The current economic climate continues to be in flux, with many companies falling back to Plan C, which is hunker down and ride things out until the next Presidential election and hope for some clarity in 2020. This obviously requires continued perseverance even if your crystal ball remains murky. For US, multinational companies with a global focus, this challenge is doubly difficult given the instability of the government’s position on a wide variety of international issues, literally from day-to-day. Now add in the compliance practitioner’s responsibilities and you begin to see the difficulties moving forward.

I was therefore interested in a recent article in the Harvard Business Journal (HBJ), entitled Globalization in the Age of Trump”, where Pankaj Ghemawat provided insights into how businesses might think about moving forward. I found many of the ideas useful for a Chief Compliance Officer (CCO) of a multinational to think about assessing not only the Trump effect on compliance but the inherent protectionism and what it might mean for compliance going forward.

The first key insight is that globalization has not gone into reverse. To be sure it has slowed somewhat but is still steady. The DHL Global Connectedness Index, which tracks international trade, capital, information and people flows, noted that for the latest year where data is available, 2015, globalization has slowed but not gone into reverse. The author believes this finding turns on two principals which govern commercial globalization. The first is that “international activity, while significant, is much less intense than domestic activity.” The second is that “international interactions are dampened by distance along cultural, administrative, geographic, and, often, economic dimensions.”

If you consider both of those principals from the compliance perspective you can begin to see some of the challenges which lie ahead for any CCO or compliance practitioner. The first is that compliance tends to be more robust where there is the greatest amount of business and for almost every US company that means in the US. The second challenge presented is that international operations bring on their own unique set of cultural, administrative, geographic and economic challenges not presented inside the US. I would ask each CCO to consider whether they have assessed, let alone addressed, your compliance program from these parameters.

The author went on to put forward three different ways for a business leader to consider moving forward under the current Trump administration uncertainty. For any CCO or compliance professional you should contemplate these approaches and then consider the compliance function response. Obviously, they present different risks but with the mandate to operationalize your compliance program as set out in the Department of Justice’s (DOJ’s) Evaluation of Corporate Compliance Program (Evaluation), this type of approach is warranted.

The first question Ghemawat posed is “Where to Compete?” and he noted, “in an environment of plunging commodity prices, dropping demand for globalization-related services, and, for U.S. companies, shifts in exchange rates—factors that clearly played outsize roles in the performance numbers. And longer-term declines over the past decade coincide with a period in which globalization actually slowed down.” Yet what he found lacking was any significant analysis of why there was any downturn in a specific market, using “a case-by-case approach in which a globalization-related move is evaluated on its own merits rather than subjected to some sweeping injunction about whether to go forth and globalize or to come back home.” However, even without such a rigorous assessment, “many multinational companies do need to pay renewed attention to where they compete—in other words, to market selection.”

This type of analysis would seem almost self-evident to any robust compliance program. However, without true operationalization of compliance my guess would be most compliance programs take a much broader global approach and consider the business in every market. The author believes that most companies have four top markets, including their home market, which generally accounts for up to 60% of corporate sales. This information allows a CCO to marshal the compliance resources for those markets, perform risk assessments which identify, analyze and address the compliance risks faced in those markets and manage them going forward.

From the compliance perspective, you might consider looking towards business “opportunities where they can find cultural, administrative/political, geographic, and economic affinities.” Such an approach would allow compliance to build upon existing structures and culture to more fully integrate compliance into the business planning going forward. This is the type of operationalization I think the Evaluation is designed to foster going forward.

The second factor Ghemawat puts forward is “How to Compete?” as your business may be required to use a mix of strategies going forward. Here he points to three globalization strategies he has previously articulated; “Companies use adaptation when they want to adjust to cross-country differences in order to be locally responsive. They use aggregation to achieve economies of scale and scope that extend across national borders. And arbitrage strategies are used to exploit differences, such as low labor costs in one country or better tax incentives in another.”

Your business answers to these questions will go a long way towards dictating your compliance response. But you will only know where to start if you are participating in these decisions or at least are aware of them so you can adequately assess the compliance risks. If it turns out that one strategy is more problematic than another from the compliance perspective, you can add that to senior management’s decision making calculus.

In one of his more interesting insights, Ghemawat also advised that beyond where and how to compete is the issue of engaging with the local society. Here he pointed to the backlash against globalization, both in the US and abroad as really a backlash against big business. He wrote that “Multinational companies need to craft governmental and societal agendas that are both localized and linked across countries. Anti-globalization pressures require that multinationals deliver more local benefits—and communicate about them—in the countries where they operate. Such efforts must go well beyond compliance to include contributions in the form of jobs, technology, and so forth.”

Not only does this final point speak to the greater requirements of a sustainable Corporate Social Responsibility (CSR) program but it also relates to the operationalization requirement by moving the compliance functions closer to the front lines of a business where it will be in a better position to do more business ethically and in compliance which can only help to win over local markets. This is yet another way in which compliance can be used to further business goals, make business more efficient and at the end of the day more profitable.

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

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

IMG_0833One of the things any Chief Compliance Officer (CCO), or indeed any business leader, must manage is team conflict. In a recent Harvard Business Review (HBR) article, entitled “How to Preempt Team Conflict”, Ginka Toegel and Jean-Louis Barsoux reported on their study of team conflict. The article posits that team conflict can erupt not solely from the differences in opinion of disparate corporate disciplines but also from “perceived incompatibility in the way different team members think.” In other words, it is about the process and not about the content. (I am sure about now my process analyst wife is thinking, as I told you many times…) To remedy this problem, the authors promote a five step approach which considers how team members “look, act, speak, think and feel, to immunize the team against unproductive conflict when the pressure is on.”

The authors believe that leaders should allow team members to meet and engage in ‘five conversations’ around these areas. Through these conversations, they believe leaders can identify areas of potential friction, which might arise when the pressure is on the group. By getting these areas out into the open before the pressure hits, they believe the “teams establish a foundation of trust and understanding and are able to set ground rules for effective collaboration.” The five areas can be broken down as follows:

Look: Spotting the Difference

The authors believe that team members often have reactions “triggered by differences in the way people present themselves” so the goal of this discussion is to have “team members reflect on how they intend to come across to others—and how they actually do.” This can be as broad as dressing in a suit where the atmosphere is business casual to a lawyer using literary references in a technical software or engineering meeting.

The authors suggested this conversation could be facilitated with some of the following questions:

In your world…

  • what makes a good first impression? A bad one?
  • what do you notice first about others (dress, speech, demeanor)?
  • what does that make you think about them (rigid, pushy, lazy)?
  • what intangible credentials do you value (education, experience, connections)?
  • how do you perceive status differences?”

Act: Misjudging Behavior

It is almost axiomatic that “on diverse teams, clashing behavioral norms are a common source of trouble.” This prong can include issues as broad as personal space to being punctual and respectful of the group’s time. Equally, it can be such things as keeping the group on a tight schedule or building in flexibility for project direction changes. Here you can simply think of the difference manner in which an American, German, South Korean and Saudi Arabian (and anywhere in between) might act. The authors conclude, “It’s important to establish team norms around all these behaviors up front to avoid unnecessary antagonism.”

The authors suggested this conversation could be facilitated with some of the following questions:

In your world…

  • how important are punctuality and time limits?
  • are there consequences of being late or missing deadlines?
  • what is a comfortable physical distance for interacting in the workplace?
  • should people volunteer for assignments or wait to be nominated?
  • what group behaviors are valued (helping others, not complaining)?”

Speak: Dividing by Language

Unfortunately for Mr. Translations, this section does not mean you need to employ a translation service but it does recognize that different cultures use different communication styles. The authors recognize that even native speakers of the same language can have differences in the way they express themselves. Yet when your team consists of a wide variety of cultures, this effect can be magnified. The authors note that “depending on context, culture, and other factors, “yes” can mean “maybe” or “let’s try it” or even “no way.”” Moreover, “even laudable organizational goals can engender troublesome communication dynamics.”

The authors suggested this conversation could be facilitated with some of the following questions:

In your world…

  • is a promise an aspiration or a guarantee?
  • which is most important: directness or harmony?
  • are irony and sarcasm appreciated?
  • do interruptions signal interest or rudeness?
  • does silence mean reflection or disengagement?
  • should dissenting views be aired in public or discussed off-line?
  • is unsolicited feedback welcome?”

Think: Occupying Different Mindsets

As a recovering lawyer and the son of an engineer, I can certainly appreciate the differences in a legal approach from an engineering perspective. The authors do as well, writing, “Perhaps the biggest source of conflict on teams stems from the way in which members think about the work they’re doing. Their varied personalities and experiences make them alert to varying signals and cause them to take different approaches to problem solving and decision making. This can result in their working at cross-purposes. As one executive with a U.S. apparel company noted: “There is often tension between the ready-fire-aim types on our team and the more analytical colleagues.””

The authors cited to two separate examples of how this gulf was breached. In the first example the leadership of a team was rotated to align with the phase of the project so that “During the more creative and conceptual phases, the free-thinkers would be in charge, while analytical and detail-oriented members would take over evaluation, organization, and implementation activities.” In a second example, involving scientists and executives in a biotech company, “a facilitator used role play to help the two groups better understand each other’s perspective.”

The authors suggested this conversation could be facilitated with some of the following questions:

In your world…

  • is uncertainty viewed as a threat or an opportunity?
  • what’s more important: the big picture or the details?
  • is it better to be reliable or flexible?
  • what is the attitude toward failure?
  • how do people tolerate deviations from the plan?” 

Feel: Charting Emotions

Often there will be a wide variation in the way team members convey emotions and even passion and how they manage these same emotions. This can be true for both positive, including enthusiasm, and negative emotions, such as venting or even keeping thing bottled up for too long. The authors noted, “The tendency to signal irritation or discontent indirectly—through withdrawal, sarcasm, and privately complaining about one another—can be just as destructive as volatile outbursts and intimidation. It’s important to address the causes of disengagement directly, through open inquiry and debate, and come up with ways to disagree productively.”

The authors suggested this conversation could be facilitated with some of the following questions:

In your world…

  • what emotions (positive and negative) are acceptable and unacceptable to display in a business context?
  • how do people express anger or enthusiasm?
  • how would you react if you were annoyed with a teammate (with silence, body language, humor, through a third party)?”

This article provides solid guidance for the CCO or any business leader on not only how to anticipate conflict but concrete steps to head it off. The author’s conclude by noting that a benefit of these five conversations is that, “We’ve found that they include greater participation, improved creativity, and, ultimately, smarter decision making.” If you can achieve this on any project involving any corporate team, you have achieved something significant.

 

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

Innovation 2I continue my Innovation in Compliance series today by discussing “superforecasting” and its use by a compliance function. Imagine that as a Chief Compliance Officer (CCO), you could create a team which might well dramatically improve your company’s forecasting ability, but to do so you would be required to expose just how unreliable the professional corporate forecasters have been? Could you do so and, more importantly, would you do so? I have been thinking about that question quite a bit as I have researched the area of superforecasting. Most generally this is the predictive capability that organizations have used. However, the new “superforecasting” movement, led by Philip E. Tetlock and others, has been gaining strength to help improve this capability.

The concepts around superforecasting came of age after the intelligence failures leading up to the Iraq War. This led to the founding of the Good Judgment Project, which had as key component a multi-year predictive tournament, which was a series of gaming exercises pitting amateurs against professional intelligence analysts. The results of the Good Judgment Project was presented in a recent Harvard Business Review (HBR) article, by Tetlock and Paul J. H. Schoemaker, entitled “Superforecasting: How to Upgrade Your Company’s Judgment”. The authors had three general observations. First “talented generalists can outperform specialists in making forecasts.” Second, “carefully crafted training can enhance predictive acumen.” Third, “well-run teams can outperform individuals.”

To move to superforecasting, the authors laid out four precepts. The first is to find the sweet spot, which is somewhere between predictions that are “entirely straight-forward or seemingly impossible.” They note the sweet spot “that companies should focus on is forecasts for which some data, logic, and analysis can be used but seasoned judgment and careful questioning also play key roles. Predicting the commercial potential of drugs in clinical trials requires scientific expertise as well as business judgment.” I find the same to be true in compliance where “Assessors of acquisition candidates draw on formal scoring models, but they must also gauge intangibles such as cultural fit, the chemistry among leaders, and the likelihood that anticipated synergies will actually materialize.”

Next is to train for good judgment. This requires employees to learn the basics in such techniques as probability concepts, the definition of what is to be predicted and an understanding of numerical probabilities. As cognitive biases are widely know to skew judgment, companies need to raise awareness for this issue to arise. Finally, training to understand the psychology behind such biases narrowed predictive domains.

Next is to build the right kind of teams. The initial thing to realize is the importance of the composition of the team. The authors found that “cautious, humble, open-minded, analytical – and good with numbers. In assembling teams, companies should look for natural forecasters who show an alertness to bias, a knack for sound reasoning, and a respect for data.” Equally critical is that the “forecasting teams be intellectually diverse. At least one member should have domain expertise (a finance professional on a budget forecasting team, for example), but nonexperts are essential too – particularly ones who won’t shy away from challenging the presumed experts. Don’t underestimate these generalists.” Clearly your compliance superforecasting team should draw from the diversity within your organization not only in discipline but in temperament as well.

After the composition is considered, the authors move to “diverging, evaluating and converging.” The authors suggest “a successful team needs to manage three phases well: a diverging phase, in which the issue, assumptions, and approaches to finding an answer are explored from multiple angles; an evaluating phase, which includes time for productive disagreement; and a converging phase, when the team settles on a prediction. In each of these phases, learning and progress are fastest when questions are focused and feedback is frequent.”

The final component of composition is trust as there must be trust among your team members to facilitate good outcomes. This might also be understood that if the superforecasters demonstrate the errors or miscalculations of others in the firm, not only will they be protected by senior management but their work will be defended. The authors note, “Few things chill a forecasting team faster than a sense that its conclusions could threaten the team itself.”

You then have to “track performance and give feedback” as the authors believe that it is essential to track the prediction outcomes and provide timely feedback to improve forecasting going forward. This also has the added benefit of providing an audit trail so that a company can learn from both the good and bad predictions. This leads to the authors’ next insight, which, in the process, is critical.

Such a feedback loop in the compliance sphere could lead to some of the following questions being posed: What information might others have that you don’t that might affect the compliance risk? What cognitive traps might skew your judgment on this transaction or risk? Why do you believe the company can safely navigate this compliance risk?

Answers to these and other questions can provide insight into not only the specific prediction but also the process by which a team moved forward so that it can be replicated, as appropriate, in the future. Conversely, as the authors write, “Well-run audits can reveal post facto whether forecasters coalesced around a bad anchor, framed the problem poorly, overlooked an important insight, or failed to engage (or even muzzled) team members with dissenting views. Likewise, they can highlight the process steps that led to good forecasts and thereby provide other teams with best practices for improving predictions.”

Like any innovation, there must be a commitment from management on moving forward. There must be data available both internally and research conducted externally with auditable trails on judgments, underlying assumption and data sources. The keys to success include frequent precise predictions and measuring accuracy of predictions for comparison with real-world events. Nevertheless, such an exercise might well be exactly what a compliance function should do going forward. Take the Italian energy company, ENI that has made a huge bet on production out of the African continent. If the company had a solid predictive basis for the risks involved, it could not only assess those risks but also more accurately manage them. It might give the company enough information to take such a seemingly risky business move, when the prediction shows the risk was lower than the ‘experts’ said. Yet the authors end on this note, “But companies will capture this advantage only if respected leaders champion the effort, by broadcasting an openness to trial and error, a willingness to ruffle feathers, and a readiness to expose “what we know that ain’t so” in order to hone the firm’s predictive edge.” It must be so.

 

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

John David CrowJohn David Crow died Wednesday. Until Johnny Football, he was the only football player from Texas A&M University to win the Heisman Trophy. He played under the legendary Paul ‘Bear’ Bryant at A&M and for all of Bryant’s success, Crow was the his only player to win the award given annually to the nation’s best collegiate football player. Crow had a productive professional football career making the Pro-Bowl four times. He was also the Athletic Director at A&M from 1989 to 1993. So here’s to John David Crow, one of the Junction Boys and one of the greatest players in the history of Texas A&M. Finally, let me say something I almost never say, Gig ‘Em, John David.

I thought about John David Crow and his legacy of greatness when I read an article in the June issue of the Harvard Business Review (HBR), entitled “You Need an Innovation Strategy”, by Gary P. Pisano. While Pisano’s article dealt more generally with innovation in marketing, I found it highly relevant for the Chief Compliance Officer (CCO) or compliance practitioner, particularly in the context a Foreign Corrupt Practices Act (FCPA) compliance program. Earlier this week, the Department of Justice (DOJ) announced the resolution of a FCPA investigation involving IAP Worldwide Services, Inc. (IAP) via a Non-Prosecution Agreement (NPA). In the NPA, the company committed to implementing and enhancing a best practices FCPA compliance program. Listed at element 18 of its compliance program is the following: “The Company will conduct periodic reviews and testing of its anti-corruption compliance code, policies, and procedures designed to evaluate and improve their effectiveness in preventing and detecting violations of anti-corruption laws and the Company’s anti-corruption code, policies, and procedures, taking into account relevant developments in the field and evolving international and industry standards.”[Emphasis supplied]

This means that the DOJ expects innovation in your compliance program to keep up with evolving international and industry standards. This requires you to implement an innovation strategy. While Pisano’s article does not specifically focus on compliance, I found that its concepts would help a CCO or compliance practitioner sustain the mandate for innovation in a compliance regime. Pisano’s article begins by stating the problem that many companies face is that “innovation remains a frustrating pursuit.” While acknowledging that failure to execute is an issue, Pisano believes the issue is deeper than simply a failure to execute, he believes there is a “lack of an innovation strategy.”

I found some of his basic definitions most useful for the compliance practitioner to think through innovation in the compliance function. Pisano wrote, “A strategy is nothing more than a commitment to a set of coherent, mutually reinforcing policies or behaviors aimed at achieving a specific competitive goal. Good strategies promote alignment among diverse groups within an organization, clarify objectives and priorities, and help focus efforts around them. Companies regularly define their overall business strategy (their scope and positioning) and specify how various functions – such as marketing, operations, finance, and R&D – will support it. But during my more than two decades studying and consulting for companies in a broad range of industries, I have found that firms rarely articulate strategies to align their innovation efforts with their business strategies.”

The key to success is something that every CCO or compliance practitioner should take to heart. Paraphrasing Pisano for the compliance practitioner is that the compliance function “should articulate an innovation strategy that stipulates how their [compliance] innovation efforts will support the overall business strategy.” Moreover, “creating an innovation strategy involves determining how innovation will create value for customers [of compliance, i.e. Employees], how the company will capture that [compliance] value, and which types of [compliance] innovation to pursue.”

Pisano posed several questions around this key area of connecting innovation to strategy. Initially he asked, “How will innovation create value for potential customers?” In my formula, customers become employees or others who will make use of your compliance innovation going forward. Here you should focus on the benefit for your end-using customer. Your innovation can make compliance faster, easier, quicker, more nimble and so on. But focus on that creation of value going forward. Pisano’s next question was “How will the company capture a shore of the value its innovations generate?” He suggests companies think through how to “keep their own position in the [compliance] ecosystem strong” through innovation. Pisano next asked, “What types of innovation will allow the company to create and capture value, and what resources should each type receive?” Here Pisano notes two major forms of innovation equally applicable to the CCO or compliance practitioner. They are a change in technology and a change in a business process. Both are equally valid.

Another problem that Pisano addresses is termed “overcoming prevailing winds” and this means that innovation can be driven downward or backward if there is not sufficient management support. This means not only must there be sufficient resource allocations but management must also incentivize the business units to proceed with implementing the innovations, particularly “when an organization needs to change its prevailing patterns.”

Another area Pisano addresses is “managing trade-offs” because it is inherent in any innovation strategy that there will be trade-offs. Here he terms the two key differences as “supply-push” and “demand-pull”. The supply-push approach comes when your innovation is focused on something that does not yet exist, for example if you are initially implementing a FCPA compliance regime. The demand-pull approach works more closely with your existing customer base to determine what they might need and work to implement innovation around those needs.

Interestingly Pisano ends his article with a discussion about “the leadership challenge”. I say interestingly because I would have thought that was required up front as it is the function of senior management to create the capacity for innovation in the first instance. Pisano writes, “There are four essential tasks in creating and implementing an innovation strategy.” Task 1 is to “answer the question “How are we expecting innovation to create value for customers and for our company?” and then explain that to the organization.” Task 2 “is to create a high-level plan for allocating resources to the different kinds of innovation.” Task 3 is “to manage trade-offs. Because every function will naturally want to serve its own interests, only senior leaders can make the choices that are best for the whole company.” Finally, task 4 dovetails with what almost every DOJ/SEC speaker I have ever heard say when they talk about the basics of any best practices compliance program. It is that “innovation strategies must evolve. Any strategy represents a hypothesis that is tested against the unfolding realities of markets, technologies, regulations, and competitors. Just as product designs must evolve to stay competitive, so too must innovation strategies. Like the process of innovation itself, an innovation strategy involves continual experimentation, learning, and adaptation.”

Pisano’s article provides the CCO or compliance practitioner with a framework to think through to help bring the innovation to a compliance program. I would have put leadership first, both in the compliance department and at senior management level. But however you go about it, you must recognize that your compliance program will have to evolve. That is one of the key differences between those who advocate static compliance standards embodied in a written compliance program and those who advocate that it is Doing Compliance that creates an active, vibrant and effect compliance program.

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