what’s happening and why.” Once again her remarks point out a clear distinction between the legal department and the compliance function. Many corporate legal departments are very good at presenting or at least explaining options. This is what lawyers do. However, this is not what the compliance function or CCO do. The role is to prevent, find and fix issues before they become problems (or Foreign Corrupt Practices Act (FCPA)) violations.

Keane also spoke about another angle to leadership not often discussed. It is the perception that she could not make difficult decisions. I found the reason and her response something a CCO often faces. Keane noted, “there was a perception that I couldn’t make hard decisions. And the reason they thought I couldn’t make hard decisions was because people liked me. I would get really angry about it because I know how to make hard decisions, but it’s always about how you treat the process when you’re making the hard decisions.”

I found this point very perceptive. A CCO generally has to be liked to do their job. They often struggle with how well they will be perceived if they have to say “No”. Keane makes clear that it is about the process. If you lay out your reasoning, having considered all the relevant facts, almost everyone will respect your decision because the process is rigorous.

Keane also talked about something that is becoming a greater problem as the compliance program matures and more compliance practitioners grow into the role of a CCO. She related, “because I’ve worked my way up, I know a lot of things. So it’s easy for me to want to jump in and try to solve something. So I’ve learned to hold myself back from solving the problem and to let the organization solve it first.”

Keane also had some thoughts that every CCO and indeed every company need to consider in the hiring process. She said, “I always ask, “Why are you leaving your current job, and why are you coming here?” You want to make sure people aren’t running away from something and you want to make sure they’re coming here for the right reasons. And then I want to know if they can build teams. Do they have a following? How many people have followed them from one job to the next?”

Finally, Keane ended with three points that are useful for any employee, which I found to be particularly applicable to a CCO or compliance practitioner. First she said that you must “work hard. You’re not going to get anywhere if you don’t dig in and work hard. And that means doing things you don’t like doing and not complaining about it.” Second she noted that you need to ask questions. Moreover, if you are not getting enough from your boss or out of an assignment, then “raise your hand “to get some attention to have the situation clarified.” Finally, and perhaps most importantly, “pick your head up from your phone. Look around, see what’s happening, engage socially. As much as we think they’re social, they’re not really that social because they do everything on their phones.”

So a fond farewell to the King of Houston Hoops, Guy V. Lewis. He helped move forward the cause of racial equality in the South. I hope you finally get that championship in the great beyond. As for more temporal matters, use the techniques that Keane has suggested, particularly to use the process of fair decision-making and get off the phone and out of your office.

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, 2015