The DOJ Evaluation of Corporate Compliance Programs states:

  • Risk Management Process – What methodology has the company used to identify, analyze, and address the particular risks it faced?
  • Information Gathering and Analysis – What information or metrics has the company collected and used to help detect the type of misconduct in question? How has the information or metrics informed the company’s compliance program?

I continue my exploration of the risk management process by focusing today on risk assessments. One cannot really say enough about the role of risk assessment in compliance programs. Each time you hear a regulator talk about compliance programs, it starts along the lines of you cannot manage your FCPA risk without first determining what your company’s risk is; and to determine that compliance risk, the process you should utilize comes through a risk assessment.

We previously considered forecasting. The differences between forecasting and risk assessment is that risk assessment attempts to consider things which forecasting either did not reliably predict for, or those things which the forecasting models have raised as potential outcomes which could be troubling, critical themes and issues. As Ben Locwin has explained, “What you’re trying to do then is decide on how you would address these. Risk assessments should create your risk registry. Those items which are most consequential for your organization, whatever it happens to be.”

Within the context of an anti-corruption compliance program, you are trying to make adjustments based on the risks of violation of the law, out in the marketplace. For instance, in a compliance forecast, third-party risk should be considered at the top of your ordinal list of risk and you should consider a multitude of factors such as the operating procedures, processes and systems and training. Of course, the execution of that process is a critical component as well.

All these things, to some degree, should appear in a risk assessment for the organization. Meaning, at the corporate level, what happens if you change products or sell into a new geographic area which is perceived to be more high-risk? There should be a risk assessment node which has a component that notes these changes so that you can adapt as necessary. Locwin stated, “The risk assessment itself is designed to be able to elevate these, and if something does happen, the next step would be to take appropriate course of action to address any of those risks.”

An example which illustrates the differences between forecasting and a risk assessment, yet how the two are complimentary. This winter when I began purchasing hot coffee products from Starbuck, as opposed to the cold drinks I buy during the hotter parts of the year, I discovered that baristas’ no longer put sleeves on coffee cups but now require you to ask for one. The second time I had to ask for a sleeve, I inquired from the barista why I had to do so. She replied that corporate had changed the policy for environmental reasons and that she could only provide a sleeve at the specific request of the customer. When I pointed out that it slowed the line down and was much less efficient in the delivery of Starbuck’s coffee, she replied, “You’re absolutely right. I hate it. Would you please email Starbucks and tell them of your dissatisfaction?”

I will let Locwin pick it up from here, “what you’ve put your finger on is the crux of the balance of forecasting versus risk assessment. They’re two very different things, but at the same time, as they weave through time, they interchange. For example, Starbucks would potentially say, “We forecast that consumers are going to be more concerned about paper use, sleeves, the economic costs to the world, of extra paper waste and things. We’re going to, in certain locations, let’s say across Texas, we’re going to pilot that we don’t give out sleeves unless they’re asked for.” In their risk assessment, which I can tell you didn’t change from that forecast, what they then should have had was a commensurate line item which said, “If consumers start to have a problem with what’s being done at these locations, our immediate contingency plan is to do the following, to strip it away immediately, full stop, so that every cup gets a sleeve, so that they’re not slowing down lines, consumers say you heard us immediately, and then the organization is back on track.”

Their forecast plans something, the risk assessment should have had countermeasures to address, and instead if they didn’t have this in place, they’re going to have to wait until they start to have a Twitter feed that blows up… The risk assessment model should say, “Then we will do the following.” Really they don’t have the capability in a lot of cases to measure the effect of this and immediately course correct. It’s probably going to be a month, two months, four months before they start to get wind of this in a consistent way to say, “Texas was dissatisfied by this change and same in our pilot in Wisconsin. Let’s stop not giving out sleeves… Then eventually that starts to dissipate and they get rid of this whole new silly paradigm.”

Locwin’s point was that your risk assessment can help to inform your response to FCPA violation, corporate crisis or even (in my opinion) the misstep of requiring Starbucks customers to ask for sleeves for their coffee purchases. In another article by Locwin, entitled “Quality Risk Assessment and Management Strategies for Biopharmaceutical Companies”, he noted, “knowledge is power”. He went on to add, “Once we have assessed risks and determined a process that includes options to resolve and manage those risks whenever appropriate, then we can decide the level of resources with which to prioritize them. There always will be latent risks: those that we understand are there but that we cannot chase forever. But we need to make sure we’ve classified them correctly. With a good understanding of each of these, we’re in a much better position to speak about the quality of our businesses.”

Three Key Takeaways

  1. The Evaluation put renewed emphasis on risk assessments.
  2. Risk assessments logically follow and are complimentary to forecasting.
  3. The risk assessment output allows you to prioritize your response with plan funding and deliver resources in a risk management solution.

This month’s podcast series is sponsored by Oversight Systems, Inc. Oversight’s automated transaction monitoring solution, Insights On Demand for FCPA, operationalizes your compliance program. For more information, go to OversightSystems.com.

This podcast considers the differences between forecasting and risk assessment is that risk assessment attempts to consider things which forecasting either did not reliably predict for, or those things which the forecasting models have raised as potential outcomes which could be troubling, critical themes and issues. As Locwin explained, “What you’re trying to do then is decide on how you would address these. Risk assessments will percolate to the top of the list, your risk registry. Those items which are most consequential for your organization, whatever it happens to be. Again, just like forecasting, risk assessments apply to every organization.”

Within the context of an anti-corruption compliance program, you are trying to make adjustments based on the risks of violation of the law, out in the marketplace. For instance, in a compliance forecast, third-party risk should be considered at the top of your ordinal list of risk and you should consider a multitude of factors such as the operating procedures, processes and systems and training. Of course, the execution of that process is a critical component as well.

There are three core areas upon which Directors should focus their attention to help establish and maintain an effective compliance program. They are: (1) structure, (2) culture, (3) risk management.

Structural Questions

This area consists of questions which will aid in determining the fundamental sense of a company’s overall compliance program. The questions should begin with the basics of the program through to how the program operates in action. Some of the structural questions Board members should ask are the following.

  • Who oversees the operation of the program?
  • What is in the Code of Conduct? Is each Board member aware of corporate standards and procedures?
  • How are complaints being received?
  • Who conducts investigations and acts on the results?
  • What corporate resources are being devoted to the compliance and ethics program?
  • How much money is allocated to the program?
  • What types of training is required? How effective is it?
  • Have any compliance failures been detected? If so, how was such detection made?
  • If a company’s compliance program is less mature, what are the charter compliance documents?
  • If a company’s compliance program is more mature, there should be queries regarding the roles of the General Counsel vs. a Chief Compliance Officer. What is the CCO reporting structure?

Cultural Questions

This area of inquiry should focus on the culture of the organization regarding compliance. Board members should have an understanding of what message is being communicated not only from senior management but also middle management. Equally important, the Board needs to understand what message is being heard at the lowest levels within the company. Some of the cultural questions Board members should ask are the following.

  • When did the company last conduct a survey to measure the corporate culture of compliance?
  • Is it time for the company to resurvey to measure the corporate culture of compliance?
  • If a survey is performed, what are the results? Have any deficiencies been demonstrated? If so, what is the action plan going forward to remedy such deficiencies?
  • Did any compliance investigations arise from a cultural problem?
  • Regardless of any survey results, what can be done to improve the culture of compliance within the company?
  • If there were any acquisitions, were they analyzed from a compliance culture perspective?
  • Are there any M&A deals on the horizon, have they been reviewed from the compliance perspective?

Risk Management Questions

Board members need to understand the company’s process being used to identify emerging risks, their evaluation and management. Such risk analysis would be broader than simply a compliance risk assessment and should be tied to other broader corporate matters.

  • What is the risk assessment process?
  • How effective is this risk assessment process? Is it stale?
  • Who is involved in the risk assessment process?
  • Does the risk assessment process take into account any new legal or compliance best practices developments?
  • Are there any new operations that pose substantial compliance risks for the company?
  • Is the company tracking enforcement trends? Are any competitors facing enforcement actions?
  • Has the company moved into any new markets which impose new or additional compliance risks?
  • Has the company developed any new product or service lines which change the company’s risk profile?

Three Key Takeaways

  1. A Board of Directors should inquire into the structural component of the compliance program as it will aid in determining the fundamental sense of a company’s overall compliance program.
  2. Cultural questions should be asked to garner an understanding of what message is being communicated not only from senior management but also middle management.
  3. Risk management questions should be asked to understand the company’s process being used to identify emerging risks, their evaluation and management.

One of the ongoing questions from members of Board of Directors is how to resolve the tension between oversight and managing. I recently had the opportunity to visit with Joe Howell, the Executive Vice President (EVP) of Workiva, Inc. on this subject. Howell has worked on and with Boards of Directors at various companies and I wanted to garner his understanding of the role of a Board and both senior management and a Chief Compliance Officer (CCO). Howell had a short response which I thought was an excellent starting point to understand the role; put sand in the shoes of management.

The key to such a metaphor succeeding is that a Board of Directors, “by continuing to challenge management on these scenarios that management has considered and the stories management is telling itself about what could go wrong”, can “help get management out of its comfort zone by and large executive teams begin to believe themselves when they talk about how well they’re doing. The independent challenge that the board can offer putting the little bit of sand in the shoe to make sure that you’re thinking about things carefully can cause you to step back and really focus your resources where they’re needed.”

Board’s do this by posing questions to management that help them challenge their own assumptions, especially those assumptions which senior management is most confident about. Howell said that Board’s “need to help senior management consider the things that management is so sure about that maybe are going to play out the way that they expect. For example, the things that can hurt investors more than anything else is a surprise. Chaos does not help investors in general. The things that surprise investors frequently are the things that also surprise management. Does management consider all of the things that can go wrong and have they built an environment where they can both help prevent those things from happening and detect them when they’re small and they can actually do something about them.”

Howell noted the role of the Board is not management but oversight, focusing on governance. To do so, an effective Board should challenge senior management not only on what they have planned for but what they may not have considered or may not even know about. He said, “one very good example is the whole, the reputation of those stakeholders involved in the company and that can be the management team itself, the employees, and the board members themselves.” This is because reputational damage hurts everyone. Howell went on to state, “it’s very important as we go through some of the ways the board can help management in that role. I think the things that really make a difference to management is when the board is able to be an effective devil’s advocate. Not managing management but helping them in their governing role by helping management to step back and think critically of their own underlying assumptions and biases.”

One of continuing struggles I hear from Board members is asymmetrical information, largely due from the siloed nature of company information and structures. Howell acknowledged, “These sorts of barriers are pervasive in any company of any size that has a particularly operations and different product lines and different markets and different countries and different time zones. These limitations in the free flow of information by themselves create a risk to the organization, to the investors of the organization, to the employees of the organization and the board’s ability to ask questions. If nothing else in their governance control creates this reminder to management to open up itself to itself and listen carefully to its own organization and be able to link information to all of the places it needs to be fed.”

I asked Howell to further explain his phase “open itself up to itself and listen”. He provided the following example, “how can the Chief Financial Officer make sure that he is giving all the information that the Chief Compliance Officer needs to do his job? Those questions from the board can be very valuable in making sure that the Chief Financial Officer doesn’t forget these issues and the Chief Compliance Officer has an opportunity to engage constructively with the Chief Financial Officer and others in the organization.”

Somewhat counter-intuitively, Howell noted that when it comes to the Board’s oversight role around internal controls, less is often more. This occurs by helping management understand a company can overdo a control environment, “in the sense that when management guides controls around risks that are not going to be the most serious risks to the company, that they end up building excessive amounts of energy and protection where they’re not really needed. That you as a management team end up deluding your attention and deluding your resources.”

Howell went on to explain it is simply a matter of resources, “When things do go wrong, you’re in effect spread so thin that you don’t see those risks coming at you. The real question where less is more can be very valuable is when the board continues to challenge the management team on the scenarios that could play out. That could be devastating to an organization where risk really matters.”

I asked Howell if he could provide any discrete examples and he pointed to the food service industry for the following., “For example, in a food service company or a restaurant company, if there were contamination or if there were things that could happen either at the plant or by people who are touching the food. Those are very serious risks that a company needs to both be mindful of and to be able to prevent. If something goes wrong, you need to be able to detect early. When customers of the company or others are hurt that there’s a consequence of failures that can be devastating.”

In another example Howell said he had seen situations where internal “controls that are used for financial reporting for example, when examined in the light of where the risk really exists for the company, the companies have been able to reduce their controls actually by as many as half and improve their overall control environment and reduce the aggregate risk to the company. It’s interesting that even spending less money on controls by having fewer controls can improve the overall comfort that the company and its management and investors are protected from risk.”

A Board is not simply there to be a rubber stamp for senior management. It must exercise independent judgment, action and oversight. Further, it is the Board’s role to ask hard, difficult and probing questions to make sure management is not only doing its job but has considered other risk possibilities. The recent SQM FCPA enforcement action was only the most recent prime example where a Board failed in its obligations in the compliance realm. As a CCO you need to have your Board ask you difficult probing questions, most particularly in the area of risk to the company. Indeed you should welcome it. Because always remember, the Board is there to be as grain of sand in the shoe of senior management, including the CCO.

 

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

One of the ongoing questions from members of Board of Directors is how to resolve the tension between oversight and managing. I recently had the opportunity to visit with Joe Howell, the Executive Vice President (EVP) of Workiva, Inc. on this subject. Howell has worked on and with Boards of Directors at various companies and I wanted to garner his understanding of the role of a Board and both senior management and a Chief Compliance Officer (CCO). Howell had a short response which I thought was an excellent starting point to understand the role; put sand in the shoes of management.

The key to such a metaphor succeeding is that a Board of Directors, “by continuing to challenge management on these scenarios that management has considered and the stories management is telling itself about what could go wrong”, can “help get management out of its comfort zone by and large executive teams begin to believe themselves when they talk about how well they’re doing. The independent challenge that the board can offer putting the little bit of sand in the shoe to make sure that you’re thinking about things carefully can cause you to step back and really focus your resources where they’re needed.”

Board’s do this by posing questions to management that help them challenge their own assumptions, especially those assumptions which senior management is most confident about. Howell said that Board’s “need to help senior management consider the things that management is so sure about that maybe are going to play out the way that they expect. For example, the things that can hurt investors more than anything else is a surprise. Chaos does not help investors in general. The things that surprise investors frequently are the things that also surprise management. Does management consider all of the things that can go wrong and have they built an environment where they can both help prevent those things from happening and detect them when they’re small and they can actually do something about them.”

Howell noted the role of the Board is not management but oversight, focusing on governance. To do so, an effective Board should challenge senior management not only on what they have planned for but what they may not have considered or may not even know about. He said, “one very good example is the whole, the reputation of those stakeholders involved in the company and that can be the management team itself, the employees, and the board members themselves.” This is because reputational damage hurts everyone. Howell went on to state, “it’s very important as we go through some of the ways the board can help management in that role. I think the things that really make a difference to management is when the board is able to be an effective devil’s advocate. Not managing management but helping them in their governing role by helping management to step back and think critically of their own underlying assumptions and biases.”

One of continuing struggles I hear from Board members is asymmetrical information, largely due from the siloed nature of company information and structures. Howell acknowledged, “These sorts of barriers are pervasive in any company of any size that has a particularly operations and different product lines and different markets and different countries and different time zones. These limitations in the free flow of information by themselves create a risk to the organization, to the investors of the organization, to the employees of the organization and the board’s ability to ask questions. If nothing else in their governance control creates this reminder to management to open up itself to itself and listen carefully to its own organization and be able to link information to all of the places it needs to be fed.”

I asked Howell to further explain his phase “open itself up to itself and listen”. He provided the following example, “how can the Chief Financial Officer make sure that he is giving all the information that the Chief Compliance Officer needs to do his job? Those questions from the board can be very valuable in making sure that the Chief Financial Officer doesn’t forget these issues and the Chief Compliance Officer has an opportunity to engage constructively with the Chief Financial Officer and others in the organization.”

Somewhat counter-intuitively, Howell noted that when it comes to the Board’s oversight role around internal controls, less is often more. This occurs by helping management understand a company can overdo a control environment, “in the sense that when management guides controls around risks that are not going to be the most serious risks to the company, that they end up building excessive amounts of energy and protection where they’re not really needed. That you as a management team end up deluding your attention and deluding your resources.”

Howell went on to explain it is simply a matter of resources, “When things do go wrong, you’re in effect spread so thin that you don’t see those risks coming at you. The real question where less is more can be very valuable is when the board continues to challenge the management team on the scenarios that could play out. That could be devastating to an organization where risk really matters.”

I asked Howell if he could provide any discrete examples and he pointed to the food service industry for the following., “For example, in a food service company or a restaurant company, if there were contamination or if there were things that could happen either at the plant or by people who are touching the food. Those are very serious risks that a company needs to both be mindful of and to be able to prevent. If something goes wrong, you need to be able to detect early. When customers of the company or others are hurt that there’s a consequence of failures that can be devastating.”

In another example Howell said he had seen situations where internal “controls that are used for financial reporting for example, when examined in the light of where the risk really exists for the company, the companies have been able to reduce their controls actually by as many as half and improve their overall control environment and reduce the aggregate risk to the company. It’s interesting that even spending less money on controls by having fewer controls can improve the overall comfort that the company and its management and investors are protected from risk.”

A Board is not simply there to be a rubber stamp for senior management. It must exercise independent judgment, action and oversight. Further, it is the Board’s role to ask hard, difficult and probing questions to make sure management is not only doing its job but has considered other risk possibilities.

Three Key Takeaways

  1. Boards should force management to open up the company to itself.
  2. Boards should be a grain of sand in the shoe of management.
  3. Boards should make sure senior management is aware of and planning for both known and unknown risks.